GST cut on real-estate: A mere optical illusion
Even though GST rate on under construction real-estate has been brought down to 5% from 12%, the consumers are unlikely to benefit because the concept of input-tax-credit has been removed. As a result, builders will not get tax credit on input costs, which they are getting at 12% GST rate
04th March 2019, 03:22 Hrs
When Union Finance Minister, Arun Jaitley, announced that Goods-and-Services-Tax (GST) would be reduced from 12% to 5% on under construction real-estate and from 8% to 1% on affordable housing projects, most people keen to buy a house felt hugely relieved because they felt that their tax-burden would fall down significantly.
But if we look at details closely, we will realise that Jaitley’s announcement is unlikely to benefit either the consumers or the builders. This is because Jaitley has removed the concept of input-tax-credit from the real-estate sector.
As of now, under construction real-estate attracts GST of 12%. However, builders can get their tax liability reduced to the extent of taxes paid by their suppliers (which is known as taking input-tax-credit). In most cases, tax credit amounts to around 8%. This means builders end up paying only 4% tax (12% minus 8%).
Now that there will be a flat 5% GST on under construction real-estate from April 1, the effective tax rate is expected to be marginally higher for builders than what is right now. If builders have to pay more tax, they are going to recover it from home buyers only.
Most sources agreed that the announcement to cut GST to 5% is more to build a perception for home buyers that real estate is not heavily taxed.
Rohit Gera, managing director, Gera Developments said, “In the short-run, it will boost the sentiment for home-buyers, as they will think that 5% GST for under construction projects is really low. But, we must realize that the very idea of GST was to avoid tax on tax. By removing the input tax credit, the government has gone back to tax on tax system.”
Builders pay 28% GST on cement and 18% GST on steel, which are the inputs for construction. As of now, they can take input tax credit for taxes paid by their suppliers. However, at 5% rate, they will not be able to take tax credit, which means there will be tax on tax defeating the principle of GST.
Dr Jagannath (Desh) Prabhudessai, president of the Goa unit of CREDAI (Confederation of Real Estate Developers’ Association of India), said, “The concept of input tax credit did not appeal to home buyers. No matter how hard a builder explained to a buyer that he had reduced price to give him benefit of tax credit, the buyer used to think that he was paying 12% GST. Now that GST is at 5%, consumers will think that tax is lesser. But in reality, it is just a perception because 12% GST is with input tax credit and 5% GST is without input tax credit.”
The fact of the matter is that the home-buyers never cared about the input-tax-credit. They couldn’t figure out whether a builder had really given them the benefit of tax credit or not. So even if a genuine builder explained to them that benefit of tax credit was given to consumers, they wouldn’t believe him.
Now that there is a flat 5% GST on under construction real-estate without tax credit, consumers don’t have to think whether they are getting benefit of tax credit or not. However, consumers may or may not benefit because the effective tax rate has not come down.
Builders across the board agreed that GST rate on cement and other inputs of construction must be reduced for real estate to become affordable for consumers.
Datta Naik, managing director, Commonwealth Developer Pvt Ltd, said, “So far GST is 12% on under construction real estate projects but input tax credit is around 8%. As a result, effective rate of GST is 4% till now. With the new changes, the government has announced 5% GST but without input tax credit. This shows that the profit margin of builders will reduce by 1 to 2%. GST of 28% on cement is very high, which should be reduced to 18%.”
Gera said that cement is a basic product and therefore it shouldn’t be taxed at 28%, which is a very high tax rate meant only for sin goods. The other concern is builders may increase the price of real estate for consumers.
Sandip Bhandare, president, Goa Chamber of Commerce and Industry (GCCI), said, “GST on cement is 28% and builders are going to lose all the tax credit they used to get on cement till recently. Since builders are not allowed input tax credit under the new rules, they may increase the price for consumers.”
It remains to be seen whether the final price of real-estate will increase for consumers or not. However, most experts are unhappy with the new rules because GST without input tax credit is not GST at all. They also think that the government should have reduced GST on cement if it was serious about making real-estate affordable for people.
How the new GST announcements will work
Suppose a builder is selling real-estate at Rs 60,000 a square meter and GST is 12% with input tax credit. In this case, a buyer has to pay Rs 7,200 GST
Now assume that cost of construction is Rs 25,000 per square meter and also assume that there is an average GST of 16% on cost. This means Rs 4,000 per square meter tax credit can be claimed by the builder
Net result: A consumer pays Rs 67,200 per square meter and a builder pays Rs 3,200 per square meter tax (Rs 7,200 minus Rs 4,000)
As per new rules, there is 5% GST without input tax credit. A buyer will pay Rs 3,000 per square meter tax (Rs 60,000 times 5%). Since there is no tax credit, the builder will not be able to get credit for Rs 4,000 per square meter tax on inputs
The builder may pass the burden of Rs 4,000 to the consumer. This means the consumer is likely to pay Rs 67,000 per square meter (Rs 60,000 plus Rs 3,000 plus Rs 4,000). In earlier case, he was paying Rs 67,200. So, there is hardly any difference
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