GST ON REAL ESTATE :
NOW WHAT :
New rates of the GST
will be applicable from 1st Apr 2019
on under construction properties.
Recently, the GST
Council revised the rate for under construction properties (without input tax
credit) from 8% to 1% for affordable
housing projects costing up to Rs 45 lakh.
For all other under construction properties, this has
been reduced from 12% to 5% without
ITC. However, completed projects were exempt from GST.
This step was taken positively by the industry and
fence-sitting home buyers who expected property prices to come down after this
revision.
The real estate industry has been grappling with lower
sales in the past owing to policy disruptions.
When GST was introduced in July 2017,
the real estate projects which were either under construction or had not
received an occupancy certificate, attracted 18% GST,
effectively 12% after 6% abatement of
land.
Similarly, under construction affordable housing units
were levied with 8% GST.
However, home
buyers were given an option to claim ITC from developers who would claim it
from the tax authorities on the cost they incurred during the construction of
their projects.
Confusion over Input
Tax Credit
The decision to have two options for builders has left
consumers in the same dilemma as they were in before the announcement of lower
GST rates on 24th Feb 2019 by the
council in its 33rd meeting.
As developers will most likely choose the old GST scheme,
there may be transparency issues for buyers to claim input tax benefit.
Earlier, a high rate of GST on under construction units
made ready-to-move-in properties more attractive.
Home buyers preferred ready units over under construction
ones to avoid paying GST. Those who were still buying under construction
properties complained that developers were not passing on the benefit of input
tax credit transparently.
On the other hand, developers said they found it
difficult to assess the right input tax credit.
This led to
confusion and defeated the purpose for which the government was giving benefit
of ITC to home buyers through developers.
Thus both home buyers and developers, especially from
Mumbai where land cost as a percentage of price is very high, requested the
government to revise GST rates on under construction properties for both
affordable and other segments of housing.
This move is expected to improve consumer sentiment
especially in the affordable housing segment.
Developers will go with the old GST rates in cases where
they have already passed on the benefit to buyers and decided the sale price of
projects launched prior to 1st Apr 2019.
Now developers have to work towards undertaking the
changes in the system (IT, documentation and processes) to meet the deadline of
1st Apr 2019.
They have to take
the decision at the earliest regarding the new projects as customers would be
expecting reduction in prices. Also, the basis of revised pricing has to be
communicated to them.”
Transition Plan
For all projects which are currently in the under
construction stage and will not be completed by 31st Mar
this year, the developers will have two options -
Continue with the
current practice of 12% and 8% tax
with ITC benefit or charge 5% or 1%
tax without ITC benefit.
However, any project launched after 1st
Apr 2019 will attract the new GST rates.
For this is 5% and 1%
the government has also suggested that 80% of the purchase
has to be made from a registered dealer.
This may pose challenges in Tier 2
and Tier 3 cities where there may not be so many
registered dealers available.
Cost may increase
According to tax and real estate experts, without ITC benefit,
the cost is likely to go up for end users. This is because construction and
overhead cost would simply be added into the total cost of the property.
Therefore, buyers may have to pay more once the new GST
scheme comes into force.
Moreover there
will be a marginal price increase for under construction and upcoming launches
to offset the loss of tax benefits in the new financial year. Albeit there is
an overall positive outlook and sales are expected to see a rise.
The law of GST is still evolving and real estate seems to
be facing the heat in this process. One issue is addressed but more issues crop
up. A holistic approach is needed to give benefit to home buyers and the
industry.
Complied by ca Anil Agrawal