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20 Mar 2019

GST ON REAL ESTATE : NOW WHAT :

GST ON REAL ESTATE : NOW WHAT :

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 



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