Results of Lower GST on Real Estate Developers

Gst on Real Estate Developers

GST on Real Estate Developers

Will property developers are able to recover input credit costs from home buyers is a million-dollar question. Charging a higher GST rate with input tax credit should be an option available to real estate developers. GST council has recently prescribed a GST rate of 5% without input tax credit for residential homes, including under-construction buildings, & GST rate of 1% without input tax credit for affordable housing segments. These rates are to come into effect from April 1, 2019. Suitable notifications for this would be issued in order to give effect to the same. The option of GST payment at a higher rate & claiming input tax credit along with will no0t be available any more.

Other Measures Proposed in GST

It is also proposed that, apart from a reduction in rates, exceptions will also be provided for payment of GST for lease premium, transfer of development rights & others. This will be valid for residential properties on which GST is payable. Since the real estate industry was grappling due to slowdown, it was thought that the proposed reduction in tax rates will provide relief to the sector.

How Will This Do Change impact the Real Estate Industry?

Reduction in GST rates is surely a welcome relief. But how would these changes lead to other unintended consequence is a question which only time will tell. How these proposed changes will impact cases where the project is yet to be launched? How will these impact projects which are already underway?

Absence of input tax credit means that taxes paid on procurements could be loaded on the base price. Will this mean that the overall reduction in price for the investor or home buyer would depend upon other factors, like the cost of the land or ratio of construction costs vis a vis selling price & other factors? Irrespective of the outcome, developers will still be in a position to control & decide how to reflect the same in base price which can be charged for the residential property.

Bigger challenges await the existing projects. On these, the developer has already agreed upon GST plus base price. Now he cannot charge 12% GST as the rates are cut down to 5%. The developer will not be able to claim the input tax credit as per the condition of the proposed amendment. This becomes a cost & whether the developer can recover this from the customer depends upon the terms laid down in the sale agreement. In the present scenario, this seems to be extremely difficult.

Implications of Anti-Profiteering

The lifespan of projects typically lasts over a couple of years. Assume that benefits arising due to the introduction of GST & computed by the developer are proportionately passed on over to the life of the project. Is it possible that the developer will not pass any benefit for the balance period? Another scenario is that the developer intends to pass on benefits at the end of the project. Can he do the same now considering the benefits of the input tax credit has been withdrawn? These changes are bound to initiate new challenges for the real estate sector. It would, therefore, be prudent that the option of charging a high GST rate with input tax credit should be one of the available options for the sector.   

A:- 1% GST is charged on affordable residential apartments without ITC, while 5% GST without ITC is charged on other residential properties.

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