Transition plan for New tax rates for Real Estate:
The GST Council allowed builders to choose between higher rates with input tax credits (ITC) on raw material or lower duties without any such benefits for unfinished projects.
The transition plan is only applicable to Residential properties or flats. No changes to GST rates on lottery or cement.
Builders can pick between paying 12 percent for non-affordable houses with ITC benefits or 5 percent without the tax rebates for under-construction houses.
Likewise, for ‘affordable housing projects’, builders can choose between 8 percent with tax rebates or 1 percent without it.
What is affordable housing as per press release?
Residential property priced at Rs 45 lakh or below will be considered ‘affordable’ and taxed at 1 percent, Under-construction properties priced over Rs 45 lakh will invite 5 percent GST, versus the previous rate of 12 percent. Property will be considered affordable if it is 90 sq. meters in metro cities and 60 sq. meters in non-metro cities.
The value of Rs 45 Lakh is same for both metropolitan and non-metropolitan cities.
Note: The rate is 18%, however due to 1/3rd deduction in land;
Effective rates will be: 5% & 1%
Standard rates will be: 7.5% & 1.5%
Metropolitan cities listed are:
- Greater Noida, Ghaziabad
What will be the GST rates for those who have made part payments for under-construction homes?
People who have already booked their flats and have made part payments, can save money as the cost of the apartment has already been fixed. What will change is only the rate of GST applicable on the instalments that have not yet been paid, if they are able to get the demand for the instalment issued after the new rates come into effect. As per GST rules, the GST is payable on the earliest of three occasions:
- Receipt of payments
- Raising of invoice
- Completion of service/supply of goods.
So, if you can get the developer to issue the invoice/demand for the remaining instalments, on or after April 1, 2019, you will be able to avail of the reduced rates of GST. If the building is nearing completion and the completion certificate is expected to be issued before the new rates come into effect, you will not be able to get the benefit of the reduced rates. However, the developer may not be willing to accommodate such requests, as this involves delay in receipt of money for him, as well as losing the benefit of input tax credit on the instalments subjected to the reduced rates of GST. In genuine cases, where the due date of the instalments fall after March 31, 2019 and the builder does not play mischief by raising the invoice before this date, you will be able to get the benefit of the reduced rates.
What will be the immediate impact on the sector with the new GST regime?
The GST council’s decision to reduce the GST rates for under-construction residential housing projects will lead to marginal traction in demand and bring in more transparency for home buyers, believes India Ratings and Research (Ind-Ra). Reduced total outflow for home buyers could increase the attractiveness of under-construction residential units, considering the base prices remain stable in the absence of input tax credit (ITC) availability for developers.
Traction in Demand to Improve Provided Base Prices Remain Stable: The reduction in GST rates could lead to a monthly saving of Rs 800-1,000 for a homebuyer, considering an average ticket size of Rs 2.5 million with 7% reduction in tax in case of affordable units. The savings could also be in the range of Rs 2,750-3,000, considering an average ticket size of Rs 7.5 million with 7% reduction in tax for the non-affordable units. This is after assuming that developers do not pass on the increase in prices due to the non-availability of ITC. The real estate sector is witnessing soft demand growth and flat prices in wake of a huge inventory of finished units/unfinished units. Companies with completed inventory are typically better placed in terms of off-load risk than those with under-construction projects, as the demand is driven by end-consumers who are averse to project risks (delay in delivery properties). However, Ind-Ra opines the change in tax rates could bring some traction in demand to the under-construction segment, if base prices remain stable.
Fresh Buying May Slowdown in FY19: Since the new GST rate for under-construction housing projects is effective from 1 April 2019, any new buying in such projects could be deferred until the beginning of FY20. Hence, the 4QFY19 sales numbers (the result is a function of accounting) for most developers having major projects in under constructions stage, could decline.
Likely Repricing of Housing Units by Developers: The rate cut ideally should support demand, assuming it results in an overall price reduction. However, considering ITC typically would account for 4%-6% of sales price, resulting in net GST tax 3%-7%, there is not much room for builders to reduce prices. Also, in cases where the builder was retaining any benefit of ITC, the new regime would eliminate any such possibility, and thus may result in builder re-pricing apartments/flats. Clarity would be required for cases where the builder has already signed a sale agreement (assuming ITC he would be availing) but invoice (linked with construction progress) would be raised under the new regime (without any ITC). This situation can result in the builder renegotiating prices as the base price should go up without factoring in ITC.
Brings in More Clarity on Tax Structure: Currently, there is lack of clarity with regards to the claims of developers in passing on the benefit of any ITC to end-buyers. The effective tax paid by home buyers in the current structure is thus ambiguous. Ind-Ra believes the reduction in GST rates and absence of ITC would bring in more transparency on the overall tax payment for home buyers.
HFCs may benefit from higher volumes and improved liquidity for developers in metros, in new GST regime
Lower prices for customers in metros such as Mumbai and NCR (wherein, land prices are high and hence, input tax credit in the previous regime was low) will help boost retail housing volumes in these locations. Private banks and large players like HDFC, are present in this space (even as HDFC has higher focus in the lower end).
Market sources suggest that customers have been waiting for projects to be completed, to avoid the burden of GST, which is available for affordable housing projects. This had further stretched the financials of under-construction projects that were constrained due to weak demand and stable real estate prices. Higher under-construction sales in metros, post a price reduction following lower GST rates, will improve the financial health of large developers operating in these locations. This, in turn, will reduce the asset quality risk for HFCs lending to this segment.
Impact of GST on real estate
The construction of a complex building, civil structure, or a part thereof, intended for sale to a buyer, wholly or partly, is subject to 12 per cent tax with full input tax credit (ITC), subject to no refund in case of overflow of ITC. In other words, residential construction services, will invite GST at the rate of 12 per cent, which will apply to developers selling residential units before completion of construction to the home buyers.
In the current regime, states with composite VAT require developers to pay lower VAT rates on the total property value without any input tax benefit (Maharashtra, Haryana) or partial benefit (intra state offset- Bangalore). Under this regime, developers pass on the transaction cost – VAT (1%) and service tax (4-5%) to buyers (total 5-6%). Developers get offset for only the input service tax component. In the GST regime, the transaction cost increases to 12%, with input credit available on both, services and material. Property transaction costs will increase by 6%, in case no input credit is passed on by developers. If developers pass on the input credit to buyers, the property price increase could be restricted to 1-2%.” If the developers pass on the credits completely and bring down the base prices, then, home buyers may marginally benefit under the GST regime.
Nevertheless, stamp duty will continue to be applicable, irrespective of whether the property is under-construction or constructed, in the pre-GST and post-GST regime.
Will GST help home buyers?
The impact of the GST on property prices, will be difficult to gauge at this stage because of the lack of clarity on abatement for land value. In a product, where the major raw material is not covered by the GST and the completed unit is also not covered by the GST, the tax input benefit will be hard to calculate or justify. Only the market forces, the ready reckoner rates and time, will decide whether and how much benefit will be passed on by the developers to the purchasers.
Impact of GST on property prices – Luxury segment
In the case of a premium properties, while the basic construction cost may come down a little, but as the input tax credit is limited to 12 per cent, it will not be sufficient to bring down the fresh tax liability to nil because of the taxes paid on other expenditures.
GST rates for real estate – Input materials
|HSN||Description of goods||Rate|
|Chapter 72||Steel||18 per cent|
|2523||Cement||28 per cent|
|6802||Marble and granite||28 per cent|
|2515||Blocks of marble and granite||12 per cent|
|Chapter 68||Sand lime bricks and fly ash bricks||12 per cent|
|2505 & 2517||Natural sand, pebbles, gravel||5 per cent|
|8428||Lifts and elevators||28 per cent|
Under the tax regime, many of the construction materials are under the 18 and 28 per cent slab. For example, steel and steel products, are mostly in the 18 per cent segment and cement and prefabricated structural components for building or civil engineering, are in the 28 per cent slab. However, as the input tax credit is available on products utilised for construction, the overall tax incidence should be neutralised.
Reverse charge mechanism in GST and its impact on construction costs
The mechanism, where the recipient of services pays the service tax, is called as ‘reverse charge mechanism’ (RCM). The same concept, with wider application, has been borrowed from the service tax laws in the Goods and Services Tax (GST) regime.
A developer has to pay GST on services availed, like those provided by a person who is located in a non-taxable area, services provided by goods transporters, legal services provided by an individual or firm, etc. The developer also has to pay GST under the reverse charge mechanism, on the services provided by government or local authorities, like municipalities, etc. Nevertheless, some of the services provided by the government, like renting of premises, specific services provided by the postal authorities, transport of goods by railways or by state transport undertakings, etc., are outside the scope of the GST, similar to the service tax regime.
A significant departure under the GST laws, compared to the erstwhile service tax provisions, is that under the reverse charge mechanism in GST, a person who is registered under the GST has to pay GST on all the services and goods that are procured from a person who is not registered under GST.
This has significantly expanded the scope of the reverse charge mechanism for all taxable persons and it will adversely affect the developers. Moreover, the tax payable under the reverse charge mechanism under the GST, cannot be adjusted by the developer against the input credit available from the GST paid on the inputs, but has to be paid by cash/bank payment.
So, under the GST, the builders are worse off, due to the dual effect of the levy of GST on the services availed from unregistered person, as well as the requirement to discharge the reverse tax on goods received from unregistered suppliers.This will certainly increase the costs for the developer, especially the small developers who were availing goods and services from unregistered suppliers earlier and were not bearing the cost of taxes to that extent.
GST on ready properties
If the OC for the project has been received, then, no GST will be applicable. A CRISIL report points out that at present, a developer pays excise tax and VAT, on inputs like cement and steel, at 27.7 per cent and 18.1 per cent, respectively, which vary from state to state. Now, under the GST regime, cement and steel will be taxed at 28 per cent and 18 per cent, respectively, while other inputs like paint and white goods, will be taxed at 28 per cent. The final product – the housing unit – will be taxed at 12 per cent, with credit for taxes paid on inputs. As the tax levied on the entire cost including the land will be 12 per cent, the amount would be sufficient to provide for the input credit for developers. Hence, a buyer opting for a ready-to-move-in apartment, is saved from the tax burden.
However, the tax calculations under the GST regime, for the real estate market, are not so simple. For example, the GST on under-construction projects will be charged to home buyers on the sale price but the credit can be availed by the developers, only on the cost of construction. As the builder will have to pay the GST on the full project and the input availed is only on the construction cost, there may be a gap that is no less than 30 per cent. Consequently, whether you opt for an under-construction property or ready-to-move-in unit, the developer will hike the prices in that proportion, to make sure this gap is bridged.
GST on property rentals
Credit/set-off of input GST is available to a developer, if the sale is executed prior to obtaining the completion certificate or prior to first occupancy. However, this credit is not allowed if the developer chooses to rent out the property. Hence, we might see spike in commercial rentals.
GST has also been levied on the renting of residential property, for use as an accommodation. Consequently, tenants may witness a hike in rent payment under the GST system, as there is no service tax applicable on residential properties, in the existing system.
Here’s how the GST will impact the tax computation on rental income:
With the clubbing of taxes on goods and services, under the GST regime, the confusion about levy of separate tax on service and goods is done away with.
Unlike under the service tax regime, the threshold limit for applicability of GST has been increased from Rs 10 lakhs to Rs 20 lakhs. So, many of the landlords who were covered under the service tax regime, will go out of the indirect tax net, under the GST.
It may be interesting to note that for the purpose of computing the aggregate limit of Rs 20 lakhs under the GST, all the taxable, as well as exempt goods and services supplied, shall be taken into account. So, unlike the service tax regime, where it is only the taxable services, which are taken into account for determining whether you have crossed the basic threshold, under the GST, the value of all the service and goods supplied in India, as well as exported, whether taxable or exempt, are taken into consideration for the Rs 20-lakh limit
There is one more major tax implication under the GST, with respect to rent on commercial properties. The parliament has borrowed the concept of ‘reverse charge mechanism’ from the service tax regime, under the GST. However, unlike in the service tax regime, where the reverse charge mechanism is applicable in case of services and is not extended to the sale or manufacturing of goods, the same is made applicable for goods as well as services, under the GST regime. A person who is registered under GST, who gets supplies of goods or services from a person who is not registered under GST, will have to pay the GST under the reverse charge mechanism. Under the service tax regime, there is no provision of reverse mechanism, with respect to the rent paid by the lessee. The proposed GST provisions, due to the increased rate and the levy under the reverse mechanism, will eventually make it costlier to take any commercial premises on rent.