Housing prices are likely to fall by up to 5% following the implementation of Goods and Services Tax (GST) across India from July. The GST Council fixed GST at 12% on the housing sector with the allowance of credits for taxes paid on inputs like cement, steel, paints, and other items. Because of the input credit, the net taxes on housing will likely fall.A simple calculation shows that the price of a house costing Rs 1 crore may reduce by Rs 3-5 lakh. The net price in the affordable housing segment of up to Rs 30 lakh at Rs 3,500 per square feet built-up area should fall by 5%.
The service tax–at the rate of 4.5% on the final price–that buyers pay while taking possession in the preGST regime will not be levied once the GST comes into force across the country. Therefore, tax consultants and realtors say that fixing the GST rate at 12% is a customer-friendly decision and will lead to reduced tax liability or be tax neutral. “The actual tax incidence under GST at 12% will match or be lower than the existing multiple indirect taxes on the sector,“ said the chairman of National Real Estate Development Council (Naredco), Rajiv Talwar, who is also the CEO of DLF Ltd.
This should give room for developers to cut the prices on housing units, Talwar said. The GST rate, he said, will help the affordable segment the most once this omnibus tax reform kicks in.
Talwar says that GST at 12% for construction of projects for sale to homebuyers with the allowance of credit of taxes paid on inputs will be a much-necessary shot in the arm to speed up growth of this sector. He said the GST rate for work contracts, which will also be offset by input credits, will provide for a seamless and simplified tax policy.
In a statement, Naredco said it recommended a GST rate between 9% and 12% for the real estate sector.Naredco submitted a white paper to the government with detailed analysis of tax rates at multiple points and their implication, the statement said.
Talwar said, “The heavily taxed real estate sector welcomes a single, stable GST rate of 12%, inclusive of the value of land and with full input tax credits.“
Parveen Jain, president of Naredco, says: “GST will bring a transformational shift for the Indian industry, including the real estate sector, as it will subsume more than 16 major taxes and levies into a single consolidated tax.“
Getamber Anand, chairman of Credai and CMD of ATS Infrastructure, said that if the system is implemented properly, customers of normal projects costing up to Rs 6,000 per square feet will benefit from GST pegged at 12%. However, premium projects may have to pay higher taxes, Anand said.
Manoj Gaur, vice-president of Credai and MD of Gaursons, said that if the input credits are allowed properly, the GST rate is for the housing sector is favourable to buyers.
Suresh N Rohira, partner (Indirect Tax & GST) at Grant Thornton India LLP, said that at 12%, the GST regime would certainly bring down the tax liability in the affordable housing segment. He said that the taxes on inputs for construction are more than 12% of the final price. But if a developer is working with a high margin, which is the case in premium projects, the net tax would remain significant.
Priyajit Ghosh, partner (indirect tax) at KPMG India, said that 12% GST on construction industry will make the sector better off. Because of input credit, the net tax on finished products will have a downward pressure.
At present, a developer pays excise tax and VAT on inputs like cement and steel at 27.7% and 18.1% respectively, which vary from state to state, a Crisil report said. Now, cement and steel will be taxed at 28% and 18%, respectively, under GST.Similarly, other inputs like paint and white goods are going to be taxed at 28%.
But the final product–a housing unit–will be taxed at 12% with the allowance of credit against taxes paid on inputs. But as 12% tax will be levied on the entire cost including land, the amount will be sufficient to provide for input credit, Ghosh says. For normal houses costing up to Rs 6,000 per square feet, GST at 12% on a finished house or apartment will effectively reduce the final tax liability to near zero, as the developer will take the credit for taxes he paid on inputs. At the same time, the buyer will not have to pay the service tax, at the rate of 4.5% of the price of the house. This will reduce the cost of acquisition of a house.
In some cases, even input credit could be more than the GST to be levied on the finished product, but a developer can claim a maximum credit to the extent of the GST he would have paid on the finished product.
Take a simple example: A developer is set to complete a housing project through works contract awarded to a contractor. The cost of construction is around Rs 2,000 per square feet, the going rate in the market for average quality. The contractor will collect a tax at the rate of 18% of amount on which he is completing the work. In this case, he will collect a tax of Rs 360 on the `per square feet’ rate of construction (Rs 2,000 per square feet) from the developer.
If the developer sells the house at Rs 3,000 per square feet for built-up area, which is the going rate for the affordable segment, he will pay a tax at 12% on the final cost. In this case, it will also be Rs 360 per square feet. Therefore, his fresh tax liability would be nil. If other expenses and tax paid is included, the developer could have claimed more. But under GST, he can claim only up to the fresh tax liability.
But if the product is in the premium segment, the entire input tax credit is not sufficient to bring down the fresh tax liability to nil. The going rate for premium construction is at around Rs 5,000 per square feet. The net tax collected by works contractor would be Rs 900 per square feet from the developer. But while selling at Rs 10,000 per square feet, he must pay Rs 1,200 per square feet.
Therefore, after adjusting against the taxes on input, he will have to pay Rs 300 per square feet, or 3%, which he will recover from the customer. But as the developer will also pay taxes on other expenditure, the net tax liability at 12% GST on finished product will be very small.