The introduction of Good and Service Tax has brought in a landmark change in the tax structure of goods and services in the country. It was introduced on 01 July 2017. GST was brought in to avoid the taxation on multiple fronts and to streamline many different indirect taxes being paid by the consumers.
Another primary objective of GST was also to bring down the prices of goods and services. As with other sectors, the cost of homes was also supposed to come down with GST.
GST Rates For The Real Estate Sector
Before we delve into the subject of the input tax credit, it is important for us to know about the GST rates charged on real estate properties
Ready to move properties
For the ready to move in properties, they are virtually exempt from GST as the buyers have to pay Stamp Duty and Registration Charges as taxes on registration of the particular property. These come up to 7-8% of the total cost of the property depending on the state where the property is located.
Under construction properties
The GST rate on under construction property or for those properties for which the ready to move in certificate has not been issued is levied at 18%, and a standard rebate of 6% (towards the cost of land) is allowed bring the effective rate to 12% on premium properties. And for those listed under the Pradhan Mantri Awas Yojana or the affordable housing sector, the effective rate of GST comes to 8%.
What is Input Tax Credit and How Does it Affect the Home Buyers?
After the implementation of GST, the prices of under-construction properties have gone up by 6.5%, while on the other hand it was supposed to go down. Are you wondering why?
While GST looked at simplifying the tax structure, it also looked at bringing the entire sector of organised material suppliers and vendors under the GST net by introducing the input tax credit. Real estate is one such sector where the input tax credit has been allowed by the Government.
Input Tax is used to signify the GST paid by a company on the materials used as input for producing /manufacturing a product. In the real estate context, it will include all the materials such as steel, iron, cement, bricks and other material etc. that went into the construction of the property.
A developer gets credit for the tax paid on his inputs and ideally, this is required to be passed on to the home buyer, thereby reducing the overall GST paid by the buyer and not taxing him twice for the same product.
However, many developers have failed to pass on the input tax credit to the home buyers in spite of repeated urging by the Government.
While on the other hand, this has caused a drop in the sale of the under-construction property as the customers are ready to wait in order to avoid payment of GST. This has had a ripple effect on other associated sectors.
To ease the woes for home buyers as well the real estate developers, the GST council is taking into consideration, two proposals that may effectively bring down the GST rate on under-construction properties.
One being, implementation of a fixed lowered 12 per cent GST rate with full input tax credit (ITC) to the builder. This will bring down the effective GST rate to 8% accounting for input cost of the land.
While the other looks at bringing down the GST rate on under-construction flats to 5%, without the benefit of ITC. This proposal has a condition that the builders would have to furnish proof that 80% of the construction material has been purchased from suppliers who are registered with a GST number.
Once in place, these measures should be more helpful to the individuals looking to buy under-construction property. Till then we would advise you to check and verify with your developer if you have been granted the benefit of input tax credit while buying an under-construction property.
