See How GST Will Impact Real Estate Developers & Home Buyers

By Admin May 25, 2017 project-reviews
See How GST Will Impact Real Estate Developers & Home Buyers

Residential properties prices are expected to drop up to 5% following the execution of GST after the Centre and states decided to peg the tax at 12% on finished houses or apartments.

After considering credit for taxes paid on construction materials such as cement, steel, paints and other items, the burden will be decreased. Consequently, the price of the apartment may fall by Rs 3-5 Lacs, according to the real estate experts.

The price of the homes under affordable segment for example (Tata Value Homes Residential Properties) which cost up to (Rs. 3, 500 per sq. ft.) should drop by 5%.  Just the once, GST kicks, home buyers will not have to pay the 4.5% service tax on the final price that they receive while at the time possession.

According to the tax consultants and real estate developers “setting the GST rate at 12% was a customer-friendly step and would initiate either lower tax liability or be tax neutral. Premium residential projects that cost up to Rs. 6,000 per sq. ft. will also give benefits to the customers.“

According to a recent report, a builder pays excise tax and VAT on materials like cement and steel at 27.7% and 18.1% respectively, which are changing state by state. At present, cement and steel will be taxed at 28% and 18% respectively according to GST. In the same way, other materials like paints and white goods are going to be taxed at 28%. But the finished product that is a home will be taxed at 12%, with the allowance of the credit against taxes paid on inputs. But as 12% tax will be charged on complete cost counting the land, the amount will be sufficient enough to provide for the input credit.

He said that 12% tax rate is favorable to the industry. For normal houses (up to Rs 6,000 per sq ft), 12% GST on a finished house or an apartment will be effectively reduced 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 4.5% of the price of the house.

This will decrease the cost of residential property possession. In other cases, even input credit could be above the GST charged on the final product, but a real estate developer can ask for a maximum credit to the extent of the GST he would be paying for the finished product.

Take all these calculation by a simple example: a builder is finishing a residential project where the work has been awarded to a contractor. The construction cost is approx Rs 2,000 per sq ft, the current rate in the market for standard quality. The contractor will collect a tax at 18% on the amount at which he is finishing the construction.

Tax Reduction


In this situation, he will collect a tax of Rupees 360 on Rs 2,000 per sq ft from the real estate developer. If the real estate developer sells the house at Rs 3,000 per sq ft built-up area, which is the price of affordable homes, he will pay a tax at 12 % on the total coast. In this case, it will be also Rs 360 per sq feet.

As a result, his fresh tax liability would be zero. If additional costs and tax paid thereon is included, the builder could have claimed more. But as per GST, he can claim only up to the fresh tax liability. But the service tax that a home buyer pays until now at the rate of 4.5% will not be charged now. As a result, the next cost for buyers of not-so-premium houses will decline. 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.

A premium residential project can be done at Rs 5,000 per sq ft. the contractor will collect a tax of Rs. 900 per sq ft from the developer. But at the time of selling at Rs 10,000 per sq ft, the real estate developers needs to pay Rs 1,200 per sq ft. Therefore, after adjusting for the taxes on input, he will have to pay Rs 300 per sq ft or 3%, which he will recover from the investors. But as the builder will also pay taxes on other costs, the net tax liability at 12% GST on final product would be very small.

About the Author - Admin
Admin
Baldev Singh writes the content on real-estate from several years and he is one of the few writers who provide the thought-provoking content on best properties deals.
Follow Me :
Send an Email. All fields with an * are required.
Subscribe Newsletter