Bottom Line: GST was supposed to be tax neutral, if not reducing, the high tax burden of homebuyers. However, it has increased the tax burden and prompted the prospective homebuyers to wait for ready to move property.
“GST was touted to reduce our tax burden in the housing market. Even though I had moderate expectations with the new taxation, the least that I was expecting was to make housing costlier for the average homebuyers like me. A few developers are openly advertising to share the GST burden of the buyers whereas it is not sharing but only passing on the advantages of Tax Input Credit with the buyers. I feel the GST has by and large failed its purpose in the housing market add made houses costlier,” argues Anubhuti Roy, a fashion designer in Gurgaon.
It is true that the GST burden is today a huge deterrent in the housing market and a large share of homebuyers are now waiting for the project to be ready as the ready to move apartment won’t attract GST burden. The problem, however, is with millions of buyers who are in the mid cycle of construction and the GST has suddenly added to their already over stretched budget in the housing market.
Take for instance, a typical apartment in Noida would cost INR 60 lakh. Since the cost of construction was estimated to be 25% of the project cost, the Service Tax burden has been 3.75%. Add to it, the Stamp Duty of 7% and a few thousand rupees in the registration process. So, all in all it has not been more than 11%.
Now with the new taxation, the project would cost 12% GST (18% GST minus land component) with the additional burden of 7%. So, the tax burden for a new homebuyer is 19% that was earlier around 11%.
Of course, over and above the tax calculation lies the fact that the developers can get Input Tax Credit that they can pass on to the buyers. The way the real estate market operates and to the extent demand-supply is lopsided, added with the developers’ financial clout to hold on the inventory, only a handful of developers have thus far announced to pass it on to the buyers, glorifying it as sharing of GST burden.
Why GST is not tax neutral for housing?
GST replaces Service Tax only and not entire set of taxation including Stamp Duty & Registration
Even with anti-profiteering clause, a check on developers passing the benefits of Input Credit to buyers a tricky affair
Tax difference between Service Tax and GST is huge to be bridged with Input Credit
Higher tax slabs on construction materials (Cement 28% for example) will escalate prices
Developers have their own reasons why they are not reducing the prices to pass on the Input Credit to the buyers. It is generally maintained within the built environment of real estate that calculation of revised sale price is a complex as well as time-consuming task. Developers have to depend upon their contractors to know the VAT and Excise Duty and also have to wait for the project to complete before they know how much price difference is possible in the final calculation. Moreover, the price difference in not enough to bridge the gap between GST at 12% and Service Tax at 3.75%
Aditya Kedia, Managing Director, Transcon Developers maintains that the real estate sector is used to be the most complicated sector as far as taxation is concerned. Almost all kind of tax that can be thought is levied on this sector in direct or indirect manner. In GST regime also, other than GST many state & local taxes are levied on the sector e.g; Stamp duty, registration charges, Labour Cess, Property Tax, Municipal Tax, Development Charges etc. and there is yet no means to subsuming them.
“With 12% GST, 6% Stamp Duty and Registration and many other local taxes, the sector is burdened with many invisible taxes. If all these taxes have to be subsumed under GST, then rate has to go up or the government has to compensate the local bodies,” says Kedia.
Parth Mehta, Managing Director of Paradigm Realty agrees the the GST will not totally reduce the overall tax burden but yes it will portray a good picture of the real estate sector which was a dire necessity. The real estate the market may witness maximum tax evasion is a myth as confirmed by Finance Minister Arun Jaitley. Also, he has recently said that GST council will consider bringing it all under the indirect tax levy.
“Higher tax slabs are extensively hurting the real estate sector. Cement prices are going up marginally, as the GST council has announced 28% tax rate on the product. As the cement industry, this rate was above than expected. The increase in the tax slabs like this on materials will be naturally transferred to the customers,” says Mehta.
Nikhil Hawelia, Managing Director of Hawelia Group points out that the aim with GST has been to keep it more or less revenue neutral with taxation of the entire set of material being procured for construction of a single project. But in case of an ongoing project where the stages of work progress is different, there this statement is difficult to justify as most of the material being used for finishing is in the highest tax slab which directly affects the cost of construction.
“At this juncture of almost 5 months past implications of GST most of the manufactures are satisfying their greed by not passing on the benefit of Excise Duty being charged in the previous tax system and directly increasing their profits by the percentage taxation of this duty. So, studying the entire effect of GST on the overall taxation cannot be judged today and in practical terms, there is a wait and watch situation to see how the market moves based on the GST effect, to evaluate the actual burden,” says Hawelia.
It can be vouchsafed at this point of time that the overall cost of the houses even after passing on the benefit to the buyers is marginally higher and GST has thus failed to its objective of lower taxation or being tax neutral in the housing market. A back of the envelope calculation indicates that with GST of 12% on property transaction, cost has increased by 6-8%, in case no Input Credit is passed on by the developers to the buyers. Of course, with the provision of anti-profiteering clause, the developers are mandated in theory to pass on the benefit of Input Credit but even if they do so, the property price still increases to 1-3%.
By: Ravi Sinha