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GST will not push real estate prices up, feel industry experts

Real estate prices would be off-set by 'input tax credit' under the GST law

Karan Choudhury  |  New Delhi 

While the service tax charged would go up from 4.5 per cent to 12 per cent, real estate prices would be off-set by 'input tax credit' under the GST law, which would help keep the final selling price neutral. BS Photo
While the service tax charged would go up from 4.5 per cent to 12 per cent, real estate prices would be off-set by ‘input tax credit’ under the GST law, which would help keep the final selling price neutral. BS Photo

Arvind Parashar, an engineer with an IT firm, got a rude shock a few days back when he got an email from his real estate developer. The developer in the mail asked him to either pay the outstanding amount for his three-bedroom flat in Delhi NCR immediately or get ready to pay a higher amount post implementation of goods and services tax (GST) in July.

On calling the developer, he was told by the staff that to be fully compliant, the company would enhance its “demand-cum invoices” as per rules and regulations. “We therefore would like to inform you that if you have any previous outstanding payments with regard to your booked flat in our project, kindly clear the same before 1st July 2017 to save extra burden of tax differential amount,” the email stated.

With the implementation of the new tax regime just two weeks away, some real estate developers are asking for full payments for properties, even as the government has deemed any such move illegal. Caught in the middle are hapless flat owners, who do not know if post the implementation, they would have to pay more. “The whole week I have been trying to make sense of this. I am already paying Rs 48 lakh in total, going by what the developer said I would end up paying close to Rs 5 lakh more,” said Parashar.

Industry experts categorically said that property rates would not go up due to While the service tax charged would go up from 4.5 per cent to 12 per cent, it would be off-set by “Input Tax Credit” under the law, which would help keep the final selling price neutral.

“The impact of on real estate would be primarily tax neutral; the Finance Ministry has made it very clear that there should be no additional tax burden on consumers. Developers who did not get the benefit of ITC (Input Tax Credit) in the pre-era will be able to avail the same post and the ITC that will be available to developers will be extremely tax efficient. As per GST, ITC has to be fully passed on to the consumers. With at 12 per cent and the ITC, the net impact should be a tax neutral environment for the consumers,” said Samantak Das, Chief Economist & National Director — Research, Knight Frank India.

He added that in the case of under-construction projects, developers will get ITC for the yet-to-be constructed portion. Hence, even if buyers have to pay 12 per cent GST, they are entitled to get the ITC (passed on to them by the developers). For new projects, it’s very straight-jacketed, will be applicable at 12 per cent and the ITC has to be passed on fully.

The Union finance ministry, state governments and the Central Board of Excise and Customs (CBEC) have received several complaints that people who have booked flats and made part payments are being asked to make the full payment before July 1 or face higher tax.
 
“This is against the law,” the government said. The construction of flats, complexes, and buildings will have a lower as compared with a plethora of central and state indirect taxes under the existing regime, it added.

Industry bodies, however, claim that the confusion over the issue has been caused due to ambiguities surrounding projects that are nearing completion. “There are projects that are almost 80 per cent complete, how will the developer get ITC there. There is confusion around it and we are seeking guidance on that. However, developers cannot force people to give the balance amount,” said Manoj Gaur, Vice-president, CREDAI National.

Why will not trigger a hike in property prices?

Taxes borne by a developer at present
 
* Central excise duty on most construction material: 12.5 per cent 
VAT on construction material: 12.5 percent to 14.5 per cent in most states
Entry Tax: Varies from state to state. 
* Input Tax Credit of the above taxes is not currently allowed for payment of Service Tax 
* Credit of these taxes is also not available for payment of VAT on construction of flats

Tax to be paid under GST
* Full input credit would be available for offsetting the headline rate of 12 per cent 
* As a result, the input taxes embedded in the flat will not and should not form a part of the cost of the flat 
* As input credits would take care of the headline rate, refund of overflow of input tax credits to the builder has been disallowed
* The builders are expected to pass on the benefits of lower tax burden under the regime to the buyers by way of reduced prices or instalments

What if a builder still charges extra post implementation?
 
* Despite this clarity on position, if any builder resorts to such practice, the same can be deemed to be profiteering under section 171 of law

First Published: Sat, June 17 2017. 22:02 IST
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