Taxing the ready to move-in houses is a good idea.

There has been a regular comparison between the completed project and under-construction projects. In the latter GST is charged whereas in the former it is not. Fully ready to move in houses are neither covered under the term “goods” nor “services” for levy of GST. The very mindset that under construction houses are built as per the specification of the consumer and ready to move in are not, needs to be changed. In today’s world where thousands and thousands of units are constructed in a project there arises no question of specification from customer. Levying a small percentage of GST on both under-construction and built in residential units would be great idea, exempting a few affordable housing projects. This will not only increase the revenue but also not pinch hard to the customers, also improving liquidity crunch faced by builders. We all know that since GST has been enforced, we have preferred built in units instead of under construction ones for obvious reasons.

The 32^nd GST Council Meeting is underway in the capital and it is expected that big relief may be granted to real estate. It is the buzz of the country that GST rates on under-construction properties will be slashed from 12% & 8% to 5% for premium houses and affordable houses respectively. There is also a discussion that 5% tax would come with No input tax credit to the builders. Input Tax credit is the credit/benefit of tax paid by builders on there purchases. This does not come in cash but  builders can  utilise it against their tax liability. It might be a big headline for newspapers, but I feel that till the time excess tax paid by the builders is not refunded to them in cash, it will not make any difference in their selling price. Dead ITC resting in coffin is as good as cost of services by these builders.

Now, after the reduction of GST Rates, the end product of the builders will be charged at lower rate whereas their inputs like steel, cement, architect services would attract  higher GST. This proposition gives light to provisions of inverted duty structure. Inverted duty structure is one where the output is charged at lower rate whereas input is procured at higher rates. This results in accumulation of excess tax paid, which is refunded in cash as per section 54(3) of the Central Goods and Services Tax Act. If the refund of the excess tax paid by builder is blocked then reduction of rate will make no difference, rather it will swell their costs.

The story does not end here, as per the provisions of Section 54(3) of CGST Act 2017 read with rule 89(5) of CGST Rules 2017 as amended by Notification 26/2018-Central Tax dated 13.06.2018, input tax credit eligible for refund in case of inverted duty structure is the tax paid on input i.e. in common language raw material. No refund is admissible for excess tax paid on account of services procured or tax paid on purchase of capital goods. In these circumstances, the builder might remain at loss and they shall be forced to recover non-refundable ITC from the customer. In both cases whether builders buys machinery or hire it on rent they shall not be allowed the refund of the tax paid. We all know that the use of machinery forms huge part of a construction contracts. Also the tax on fees charged by the architects would also remain blocked as it forms input service. But certainly yes in respect of cement which is charged at 28% and also forms major chunk of construction activity, could lead to refund under inverted duty structure. But it seems that GST Council is already planning to reduce GST rates on cement as well. At the moment, stocking cement would be a bad idea at least till 2019 elections are over. The crux of the story is that whether you are a consumer or a builder, things will change only where the government allows cash refund of excess tax paid on the construction activity.

I feel real estate sector needs to be analysed from all angles and then decisions must be taken. A small step of charging tax on ready residential units, might ask government to amend necessary laws but it shall certainly prove to be a win-win situation for all the stakeholders.

Regards

CA. Keshav R Garg

(B.Com, FCA, CS, ISA(ICAI))

Author: Bharat's GST Ready Reckoner

            A Handbook on GST

Member: Indirect Tax Committee of CII, 

Founder: MyGst.MyTax Foundation

Adviser: Industries Association of Chandigarh

Adviser: Chambers of Chandigarh Industries

Address: 3328, First Floor, Sector 27 D, Chandigarh, India - 160 019

Phones: +91-172-461-3328, +91-98880-90008