Reduction in rates of GST on houses: How it impacts you

Reduction in rates of GST on houses: How it impacts you

(Keshav R Garg – Partner, K D & Associates)

In recent GST Council meeting lower GST Rates for Housing has been approved. As per the new rates effective from 1^st April 2019, an affordable house would be charged at 1% GST and others at 5%. Further it has been announced that builders shall not be allowed to claim input tax credit in respect of their purchases. It must be informed that GST is charged on under construction houses who are yet to get completion certificate from competent authority. As being portrayed by the government, is reduction in GST rates something really to cheer about. Let us understand in this article.

At present Affordable housing was charged 8% whereas 12% GST was charged on other houses. But the builder were earlier allowed to claim input tax credit. Input tax credit is the benefit of tax which builders pays on the material he purchases for constructing the house. Where such benefit is not allowed to the builder, it shall now become his cost making the cost of house dearer. Let us understand this by following Example:

S. No.		Before Rate Change	After Rate Change (without ITC)
1	Average Cost of Constructing a House (Assumed 20% margin for Builder)	50,00,000	50,00,000
2	Average GST Paid on Purchases (Assumed at 12%)	6,00,000	6,00,000
3	Cost to Builder	50,00,000	56,00,000
4	Basic Sale Price of Builder	60,00,000	67,20,000
5	GST Charged from Customer	7,20,000	3,36,000
6	Total Amount paid by Buyer	67,20,000	70,56,000
7	Net Tax paid by builder	1,20,000	9,36,000
8	Collection by Government	7,20,000	9,36,000
9	Increase in Price for Customer	--	3,36,000

Please note that for a house to be classified as “Affordable House” it must have area less than 90 sq mtrs/60 sq mtrs in non-metro/metro cities respectively. Also the cost of the house should not be more than Rs. 45 lakhs. Houses which do not fulfil these conditions would be charged 5% GST without ITC.

As far as the existing contracts are concerned, there is no change of tax structures for them as far as payments made before 1^st April 2019 is concerned. Any payment becoming due after the effective date would be charged at 5% without ITC. If the possession of the house in nearby, buyer should make all efforts to settle the payments before 31^st March 2019 to save some money in his pocket. 

As far as the builders are concerned they would now be required to work on details and find out amounts before and after 31^st March 2019. Also they shall now be required to reverse the input tax credit already utilised by them in respect to amounts becoming due after 1^st April 2019. This would result into extra financial burden on the builders further leading to liquidity crunch.  The builder community would now be in trouble in relation to anti-profiteering which might be aggressively invoked against them, especially in affordable houses.

The projecting of the government that it has reduced the tax rate and hence purchase price of houses is merely a gimmick. Realities are quite different. After the change of Rate, government would enjoy more tax realization putting extra burden on the buyer of houses. The free flow of Input Tax Credit was the basic fundamental of GST and if the same is denied, the costs are certainly going to rise. Not only it will become heavy on pockets of the buyer but would also force them to get attracted towards illegal activities of under invoicing landing up paying lower taxes to the government.

Recent ordinance regarding non-acceptance of deposits by business concerns and now this decision cements the belief that serious overhaul is required at the decision makers level. The government needs to ensure that they not only make newspaper headlines but real relief being passed to the taxpayer. In short if you are buying a property, don’t get swayed away with yet another not so thought over decision by the government.

Regards

CA. Keshav R Garg

9888090008