GST rates: Under construction properties to attract 12% tax
The Goods and Services Tax (GST) rate of 12 percent will be applicable on under-construction properties. This rate with input tax credit seeks to remove the inefficiencies of dual taxation in the form of value added taxation (VAT), service tax and puts an end to multiple taxes.
The service tax exemptions to be continued in GST as decided by GST Council include services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction/enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY).
The schedule of GST rates for services as approved by the GST Council said that the “construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. The value of land is included in the amount charged from the service recipient.” These will be taxed at 12 percent with full input tax credit.
What this means is that from July 1, GST would be applicable on under construction properties at the rate of 12 percent but not on completed, ready-to-move-in apartments. Real estate experts say that stamp duty and property taxes may continue to be levied on immovable properties.
A property that is under construction is governed by the works contract. The GST Council has announced four rates for services – 5, 12, 18 and 28 percent. While 5 percent rate is mostly for transportation services, rates for restaurant services will vary as per tariffs charged and facilities provided, ranging from 12-18 percent; Gambling and cinema services will fall under 28 percent slab, as entertainment tax merged with service tax under GST while works contract is taxable at 12 percent with full input tax credit.
Under the current tax regime, works contract attracts a service tax rate of 6 percent which is a reduced tax rate under a special scheme known as the abatement scheme and a value added tax or VAT that currently ranges from 1 to 5 percent depending from state to state. While paying these taxes today, developers do not get a deduction of the input tax but under GST they will. This means that on the amount of excise duty and VAT they pay on cement or steel, no set off is available to them but under the new GST regime, developers will be able to get benefits on taxes.
“The full availability of input credit as compared to current regime (where input credit is not available on excise duty paid on certain raw material inputs) is expected to be beneficial for reducing project costs under the GST system,” says Shubham Jain, vice president and sector head, ICRA Limited.
But will this reduce or increase the price of properties? “Houses will be cheaper or expensive depending on the current value added tax prevailing in different states. For example, if the current VAT is 2 percent and service tax rate is 6 percent, then though the total tax rate may increase to 12 percent, the price of the property may be cheaper if the benefit of additional tax credit outweighs the negative increase in the tax rate,” explains Harpreet Singh, partner, indirect taxes, KPMG in India.
“Buyers should not worry about the developers not passing on the benefit of the additional tax credit because GST also provides for an anti-profiteering provision which makes it mandatory for the dealer to pass on the benefit of GST to the end consumer. Therefore, it is a win-win for both buyers and developers,” says Singh.
Earlier, both developers and homebuyers received benefits under the abatement scheme (reduced tax rate under a special scheme). Under the current service tax regime, for those buying an under-construction flat, an abatement of 75 percent was allowed, subject to the flat being less than 2,000 sq ft and sold for less than Rs 1 crore, taking the effective tax rate from 15 percent to 4 percent. Similarly, if the cost of the flat was above Rs 1 crore and the size of the unit was more than 2,000 sq ft, the abatement was reduced to 70 percent and the effective tax rate to be borne by the buyer was 5 percent. States also charged VAT over and above service tax. This has now been done away with, say experts.
Currently, EMIs for ready-to-move-in apartments do not attract indirect tax. But installments paid to the builder for an under-construction property attracts a service tax of 15 percent on which abatement is provided. The premise here is that a builder is providing a service to a homebuyer by constructing an apartment. The abatement is allowed to take care of the value of the land involved in the construction of apartments, say experts.
Under GST, “rates for goods used in the real estate sector, inputs used in the construction of houses have either found a place in the 18% bracket and some in 28 percent bracket. Products like commonly used Portland cement would be taxable at 28 percent while iron and steel products would be taxable at 18 percent,” says Saloni Roy – Senior Director, Deloitte Haskins & Sells LLP.
“This a good move for as long as it remains revenue neutral, so long as the outflow for both the developers and the customers remain the same as was the case prior to the GST regime and does not increase,” says Getamber Anand, chairman, Confederation of Real Estate Developers Association of India, Credai.