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Prices of flats may drop by up to 5%

Prices of flats may drop by up to 5%
Housing prices are likely to fall by up to 5% following the implementation of goods and services tax (GST) after the Centre and states decided to peg the levy at 12% on finished houses or apartments. After allowing for credit for taxes paid on inputs such as cement, steel, paints and other items, the actual burden will be lower.

As a result, the price of a Rs 1-crore apartment may come down by Rs 3-5 lakh, said a consultant. The net price of houses in the affordable segment, which cost up to Rs 30 lakh (at Rs 3,500 per sq ft of built-up area) should fall by 5%.

Once GST kicks in, home buyers will not have to pay the 4.5% service tax on the final price that they sell out while taking possession. As a result, tax consultants and realtors said that fixing the GST rate at 12% was a customer-friendly move and would lead to either lower tax liability or be tax neutral.

For a premium product, however, Credai chairman and CMD of ATS Infrastructure Geetambar Anand said that at 12% GST, customers will benefit from projects that cost up to Rs 6,000 per sq ft. A premium project may not gain significantly as developers build high margins into such properties.

Manoj Gaur, Credai vice president and MD of Gaursons, said that if input credits are allowed properly, the 12% GST rate is favorable to buyers. Suresh N Rohira, partner, Grant Thornton India, said that GST at 12% would certainly bring down the tax liability in the affordable segment. He said that the taxes on inputs for construction are more than12% of the final price. But if a developer is working with a high margin, which is the case in the premium project, the net tax will remain significant.

Priyajit Ghosh, partner ­ indirect tax, KPMG India, said that under the GST regime, 12% GST on construction sector would make the sector better off.Because of input credit, the net tax on finished product would have a downward pressure.

According to a Crisil report, at present, a developer pays excise tax and VAT on inputs like cement and steel at 27.7% and 18.1% respectively, which vary from state to state. Now, cement and steel will be taxed at 28% and 18% respectively under GST. Similarly, other inputs like paints and white goods are going to be taxed at 28%. But the final product that is a housing unit will be taxed at 12%, with the allowance of a credit against taxes paid on inputs. But as 12% tax will be levied on entire cost including the land, the amount will be sufficient enough to provide for the input credit, said Ghosh. He said that12% tax rate is favorable to the industry. For normal houses (up to Rs 6,000 per sq ft), 12% GST on a finished house or an apartment will be effectively reduced to near zero as the developer will take the credit for taxes he paid on inputs. At the same time, the buyer will not have to pay the service tax4.5% of the price of the house. This will reduce the cost of acquisition of the house.

In some cases, even input credit could be more than the GST levied on the finished product, but a developer can claim a maximum credit to the extent of the GST he would be paying for the finished product.

Take a simple example: A developer is completing a housing project where the work has been awarded to a contractor.The cost of construction is around Rs 2,000 per sq ft, the going rate in the market for average quality. The contractor will collect a tax at 18% on the amount at which he is completing the work. In this case, he will collect a tax of Rs 360 on Rs 2,000 per sq ft from the developer.

If the developer sells the house at Rs 3,000 per sq ft built-up area, which is the going rate for the affordable segment housing, he will pay a tax at 12 % on the final cost. In this case, it will be also Rs 360 per sq feet. Therefore, his fresh tax liability would be nil. If other expenses and tax paid thereon is included, the developer could have claimed more. But under GST, he can claim only up to the fresh tax liability.But the service tax that a buyer pays so far at the rate of 4.5% will not be levied now. So the next cost for buyers of not-so-premium houses will decline.

But if the product is in the premium segment, the entire input tax credit is not sufficient to bring down the fresh tax liability to nil. A premium construction can be done at Rs 5,000 per sq ft. The net tax collected by works contractor would be Rs 900 per sq ft from the developer.But while selling at Rs 10,000 per sq ft, the developer needs to pay Rs 1,200 per sq ft. Therefore, after adjusting against the taxes on input, he will have to pay Rs 300 per sq ft or 3%, which he will recover from the customer. But as the developer will also pay taxes on other expenditures, the net tax liability at12% GST on finished product would be very small.

Source: times of India


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