The Winning Formula!
The GST Council’s decision to give an option in the choice of the tax regime in GST for projects under construction has given an opportunity to home buyers to negotiate with developers to choose the system beneficial to them.
The decision has also brought some reprieve to developers over their concerns on the loss of Input Tax Credit (ITC) in the new regime.
In its latest decision, the GST Council has given an option to projects under construction, where construction started prior to April 1, 2019, to choose either the old regime of GST, at the rate of 12% with ITC, or the new regime of GST where tax is charged at 5%, but without ITC, for general housing.
For affordable housing, the council has given an option of tax at 8% with ITC under the old system, or GST at 1% without ITC under the new system.
All new projects, where work will begin from April 1, will be charged GST under the new system of 5%, without ITC, for general housing, and 1% without ITC for affordable housing.
In cases, where developers passed on the benefit of ITC to their customers, for the general housing apartments of mid-price range, say around of Rs 6,000 per sq ft, the old system could be more beneficial to customers.
Take for example a 2,000 sq ft flat, which a developer wants to sell at Rs 1 crore. Industry sources say ITC available for such flat is around Rs 7.50 lakh. Therefore, developers can price the flat for customers at Rs 92.50 lakh, as they can secure the rest, Rs 7.50 lakh, from the tax department against ITC.
Now, a buyer will pay GST of Rs 11.10 lakh, at 12% on the selling price of Rs 92.50 lakh. The total price after tax that the buyer will pay will be Rs 1,03,60,000 (Rs 1.03 crore).
In the new system, the developer will not get any ITC, so he would fix the selling price itself at Rs 1 crore. In this case, the buyer must pay GST of Rs 5 lakh, at the rate of 5% on the selling price of Rs 1 crore. Hence, the buyer ends up paying Rs 1,05,00,000 (Rs 1.05 crore).
Therefore, if a buyer choses the new system, he must pay Rs 1.40 lakh more, provided the developer gives him the entire ITC credit. Therefore, buyers must consult their developers in choosing the correct system, so that the final price they pay remains the same, or reduces further.
In the case of super-premium units of Rs 10,000 per sq ft and over, buyers should go for the new system of 5% GST without ITC.
Take for example a 2,000 sq ft flat of Rs 2 crore where ITC is Rs 10 lakh. In this case, the developer will fix the selling price at Rs 1.90 crore in the old GST system, as he would get Rs 10 lakh as ITC. At Rs 1.90 crore selling price, the buyer pays Rs 22.80 lakh as GST, taking the price after tax at Rs 2,12,80,000.
Under the new system, however, the developer will fix the selling price at Rs 2 crore. With GST at the rate of 5%, the buyer must pay Rs 2.10 crore, saving Rs 2.80 lakh. If the premium is higher, the savings would be more.
In the case of the affordable segment, as the GST has been fixed at 1% in the new system, there would not be a big difference. But, there are instances where developers are not charging net additional tax under GST in the old system, as ITC is equal to the 12% GST that the buyer pays.
The option given by the council is also good for developers.
Mekhla Anand, partner at Cyril Amarchand Mangaldas, said: “By making the new tax rates optional for residential projects under construction, the 34th GST Council has effectively addressed the concerns as well as potential disputes on various computational and transitional issues like loss of input credits, pricing, etc, which are bound to arise owing to the change.”
Giving such option to developers will be beneficial to those who already factored the entire input credits of the project while arriving at the sale price and, in many cases, these benefits may already have been passed on to customers, said Pratik Jain, partner and leader (indirect tax) at PwC India.
“Industry must work out which option works best and come up with the revised price structure quickly. It is important to make changes in the IT systems, documentation, and processes at the earliest,” Jain says.