GST rate on homes: Now builders can pick up old or new rates on unfinished projects

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Updated: March 20, 2019 7:14:20 AM

The GST Council on Tuesday allowed builders to choose between the old and new GST regimes for projects that will remain unfinished as on March 31, removing the fear among these firms that they might lose accumulated input tax credit for under-construction projects.

GST: Builders can pick old or new rates on unfinished projectsGST: Builders can pick old or new rates on unfinished projects

The GST Council on Tuesday allowed builders to choose between the old and new GST regimes for projects that will remain unfinished as on March 31, removing the fear among these firms that they might lose accumulated input tax credit for under-construction projects.

The new GST rates of 5% for regular projects and 1% for affordable housing — as against the old rates of 12% and 8%, respectively — along with denial of ITC would, however, will be applicable to all projects where construction commences on or after April 1.

At its 34th meeting, the council also approved a formula for utilisation of ITC based on the extent of completion of buildings and for bookings already made. A developer would need to reverse ITC if excess credit has already been used. However, in case ITC already used is lower than allowed, it will be protected and can be used to offset the GST liability.

For builders opting to continue with existing rates (12% for regular houses and 8% for affordable housing), for under-construction projects this mechanism obviously won’t apply.

“Reasonable time for transition (to choose between the two options) will be given to developers in consultation with states,” revenue secretary Ajay Bhushan Pandey said. He added that government revenue won’t be impacted much by builders’ choice of GST rates. Another official said that builders could be given a month to choose between the available options, although a final decision hasn’t been made.

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MS Mani, partner, Deloitte India, said: “The pragmatic move to segregate under construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit. This would also enable them to price the loss of input tax credits in the new projects,” MS Mani, partner at Deloitte India said.

He added that protecting existing input tax credits and mandating the new rates only in respect of new projects would benefit both builders and consumers. “The specific statement on invocation of anti-profiteering provisions if the benefits of lower rates are not passed to consumers, appears to indicate that the government is keen to protect consumers from a GST-led price increase,” Mani said.

A source said that Bihar’s deputy chief minister Sushil Modi in the last Council meeting had mooted the idea of providing builders with a choice. On Tuesday, nearly 15 states including Maharashtra and Gujarat concurred with this proposal. The fitment and law committees — both comprising tax officials — were in favour of shifting all real estate projects to the new scheme at once, the source added.

A state finance minister, who spoke on the condition of anonymity due to electoral model code of conduct, however, told FE said the transition formula is quite complex. Any reversal of credit would affect cash flows adversely, he said, adding most builders would likely choose the old rates for under-construction projects to avoid the compliance burden. However, an official said that the calculation suggested that most real estate firms wouldn’t suffer any reversal of credit.

“Given that the new rates were demanded by the real estate industry, we expect most of them to transition to the new rates and associated transition mechanism. However, if a builder believes that sticking to old rates is more beneficial in getting the inventory cleared, he can exercise that option too,” Pandey said. He added that while ideally housing prices should come down with the new rates, a failure to pass on the benefit of rate reduction would attract attention from anti-profiteering watchdog.

Additionally, the council approved the condition that builders would require to procure at least 80% of raw materials — steel, cement, sanitary fitting and tiles etc — from among the dealers in GST chain under the new regime. The idea is to check large-scale tax evasion. Further, the cost of any capital goods won’t be counted against this requirement as these items are much more expensive compared with other building inputs and could therefore be used to circumvent the liability.

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