GST for under-construction units may be cut to 5% from 12%; input tax credit may go for builders
In a move that could give a fillip to the real estate sector, the Goods and Services Tax (GST) Council is set to bring down the tax incidence on under-construction houses/flats.
One option is bringing the tax rate from 12% to 5% for all such projects but deny the input tax credit (ITC). Alternatively, the Council at its 32nd meeting on January 10 may also allow ITC to those builders who buy 80% or more of inputs from registered dealers, even with the reduced tax rate.
The proposed change in the tax structure for under-construction housing projects is intended to correct the practice of builders not passing on the benefit of reduced tax incidence under GST compared to the previous regime to the consumers. It could also give a further boost to affordable-housing projects, incentivised by the government.
Currently, the Goods and Services Tax (GST) is levied at 12% on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale.
However, GST is not levied on buyers of real estate properties for which completion certificate has been issued at the time of sale as sale of land is involved in such cases.
In the case of affordable housing projects like Jawaharlal Nehru National Urban Renewal Mission, Rajiv Awas Yojana, Pradhan Mantri Awas Yojana or any other housing schemes of state governments, the GST is levied at a lower rate of 8 %. Given the higher tax on inputs, the builders actually pay nil tax on the value they added, but this benefit barely reaches the consumers.
Massive investments are being planned in the affordable-housing segment; under the Pradhan Mantri Awas Yojana (Urban) itself, the total investments envisaged by 2022 is RS 3.85 lakh crore.
“Any move to bring down the GST rate of under-construction apartments to 5% would act as a fillip to promote sales in an otherwise sluggish residential market. However, this should ideally be accompanied by steps requiring builders to make all or the majority of purchases from registered dealers, so that the value chain is unbroken,” MS Mani, partner, Deloitte India, said.
Of course, denial of input tax credit militates against the GST principle of unbroken tax chain but the government had earlier brought restaurants under such a scheme with a flat tax rate of 5% as it found that most of them were not actually passing on the benefit of ITC to the customers.
In a recent interview to ANI, prime minister Narendra Modi acknowledged that some small traders have faced inconvenience under the GST regime. Stating that the government’s responsibility was to be sensitive to their concerns, he said the collective effort of the Council was to simplify the tax structure to the extent possible and make rates moderate.
“Practically speaking, all builders working on a model which is chargeable to GST, but they pay for inputs in cash till the time completion certificate is issued. That is how tax is being evaded. If the tax rate is cut to 5%, people will stop playing with legislation and start paying due taxes,” Rajat Mohan, partner at AMRG & Associates, said.
Briefing reporters after the last GST Council meeting, finance minister Arun Jaitley had said: “The potential home-buyers feel they are not getting benefits under GST. Certain proposals have come before the Council and the law and fitment committee will look into the matter and the matter will come up in the next Council meeting. There was a total consensus that something needs to be done.”
Major construction materials, capital goods and input services used for the construction of flats and houses attract 18% GST, while cement attracts 28% tax. The government has clearly stated that its intention to cut the rate on cement to 18% but the decision is postponed, considering the huge revenue implications (seen at Rs 14,000 crore/year).
Prior to GST roll-out, under-construction housing projects attracted 4.5% service tax and state-level value-added tax (VAT) of 1-5 %. Also, inputs used in construction attracted 12.5 % excise duty in addition to 12.5-14.5 % VAT. Besides, entry tax was also levied on the inputs. After adjusting for credits on inputs used, the effective per-GST tax incidence on such housing property was 15-18 %, a quote higher than the current incidence with 12% tax rate and ITC. However, the benefits of this don’t actually reach the consumer.
At its January 10 meeting, the council could also raise the turnover threshold for GST application to Rs 75 lakh or thereabouts from Rs 20 lakh at present, in a move that could give lakhs of MSME units the option to move out of the tax ambit. The centre-state body that works on a defined principle of consensus, however, could also announce a composition scheme for small service providers, as it reckons high tax incidence of 18% is onerous for a sizeable section of the industry, leading to tax evasion.