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GST Impact On Under-Construction Properties Depends On Degree Of Completion & Raw Materials Used
Homebuyers and developers are all trying to know how Goods & Services Tax (GST) will impact residential real estate. The rate of GST has been fixed at 12 percent for new and under-construction projects. Prices of properties are not likely to go up even though the present tax of 4.5 percent has been replaced by 12 percent GST. Let us explain why prices won’t go up. Before GST, builders paid 12.5 percent tax on raw material and excise, 12.5-14.5 percent VAT on construction material, entry tax levy in different states, 4.5 percent service tax on construction and 1-2 percent VAT under composition scheme.
GST has replaced nearly half a dozen of the existing taxes. These taxes had a cascading effect and ultimately the accumulated tax liability fell on the customers. This resulted in a higher housing cost. Apart from the lower tax incidence on buyers, the builder gets input tax credit for construction materials. Due to the presence of an anti-profiteering law, builders are bound to pass the reduced tax liability onto consumers. Thus, input tax credit will allow builders to claim refund for taxes already paid. 12 percent GST will subsume multiple taxes. Hence, overall housing prices may even come down.
The impact on under-construction projects depends on degree of completion of the projects and the raw material used once GST kicks in. Hence, it is very difficult to say if under-construction projects will cost more to homebuyers. Under-construction project buyers will pay 12 percent GST on the portion completed after July 1. However, this will also enable builders to receive input tax credit on goods and services purchased after July 1.
“Builders asking for early payments to avoid GST is strictly illegal as the payment terms in most projects would be based on slab completion, etc. and seeking payment before completion of the taxable event/milestone is incorrect, as the objective seems to be avoid GST,” Senior Director, Deloitte Haskins & Sells LLP, MS Mani, told ET Realty.
It has also been reported that post implementation of GST, maintenance charges more than INR 5,000 paid in housing societies may go up.