GST Effect Relief for home buyers, as Real Estate to be taxed less

 A great relief to home buyers, real estate will bear lesser tax load under the new indirect tax regime, Goods and Service Tax (GST), coming into effect from July 1.

Construction of flats, complexes and buildings will have a lower incidence of GST as compared to a plethora of central and state indirect taxes, suffered by them under the existing regime. Thus, buyers will get rid of making higher payments for their already booked properties even after July 1.

Central Board of Excise and Customs (CBEC) as well as the states had received several complaints regarding people, who already have booked flats and made part payments, being asked to make the entire payment before 1 July 2017 or to face higher tax incidence for payment made after that, in view of the work contract service tax rate under the GST at 12 per cent for under construction buildings.

CBEC however, in an official communication said that this was against the GST law and clarified that central excise duty is payable on most construction material at 12.5 per cent, higher in case of cement. In addition to that VAT is also applicable to construction material at 12.5 per cent to 14.5 per cent in most of the states, it added.

Also, construction material presently suffers ‘entry tax’ levied by the states and input tax credit of the above taxes is not currently allowed for payment of service tax. Credit of these taxes is also not available for payment of VAT on construction of flats under composition scheme. Thus, there is cascading of input taxes on constructed flats and buildings.

As a result, incidence of central excise duty, VAT and entry tax on construction material is also currently borne by the builders, which they pass on to the customers as part of the price charged from them. This remains invisible to the customer as it forms a part of the money charged for the flat.

Customer fails to see embedded taxes :

The current headline rate of service tax on construction of flats, residences, offices and other structures is 4.5 per cent. Over and above this, 1 per cent VAT under composition scheme is also charged. The buyer only looks at the headline rate of 5.5 per cent. In other cities or states, where VAT is levied under the composition scheme at 2 per cent or above, the headline rate visible to the customer is above 6.5 per cent. What the customer does not see is the embedded taxes on account of cascading and sticking of input taxes in the cost of the flat. This will change under GST.

Input taxes excluded from building cost :

Under GST, full input credit would be available for offsetting the headline rate of 12 per cent. As a result, the input taxes embedded in the flat will not (and should not) form a part of the cost of the flat. The input credits should take care of the headline rate of 12 per cent and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed.

Builders must pass on benefits to buyers :

The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices and installments. It is, therefore, advised to all builders and construction companies that in the flats under construction, they should not ask customers to pay higher tax rate on installments, to be received after imposition of GST.

Real estate sector will have lower tax rates under GST regime, compared to the taxes levied by the central and state governments at present. If any builder demands higher payments from buyers citing GST, the same can be considered as profiteering under section 171 of GST law.

By :– Sudeep Gupta 

Deputy Commissioner, Commercial Tax Department