Not the quickest start for GST in realty sector
CONFUSING TIMES In the first week of the introduction of the GST, the housing sector is still to come to terms with the new tax regime with both buyers and builders looking for greater clarity
The under-construction housing segment came to a standstill in the first week after the introduction of the Goods and Services Tax (GST). These are still initial stages for all the stakeholders to understand the implementation and implications of the new tax regime and there is a lot of confusion about it.
“Before the introduction of the GST, builders were asking buyers to make full payment. Buyers were being told that the tax rate will increase after the introduction of GST. But, now this has also stopped.”
“It will take at least three months or one financial quarter for things to become clear,” says 48-year-old Ludhiana realtors association president Deepak Badyal.
The government notified the GST on under-construction real estate at 18% that will be applicable on two-thirds of the value of the property. After the adjustment to the land cost, the effective tax is 12% of the selling price of a property.
Builders argue that the land cost component in the total price of a property varies from place to place and time to time, asking for a greater clarity on the issue.
Rajinder Mittal, 56, Mittal Group of Companies chairman says, “These are tricky times for the industry. The government has kept one-third as the land cost and imposed 18% GST on the two-third cost of a property. While the basic construction cost is similar in most locations, there are wide variations in the land costs.”
“But the government has kept the cost of land around 33% for all locations. This is not practical and prudent. This will lead to problems for both builders and buyers. What if the land cost is more than 50% of the property cost? What will builder suppose to do in such a scenario? This will lead people to avoid under-construction property and go in for only the readyto-move properties.”
The issue of input tax credit is also creating confusion.
“If a builder has constructed more than 80% of the property and buyer has also paid 80% of the price and the service tax. In this scenario, excluding the oneyear period, the input tax credits will not be available and builder will not be able to pass on any benefits to the buyer,” says LC Mittal, 47, director, Motia Group.
Confusion also prevails regarding the impact of the input tax credits on the housing sector. “On some raw materials tax has increased and on others decreased. But more importantly, there are some materials on which there is no tax, but are important inputs in the construction industry. So the impact of input tax credits will be at most mix and is unlikely to reduce prices,” says Rajinder.
The ready-to-move or completed property segment gained from the confusion in the underconstruction segment.
“Already the buyer was inclined toward the completed projects. But, now so much confusion and expectation of increase payment of tax, the buyer is totally moving towards the ready-to-move segment.”
“There is no GST on the segment, and the total tax comes out to be in the range of 7% to 9%, which is less than the 12% GST. In case the builder is not passing the VAT (value added tax) to the buyer it is around 4.5% only,” says LC Mittal.
Confusion also prevails regarding the impact of the input tax credits on the housing sector.