De­cod­ing In­put Cost Credit

While many ar­gue that GST has been un­fair to real-es­tate sec­tor, ac­cord­ing to rahul Shah, ceo, Sumer group, it is very im­por­tant for the con­sumer to un­der­stand the con­cept of in­put cost credit

Realty Plus - - Contents -

The na­tion woke up to a new tax regime on the morn­ing of 1st July 2017. The Goods and Ser­vice tax (GST) was fi­nally rolled out across the na­tion. For a few months now, In­dian real-es­tate sec­tor has faced mo­men­tous chal­lenges de­mand con­cerns, de­mon­e­ti­za­tion, RERA, sup­ply side is­sues and GST. While these changes had a ma­te­rial im­pact on the launches and de­mand, many be­lieve that the trans­parency will im­prove ma­te­ri­ally go­ing for­ward. This will not only lead to higher con­sumer con­fi­dence but also weed out un­or­ga­nized de­vel­op­ers. Cur­rently, GST is ap­plied at the rate of 12% on the sale of a prop­erty ex­clud­ing stamp duty and reg­is­tra­tion. At the first in­stance, this tax rate would look stag­ger­ing, but many tend to for­get that this will be off­set by high in­put cost credit. If one were to go by pure text­book def­i­ni­tion, in­put cost credit may be de­fined as the credit man­u­fac­tur­ers re­ceived for pay­ing in­put taxes to­wards in­puts used in the man­u­fac­ture of prod­ucts. Now, this gets tricky when it comes to real-es­tate sale. As­sume that a prop­erty is be­ing sold for Rs. 100. From a con­sumer’s point of view, if he was to keep aside stamp duty and reg­is­tra­tion, he will pay Rs. 112 to the de­vel­oper at the time of hand­ing over the prop­erty. It is nat­u­ral for any con­sumer to be­lieve that he is pay­ing at least 5-6% higher tax than it was dur­ing the pre­vi­ous tax regime. This is where, he will need to un­der­stand the con­cept of in­put cost credit. There­fore the to­tal in­put tax paid by the de­vel­oper is Rs. 4.6. It will only be fair to as­sume that by keep­ing a rea­son­able mar­gin and profit the de­vel­oper even­tu­ally de­cides to sell the prop­erty at Rs. 100 and af­ter adding the GST the to­tal amount the con­sumer has to pay comes to Rs. 112.

Here, the de­vel­oper has al­ready paid an in­put tax of Rs. 4.6 which he can claim a credit for and de­posit the dif­fer­ence that is Rs.7.4 with the Govern­ment This will have to be even­tu­ally passed on to the end con­sumer. While rolling out GST, the Govern­ment has in­cluded an anti-prof­i­teer­ing clause un­der sec­tion 171 of the GST law. This would mean that it is manda­tory to pass on the ben­e­fit tax re­duc­tion due to in­put tax credit to the fi­nal con­sumer.

Thus, once the de­vel­oper passes on the Rs. 4.6 ben­e­fit to the con­sumer, then the con­sumer would even­tu­ally be pay­ing Rs. 107.4 to the de­vel­oper. In per­cent­age terms, he has paid 7.4% as tax. If one were not to con­sider in­put cost credit, it would have been 12%. This clearly shows how in­put cost credit has an off­set ef­fect on the GST rate.

There­fore, with the RERA and GST kick­ing in, to­day’s con­sumers are more em­pow­ered and has made their de­ci­sion mak­ing much sim­pler.


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