Will GST Empower Homebuyers To Strike A Better Deal?

The Goods and Services Tax or GST is scheduled to be launched on July 1, and it is set to change the way the real estate sector will look at taxes. A unified market is not a distant dream anymore. With over 25 states that have already passed the State GST rates, many of us are aware of what it entails for a developer. However, as a home buyer, what does GST mean to you? Will prices go up, come down and if so, when?

Will property prices go up after GST?

This is of utmost interest to most homebuyers. There is still not a lot of clarity about how prices will be. The industry experts differ. However, if you are deferring a property purchase just on account of GST, here's what you need to know. At the moment, if you are buying a property, you would have to pay the Service Tax of about 4.5 per cent and a Value-Added Tax or VAT of 1.05 per cent. If you are waiting for GST to roll out in all its might, you would not be paying at this rate but at 12 per cent, which means yes, property prices would be higher.

However, provisions under GST give the developer the benefit of input tax credits. This means that the developer can make use of the change in tax rates to his advantage. For example, at present excise tax on input such as steel stands at 12.5 per cent and the VAT is four per cent. Under GST, there would be a standardised rate of 18 per cent. Similarly, while services were taxed at 15 per cent, under the new GST provisions, it is taken at an even ground of 18 per cent. As for the construction activities, service tax at present is 4.5 per cent and the VAT differs from one to two per cent and after GST it would be 12 per cent. As for cement, excise tax came to 12.5 per cent plus a VAT of 12.50 to 15 per cent which would now be standardised at 28 per cent. The developers would benefit because of this standardisation of taxes.

On bills and actuals, the developer can avail of the input tax 'credits'. This is exactly why home buyers are expecting price cuts or discounts and negotiations. However, in the short-run, buyers may not be able to avail of this since there are certain conditions to avail this 'credit'. The builder must have the tax invoice, the receipt of goods and services, proof of payment of tax by supplier, furnishing of IT returns and the payment must be made for the value and tax within 180 days to the vendor. Therefore, the credit comes back to the developer only after paying it and therefore, for the time being, translating this credit as price cuts for an existing home buyer may not be easy.  However, in the long-run, prices may come down. There are also some restrictions. For example, a developer cannot claim input tax credit if goods and services tax for construction of a project is on one's own account or if there is a work contract service for construction of an immovable property unless it is received for a further supply.

The developer's margins are trimmed too. The provisions laid out clarify that GST is shooting right at any intention of imbalanced profiteering. While it makes things easy for a developer, there are checks and balances too. So, if a developer is buying goods from an unregistered vendor, that is a vendor whose turnover is less than Rs 20 lakh, then the developer would be liable to pay tax on the vendor's behalf making the system cleaner.

What is the government's take on this?

On June 15, 2017, the government clarified that GST will reduce their tax outgo for payments made after July 1.  The Finance ministry's statement read, 
"Construction of flats, complex, 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." Builders are expected to pass on this benefit to property buyers in terms of reduced prices and installments. "Despite this clarity on law position, if any builder resorts to such practice, the same can be deemed to be profiteering under Section 171 of GST law." This gives some relief to those home buyers who had booked homes and made part payments.

Arun Jaitley said the real estate builder will enjoy the benefit of input credit, which will be deducted from his tax liability. "The lowered tax liability should lead to price reduction. The price reduction has to be be passed on to the customer," he said. 

Rules under anti-profiteering has also been set. If investigations suggest that the benefit has not been translated into a lower cost for the home buyer, the Directorate General of Safeguards can direct the firm to refund the money.

Venkaiah Naidu has also asked the chief ministers of all states to ensure that builders do not charge higher tax from home buyers on instalments to be paid after the Goods and Service Tax (GST) comes into effect from July 1.

The government has also warned real estate builders to refrain from asking home buyers to make full advance payment on under-construction projects in order to avoid paying higher taxes.

Do existing home buyers have a chance to negotiate on property prices?

It may be important to understand whether there is a scope for such negotiations. Property differs from one segment to another. For a basic construction, goods and services required may be less. For a high-end property where fit-outs, goods, furnishing and finishing is any day required in bulk, the input credit may be higher and thus buyers and developers can think about converting the credit into lower property taxes. But do understand that property prices are not dependent on GST alone. There are a lot of other reasons such as a buyer's financial status and spend capacity, the health of the economy, home loan rates, unsold inventory in the market, underlying demand etc.

Input tax credits can be carried forward too and therefore we say that in the long run, prices may sober. As for the transition, developers can ask for input tax credits on excise duty paid for inputs for under-construction or semi-constructed projects. Original invoices from the vendor's side would be required to avail this. Also, VAT that has been paid for unfinished stock can also be claimed with original bills. However, there is a cap on the timeline. It shouldn't be over 12 months prior to the GST roll out date.

There isn't any benefit likely in the short-run as real estate developers would take time to quantify these credits and also to understand the system. However, rest assured there may not be any additional burden on the home buyer.

Meanwhile, stamp duty prevails as set by the states and this cannot be subsumed as it constitutes one of the revenue sources of state governments.

Industry Take

The much-debated and long-pending GST is ready to roll out by July 2017. This augurs well for the real estate industry which has always been regarded with suspicion. The GST rate, set at 12 per cent for the real estate could possibly push affordable and mid-level real estate prices marginally lower. Further, the input credit provisions, if managed efficiently, will help improve cash-flow of the developers. The simplification of taxation is probably the most positive aspect and will augur well for both foreign investment as well as give the Non-Resident Indian (NRI) market more confidence to buy Indian real estate. Together with the Real Estate Law, GST will go a long way in making real estate more transparent and increase customer confidence," says Tushad Dubash, Director, Duville Estates.

"GST aims at simplification of the overall business, thereby benefiting both the developer as well as the consumer. There is a general sentiment that GST would bring the prices down. The passing of Goods and Services Tax (GST) will ease the business in the real estate domain," says M Murali, Managing Director, Shriram Properties.

"GST is not just going to impact the residential real estate but also commercial estate, rental and affordable housing. GST will simplify tax compliance and minimise the scope for double taxation. With GST impacting the taxes, the service tax and VAT will be replaced by Central GST and State GST. So, there is clear reason for home buyers to be optimistic, even if they have to pay slightly more in case the standard GST rate is high. GST will radically transform the real estate sector and will help real estate growth in the long term; but in short term the cost is likely to go up marginally," he adds.

Rohit Poddar, Managing Director, Poddar Housing and Development says, GST will be a boon to the developers provided there are issues resolved from the GST law for the following:

• Allowance of land deduction for the sale of the property for providing lower rate of tax
• Extending the proposed exemption on taxability of  long term leases other than industrial plots
• Granting of development rights to be treated as similar to sale of land
• Granting exemption for affordable housing
• Allowance of input tax credit of construction of property for renting/leasing purposes
• Clarity on taxability of PLC, parking charges etc

What happens to a resale property?

GST does not apply to completed projects or resale properties. So, the 12 per cent is not applicable here but just the stamp duty since there is no service tax or VAT on resale properties. Therefore, on a resale property, you anyway have the benefit of saving up to nine per cent which includes the approximate value of service tax and VAT taken together in case of an under-construction property. However, this is a simplistic assumption. The price of a resale property and an under-construction are anyway not the same. Where it is similar, buyers do have the benefit of saving some fraction.

Also Read: No Additional Burden On Homebuyers Under GST