Reduction in GST on Real Estate: A Big Bonanza

In these columns while analysing the effected on the Budget 2019, we had mentioned about possible reduction in GST (Goods and Services Tax) on real estate. The downward revision in GST rates applicable to real estate has been announced by the GST Committee in the meeting held on March 19, 2019.

At present, an under-construction property attracts GST at the rate of 18%. But GST is not charged on the entire value of the property; it is charged only on two-third of the value. One-third value of the property is considered as the cost of land. According to CBEC (Central Board of Excise and Customs), ‘Effective rate of GST payable on purchase of under-construction residential or commercial properties from builder involving transfer of interest in land or individual share of land to the buyer is 12% with full input tax credit (ITC).”

Also, at present, in case of affordable housing projects, the Effective rate of GST payable on purchase of under-construction properties is 8%.

As per the Press Release dated March 19, 2019 issued by Central Board of Indirect Taxes and Customs, the GST Committee has announced a deep reduction in rates of GST, which will come into force from April 1, 2019, as follows:

(i) New rate of 1% without input tax credit (ITC) on construction of affordable houses shall be available for,

(a) all houses which meet the definition of affordable houses as decided by GST Committee (area 60 sqm in non- metros / 90 sqm in metros and value upto Rs. 45 lakhs), and

(b) affordable houses being constructed in ongoing projects under the existing central and state housing schemes presently eligible for concessional rate of 8% GST (after 1/3rd land abatement).

(ii) New rate of 5% without input tax credit shall be applicable on construction of

  • all houses other than affordable houses in ongoing projects whether booked prior to or after 01.04.2019. In case of houses booked prior to 01.04.2019, new rate shall be available on instalments payable on or after 01.04.2019.
  • all houses other than affordable houses in new projects.
  • commercial apartments such as shops, offices etc. in a residential real estate project (RREP) in which the carpet area of commercial apartments is not more than 15% of total carpet area of all apartments.

The GST Committee has defined the affordable housing as follows:

A residential house/flat of carpet area of upto 90 sq. m. in non-metropolitan cities/towns and 60 sq. m. in metropolitan cities having value upto Rs. 45 lacs (both for metropolitan and non-metropolitan cities).

Metropolitan Cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region).

Let us see what happens to on-going projects. As per GST Committee, the promoters shall be given a one – time option to continue to pay tax at the old rates (effective rate of 8% or 12% with ITC) on ongoing projects (buildings where construction and actual booking have both started before 01.04.2019) which have not been completed by 31.03.2019.

Further, the option shall be exercised once within a prescribed time frame and where the option is not exercised within the prescribed time limit, new rates shall apply.

Let us analyse what would be the savings for home buyers after the new GST rates come into force.

 

S NO. PARTICULARS MR. ASHOK MR. SHYAM
1 PRESENT GST RATE 12% 8%
2 TAX THEREON 7,20,000 2,40,000
3 NEW GST RATE 5% 1%
4 TAX THEREON 3,00,000 30,000
5 SAVINGS 4,20,000 2,10,000

Mr. Ashok has decided to buy a 2 BHK (Bedroom, Hall, Kitchen) flat having carpet area of 111.5 sq. mt. (1,200 sq. ft.) costing Rs. 80 lakh in J P Nagar, Bangalore. The project is under construction and the completion is expected in September 2019.

If he buys now and pays Rs. 60 lakh, as per construction progress, the GST applicable is 12%, which works out to Rs. 720,000.

Suppose he buys the same apartment after April 1, 2019 and after the GST rates are in force, the GST payable shall be 5%, which works out to 300,000.

The savings shall be Rs. 720,000 – 300,000 = Rs. 420,000.

In another case, Mr. Shyam has decided to buy a 2 BHK (Bedroom, Hall, Kitchen) flat having carpet area of 88.25 sq. mt. (950 sq. ft.) costing Rs. 40 lakh in Anekal, Bangalore. The project is under construction and the completion is expected in September 2019.

If he buys now and pays Rs. 30 lakh, as per construction progress, the GST applicable is 8%, which works out to Rs. 240,000.

Suppose he buys the same apartment after April 1, 2019 and after the GST rates are in force, the GST payable shall be 1%, which works out to 30,000.

The savings shall be Rs. 240,000 – 30,000 = Rs. 210,000.

Since the builder will not get the input tax credit (ITC) for the materials purchased for construction, such as steel, cement, sand, stones, flooring tiles, electrical, sanitary fittings, plumbing materials etc., which attract GST rates varying from 5 – 28% (average may be 18%), builder may increase the sale price to absorb the GST paid on construction materials.

Anticipating this, recently our Prime Minister in an exclusive interview with ANI, has said that the Government is planning to reduce the GST rates on construction materials to an average rate of 5%.  One can hope the GST rates on construction materials will also be rationalized, so that builders will not increase the sale price.

The reduction in GST rates for under construction projects could be the biggest bonanza for home loan buyers and it could catalyse the sluggish market to return to good days.

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The author is Managing Director of Abhrant Property Counseling Services Pvt. Ltd., Bangalore and can be contacted on 913412 13530 or email: deshpande@propseva.com