The option of charging a higher GST rate with input tax credit should be one of the options available to the developer
Apart
from a reduction in rates, it is also proposed that exemptions would be
provided from payment of GST to transfer of development rights, lease
premium, etc, for such residential property on which GST is payable.
(Representational photo)
In
a decision which would have far-reaching implications for the real
estate sector, the GST Council meeting has prescribed a GST rate of 5%
without input tax credit for the residential sector and a GST rate of 1%
without input tax credit for the affordable housing segment. The
changes would be brought into effect from April 1, 2019, and suitable
notifications would be issued to give effect to the
same. It appears
that the option of paying GST at a higher rate by claiming input tax
credit would not be available going forward.
Apart from a
reduction in rates, it is also proposed that exemptions would be
provided from payment of GST to transfer of development rights, lease
premium, etc, for such residential property on which GST is payable.
The
reduction in tax rates is being proposed with a view to provide relief
to the industry which is grappling due to slowdown. Whilst reduction in
rates is a welcome relief for the industry, let us evaluate whether
these changes would lead to other unintended consequences. For this
purpose, let us consider the impact due to proposed changes for cases
where a project is going to be launched i.e., new projects and projects
which are already underway.
For new projects, there would be a
reduction in upfront GST chargeable i.e., 5%/1%, instead of the current
12%/8% rate. But absence of input tax credit would mean that the said
taxes paid on procurements would be loaded on to the base price. Whether
this would mean an overall reduction in price for the end consumer
would depend upon other factors like ratio of construction costs
vis-à-vis selling price, cost of land, etc. Whatever may be the outcome,
the developer would be in a position to decide and control the outcome
i.e., reflect the same in the base price to be charged for the
residential property.
A bigger challenge awaits the existing
projects. Let us say, the developer has contractually agreed for base
price plus GST. Since the GST rate has reduced from 12% to 5%, he cannot
charge the rate of 12% any longer. Further, as per the condition of the
proposed amendment, the developer would not be able to claim input tax
credit. Therefore, it becomes a cost. Whether he can recover the same
from the customer would depend upon the terms of his sale agreement, but
looking at the current environment, it would be a herculean task.
It
is also commonly seen that the project has been advertised as an
all-inclusive cost i.e., a lump sum price including GST, stamp duty,
etc. For such cases, seeking any additional consideration due to denial
of input tax credit would be difficult.
It would also be
interesting to see the implications of the anti-profiteering provisions.
Typically, any project would have a lifespan of a couple of years. If
the benefit arising due to introduction of GST has been computed by the
developer and is being passed on over the proportionate life of the
project, can he now take a position of not passing any benefit for the
balance period? Or, let’s say, if the developer intended to pass on the
benefit towards the end of the project, would he be required to do the
same now, considering that the benefit of input tax credit has been
withdrawn?
Given that anti-profiteering provisions are one-way
traffic—all the benefits would be required to be passed on without
taking into account additional costs, these changes could initiate new
challenges for the sector.
It seems prudent that whatever changes
are proposed, the option of charging a higher GST rate with input tax
credit should be one of the options available to the developer at least
in so far as existing projects are concerned.