Many real estate developers are not passing on the benefits they receive under the goods and services tax to the buyers. As a result, the actual tax burden may have increased by up to 2.5% for the buyers in some cases.
Depending on the raw materials used and where they are sourced from, the realtors are now claiming input tax credit (ITC) in the range of 5-7% under GST. However, this has not translated into a proportionate reduction of property prices for the home buyers.
Now, the overall taxes inclusive of stamp duty and registration charges are between 16.5 and 21% as compared to a maximum of 18.5% before GST was rolled out on July 1 this year.
While the end buyer pays 12% GST on purchasing a new home, earlier, service tax of 4.5% and value-added tax between 0% and 5% (depending on the state in which the property was bought) were levied on real estate purchases in addition to stamp duty and registration.
Different states have varied stamp duty slabs that range from 4-8% and it also differs if the property is owned by a male or female. Similarly, registration charges are in the range of 0.5-1%.
“Realtors are obviously claiming ITC. Though it isn’t in double-digit percent, the same isn’t really getting passed on to the purchasers,” said an with PwC.
If the benefits are passed on to the home buyers, property prices too should decrease proportionately.
But instead of passing on the benefits of ITC, the realtors are asking the government to revise GST rate from 12% to 6%.
“National Real Estate Development Council (Naredco) has requested Government of India to fix GST rate for the real estate sector at 6% from the current rate of 12%. Naredco feels that GST rate of 6% with ITC will be a win-win situation for all stakeholders,” Naredco president Niranjan Hiranandani told DNA Money.
Hiranandani added that different builders claim varied ITC that is in the range of 5.5% to 6.5%. “By having levied 12% on property sales, the taxation isn’t revenue neutral.”
If a tax reform is revenue neutral, it should only shift taxes, not lower them and if someone’s taxes are lowered, someone else’s taxes must be increased.
Central Board of Excise & Customs (CBEC), too, has received various complaints with respect to GST on under-construction flats, complexes, with some buyers even complaining of paying higher taxes.
Therefore, on December 6, CBEC issued a clarification that, “Construction of flats, complex, buildings will have a lower incidence of GST as compared to a number of central and state indirect taxes suffered by them under the existing regime.”
Hence, the incidence on taxes that were being borne by the developers and eventually being passed on to the customers has to discontinue.
“Under GST, full ITC would be available for offsetting the GST rate of 12%. As a result, the ITC embedded in the flat will not (& should not) form a part of the cost of the flat. The builders are expected to pass on the benefits of lower tax burden due to ITC, under the GST regime to the buyers of property by way of reduced prices / installments…” the clarification note read.
“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,” the note adds.