There has been conflicting news around the impact of GST (Goods and Services Tax) on under construction apartments and properties. The prescribed tax rate under GST is at 12% in respect of under construction flats, complex etc. Ever since the GST rates were revealed, homebuyers of under construction apartments are worried that they shall have to shell out more for their pending payments. In fact, certain developers are asking homebuyers to pay all pending installments before GST kicks in from July 1.
Developers can’t ask for higher tax on pending installments – Govt
The Govt has issued directions and has asked developers not to ask customers to pay a higher tax rate on installments to be received after imposition of GST. The Govt is of the opinion that builders will further pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/ 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.
Pre GST (existing) Tax liability on apartments etc
Payable by customer
The current headline rate of service tax on construction of flats, residences, offices etc. is 4.5%. Over and above this, VAT @1% under composition scheme is also charged. The buyer only pays the tax rate of 5.5%. In other cities/states, where VAT is levied under the composition scheme @2% or above, the headline rate visible to the customer is above 6.5%.
Paid by developer under various heads
Central Excise duty is payable on most construction material @12.5%. It is higher in case of cement. In addition, VAT is also payable on construction material @12.5% to 14.5% in most of the States. In addition, construction material also presently suffer Entry Tax levied by the States. Input Tax Credit of the above taxes is not currently allowed for payment of Service Tax. Credit of these taxes is also not available for payment of VAT on construction of flats etc. under composition scheme. Thus, there is cascading of input taxes on constructed flats, etc.
As a result, incidence of Central Excise duty, VAT, Entry Tax, etc. on construction material is also currently borne by the builders, which they pass on to the customers as part of the price charged from them. This is not visible to the customer as it forms a part of the cost of the flat.
Composite Tax liability under GST
Under GST, full input credit would be available for offsetting the headline rate of 12%. As a result, the input taxes embedded in the flat will not (& should not) form a part of the cost of the flat. The input credits should take care of the headline rate of 12% and it is for this reason that refund of the overflow of input tax credits to the builder has been disallowed.
The govt has cleared the air around the GST impact on under construction apartments. Buyers are therefore advised not to pay any increased demand from developers because of GST. Buyers are further advised not to make advance payments under pre-GST schemes being run by the developers.