With the implementation of Goods and Services Tax (GST), the pricing of houses is expected to come down by 5% as the state and Central government is planning to peg the levy at 12% on the finish apartments and houses.
As GST rolls in, the additional 4.5% of the service tax on the final price shall not be levied over the homebuyers for the purpose of possession thus bringing the pricing down by 5%. It shall become tax neutral as the GST at 12% is customer friendly.
The actual cost for construction shall be reduced due to the credit granted on account of steel, cement, paint and other essentials thus impacting the price reduction of the complete houses. The expert revealed that an apartment worth Rs. 1 crore is expected to get cheaper by Rs. 3 lakhs to Rs. 5 lakhs. The net price is largely get impacted under affordable segment with cost up to 30 lakhs which will observe this downfall in pricing by 5%.
As the developers are expected to derive higher margins in premium projects, hence those projects may not gain significantly from this move. With proper allowance of input credit, GST at 12% shall be a favourable rate for home buyers. As of now the taxes on the input for construction are fairly much higher than % on the final price, thus GST is expected to bring down the overall tax liability.
As the developer under current scenario pays the VAT and excise tax on the various inputs used in construction including steel and cement at 27.7% and 18.1% respectively which further varies from state to state. Now under GST regime both these inputs shall be taxed at 285 and 18% respectively. White goods and paints are also taxed at 28%. For affordable houses (up to Rs. 6,000 sq ft) as the 12% GST is imposed on the finished houses, effectively it shall cost to zero on account of credit taken by the developer for taxes paid on the inputs. Moreover the buyer shall also get exempted for additional service tax of 4.5% of the price of the house. All these factors will slash down the cost of acquisition.
For a housing project say Rs. 2,000 per sq ft as the cost of construction, the contractor will collect a tax @ 18% i.e. Rs. 360 sq ft from the developer. Now developer if sells this house at say Rs. 3000 per sq ft then the GST levied shall amount to Rs. 360 per sq ft on account of 12%. Hence the fresh liability of the developer will turn zero. In case if the developer add other expenses and taxes, he can even claim more. But under GST regime, he shall be entitled to claim upto his fresh liability.
However, for the projects in premium segment, the entire input tax credit is not at all sufficient to bring down his fresh liability to nil. The gap between the cost of construction and the selling price is quite high due to higher margins with developer. Say the cost of construction for a premium housing is Rs. 5000 sq ft which will account a tax liability of Rs. 900 per sq ft. If the developer sells it off at Rs. 10,000 per sq ft, the developer shall be accountable to pay Rs. 1200 per sq ft. Hence developer shall be liable to pay the differentia; of Rs. 300 sq ft which in any way he will recover from the customer as the cost of project.