Post GST cut-rate, Home buyers may end up paying more!

02-Mar-2019    |    Source:    Economic Times

The cut in GST on affordable homes from 8% to 1% may not be the bonanza that it appears to be. For most buyers it may result in only a marginal reduction in the cost and, in some cases, may even make homes more expensive. This is because with 8% GST charge, input tax credit (ITC) was available. That has been removed with a reduction of GST to 1%. ITC is a deduction available on final GST liability for the tax already paid on the purchase of inputs or raw materials.

Affordable homes are defined as ones with the sale price of Rs 45 lakh or less and a carpet area of 90 square metres (968 square feet) or less in non-metro cities like Nagpur. Given the criteria, an affordable home can be priced up to Rs4,000 sqft in the city, according to builders.

Here is how slashing GST rates will impact the price, point out chartered accountants. When GST was at 8% for affordable homes the sale price was fixed by adjusting the ITC. This is because, under anti-profiteering laws, ITC benefits have to be passed on to the buyers.


Considering a rate of Rs4,000 sqft which takes into account the ITC, the final rate payable by the consumer came to Rs4,320 sqft by adding GST at 8%. The average cost of construction inputs, according to local builders, comes to around Rs1,500 per square foot. With an average tax rate of 15% on that, a credit of up to Rs225 per sq ft was available. The final sale price was fixed by deducting this amount of credit.

Now when no credit is available, the tax paid on inputs will have to be loaded on to the sale price. The rate of Rs 4,000 sqft would go up to Rs 4,225. After adding 1% GST the gross amount would now come to Rs 4,276 sqft. The new rate brings down the price by only by Rs52 per sqft.


This is when the input cost is taken at Rs1,500 sqft. According to ready reckoner rates, the cost of construction comes to Rs 2,261 sqft. In that case credit available on the inputs exceeds the tax payable.

At 8% GST the tax on  Rs 4,000 sqft house comes to Rs 320 and the credit available was Rs 339 at an average GST rate of 15% on inputs, point out experts. In such cases, buyers will have to shell out Rs4,384 sqft after adding 1% GST or Rs 64 sqft more than at present. The ready reckoner rates fixed by the town planning department are considered estimated to be on a conservative basis.


Anil Nair, president of Nagpur metro region of Confederation of Real Estate Developers of India said doing away with the credit will marginally increase the cost for builders. However, this will do away with the disputes between consumer and developers over passing on ITC. It was difficult to calculate ITC because construction is a continuous process and even payment comes in stages, he said. Pritam Mahurre, a chartered accountant, said considering the cost of construction and rate of tax earlier, the input credit surpassed the tax payable, which will not be the case now.


 


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