GST on real estate: Can developers recover input credit cost from home buyers?

  • 27-Feb-2019
  • GST on real estate: Can developers recover input credit cost from home buyers?

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.

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