Real estate developers may pass on differential input tax credit benefit to homebuyers invested in the same project depending on the amount that may be due from them to the builder on July 1, say real estate experts.
The government has proposed 12 percent Goods and Services Tax (GST) on sale of under-construction units from July 1 onwards. In case of real estate, GST will be in addition to the stamp duty rate charged by states. It will be subsumed by Value Added Tax (VAT) and Service Tax. Under the new GST regime, while there is an increase of 6.5 percent in terms of the tax payable by flat purchasers, there is also an option of the builder passing the benefit of input tax credit to the buyers.
“The quantum of GST a developer will be charging customers will be based on the amount of consideration outstanding as on July 1. This can be different for different customers in the same project,” says Rohit Gera, managing director, Gera Developments and VP Credai, Pune Metro.
“It is, therefore, conceivable that two customers in the same project with different amounts payable to the builder and two customers in two different projects with the same amount payable to the builder, may end up getting a different input set off benefit.
Assuming that the cost of construction for a flat worth Rs 1 crore in a project is Rs 50 lakh for which the developer has spent Rs 40 lakh so far, the builder will have to pay GST on the remaining Rs 10 lakh after July 1 and get input tax credit from the vendor. If the GST applicable to the builder is 18 percent, he may have to pay Rs 1.8 lakh as GST to the vendor.
For a customer who may have paid Rs 90 lakh and has Rs 10 lakh as outstanding after July 1, may have to pay Rs 10 lakh and Rs 1.2 lakh as GST which amount to Rs 11.2 lakh which means that the builder can technically pass on the full input tax credit benefit of Rs 1.2 lakh to this buyer.
As for the second customer, who has an outstanding amount of Rs 90 lakh as on July 1, the amount due from him will be Rs 90 lakh plus 12 percent GST which is Rs 10.8 lakh. Out of Rs 10.8 lakh, a developer may be able to pass on an input tax credit limited to Rs 1.8 lakh.
“Now that the service tax has been subsumed into GST, GST charged to the customer will differ from customer to customer. A developer will get to know the quantum of savings due to the customer only in the future because the developer has no clue regarding the amount he has to pay his vendors. That again is dependent on whether the turnover of the vendor is less than Rs 20 lakh or over Rs 20 lakh,” says Gera.
“There is no transparent formula whereby a customer can ascertain what benefit he can get. That is where there is scope for disputes,” he says, adding, "we can pass on the benefit to customers but will pass it on as and when we can ascertain the exact quantum of the benefit."
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GST, however, is not applicable on ready properties and as a result, developers will either have to bear the burden of the tax since it cannot be passed on to the end consumer or the rates of apartments that are ready to occupy will increase to the extent of the taxes. Again, this will lead to a change in the quoted price by the developer but overall cost to the end customer will stay largely unchanged, say developers.
But will developers pass on the input credit benefit to homebuyers?
They may just have to because of the anti-profiteering provision. “The objective of anti-profiteering is to ensure that the benefits derived, if any, should be passed on and it is legitimate to do so. Generally, the industry in mindful and would intend to pass on the benefits. Having the Rules in place, if any developer chooses not to do so, then certainly the penal consequences could attract. Bottom-line, the tax is a pass-through and whether one would reduce margins to pass on the benefits seems unlikely,” says Suresh Nandlal Rohira, Partner, Grant Thornton India.
Homebuyers, however, are skeptical. “The government has been doing everything possible to ensure that builders pass on input tax credit on construction materials available under GST to homebuyers to make house buying affordable. Government has also warned builders against charging more from buyers invested in ongoing projects as GST. But considering the track record of real estate developers, it is highly unlikely that they will pay heed to such requests from the government,” says Abhay Upadhyay, National Convenor, Fight For RERA.“Hence, the only option left before the Central Government is to come out with an official notification to deter builders from charging GST without giving benefit of input tax credit to the homebuyers of ongoing projects. In case of failure by builder to pass on such credit to homebuyers, the extra burden should be borne by builders themselves,” adds Upadhyay.