Reduced liability of tax on homes under GST

CA Pathik Shah, Partner, B. P. Shah & Co.

Many builders are facing the issue that many buyers are asking discount or pass on the benefit of GST. However, builders are getting confused whether builders are actually getting benefit after the introduction of GST.

Also, Central Board of Excise and Customs Department has issued flyer stating that the builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/ installments. It is, therefore, advised to all builders/ construction companies that in the flats under construction, they should not ask customers to pay a higher amount of installment inclusive of all taxes to be recovered after imposition of GST.

In this article, we try to measure the impact of GST and quantify the benefits from GST on the Flat Sales and how much amount they can pass to the purchasers on the Flat Sales.

Before GST, Builders were paying an effective total tax of 5.5% (Vat 1% and Service tax 4.5%) on the Sale Price of Flat towards both Central Service Tax & State Sales Tax/VAT put together. Whereas the present rate of GST on the Sale Price of Flat which is inclusive of both Central GST and State GST is 12%.

Then, let us examine the effect of GST on Purchases Front. Central Excise duty was earlier payable on most construction material @12.5%. It was higher in case of cement. In addition, VAT was also payable on construction material @12.5% to 14.5%. A credit of these taxes was also not available for payment of VAT on a construction of flats. Thus there was cascading of input taxes on construction flats. As a result, an incidence of Central Excise, VAT on construction material was earlier being borne by the builders, which they passed on to the customers as part of the price of flats charged from them. This was not visible to the customers as it formed a part of the cost of the flat.

Since, the GST regime subsumed these multiple taxes into Single Tax and consolidated the Rate Structure of many of these items into 18%, 28% slabs. Therefore, One can observe that the Present GST Rate of Tax on material inputs is almost equal to the earlier Tax incidence and in many cases, it is lower. Coupled with this, the availability of ITC is the basis for the claim that there will be a reduction in the flat Prices.

Let us try to quantify these benefits of GST. Generally, the flats are sold on the basis of the per Square Feet. If we consider the basic price of per Square Feet as Rs.10,000/-, Out of the basic price of Rs.10,000, the land cost is taken as Rs.3000, the Cost of Inputs & Services used in Construction is taken as Rs.4,600 and the balance of Rs.2400 is towards Profit, Interest on the Capital employed & Administration Expenses etc.,].  The following is the sequence of Calculation Methodology;

Description % Tax Pre-GST % Tax Post-GST Formula used Explanation
In Rs. In Rs.
Total Price of per Sq.Ft 10,550 10,550 Post-GST Price of Rs.10,550 is taken for calculation purpose only
Basic Price 10,000 9,419 (Rs.10,550 x 100/112)

 

(112 = 100 + GST @12%)

This factor is used to arrive at basic price

Tax Outgo on Basic Price 5.5% 550 12% 1130 (Rs.9419 x 12%)
Cost of Inputs & Services contained in per Sq.Ft 4,600 4,600
Amount of ITC available 860 (Rs.4600 – Rs.3740)

 

Rs.3740 is the basic value of Inputs & Services

(Rs.4600 x 100/123 = Rs.3740]

Average Tax rate was taken as 23 %. It is the average of GST rates of 18% & 28%

Net Tax Outgo in Cash 550 270 (Rs.1130 – Rs.860) The net of Total Tax Outgo Rs.1130 and  the available ITC Rs.860
Benefits from GST   280 (Rs.550 – Rs.270) Reduction in Net Tax Outgo in Cash
Post GST price of per Sq.Ft   10270 (Rs.10,550 – Rs.280)

From the above, One can conclude that the Net Benefit available on account of GST works out to Rs.280 (Rs.180 – Rs.80) on per Sq.ft of flat. This works out to 3% on the total price of per Sq.ft of flat. Therefore, one can expect a general 3% reduction in the flat Pricing. (Above calculation is an example from an academic perspective. A builder should calculate project wise GST benefit based on actual data of project.)

 





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