At the 33rd GST council meeting held in late February 2019, input tax credit was recently removed in case of residential real estate transactions. The new lower GST rates for under construction residential property purchases are 1% GST in case of affordable housing residential transactions (from 8% earlier) and 5% GST in case of residential properties that are not part of the affordable housing segment (from 12% earlier). But the rate change in itself is not the entire story as this rate cut, which will be effective from 1st April, will also include the removal of Input Tax Credit (ITC) which was applicable earlier. From a prospective home owner’s perspective, the lower GST rate potentially equals lower tax pay out resulting in cheaper property purchases however this selective ITC removal may impact property buyers in unexpected ways.
What is Input Tax Credit?
Input Tax Credit (ITC) is a mechanism by which, suppliers of goods or services can reduce their tax burden by receiving tax credit on inputs used to manufacture the good/service. For example, if a jeweller contracts a 3rd party (job worker) to design a specific piece of jewellery and pays GST on the amount charged by the job worker, the tax paid is subsequently adjusted with the total GST due at the time of sale to the final customer. This ITC amount is not paid out in cash but instead credited to the electronic credit ledger of the GST registered business/individual. In many ways, ITC in GST is the ideal mechanism to prevent the cascading tax effect observed under the VAT regime.
Input Tax Credit in the Real Estate Sector
A real estate project tends to include multiple stakeholders apart from promoters, such as architects, contractors, raw material suppliers and others. Payments by promoter for supplies such as cement and sand as well as services such as building plan/design creation include a GST component. Under the existing rule for GST on real estate, these GST payments could be charged as input tax credit by the promoter of the project reducing their overall tax burden. It was expected that this reduced tax burden benefit will be passed on to property buyers resulting in a reduction of overall property prices.
Another Case of Selective ITC Removal
Residential real estate is not the only GST item which has witnessed a removal of ITC. The most prominent example in this regard is the removal of ITC in case of restaurants. The current GST rate in case of restaurants is 5% without input tax credit. However, this rate in higher at 18% with ITC benefit for restaurants located within the premises of hotels that provide rooms with per night tariff of Rs. 7500 or higher. Know more about GST on Food
Proposed Advantages of New GST Rates for Real Estate Sector
The following is a list of the proposed benefits of reduced GST rates in real estate to be implemented from 1st April 2019:
- Lower housing prices especially in the affordable housing segment
- Resolution of problems regarding ITC benefits not being passed on to home buyers
- Elimination of problems related to unused ITC being added to the cost of project
- Simpler tax structure as well as compliance for builders.
Know more about proposals of the 33rd GST Council Meeting
Expected Impact of ITC Removal in Residential Real Estate
While the possibility of lower under construction residential housing prices is very real after the proposed lower GST rates come into effect, the removal of input tax credit has brought some criticism. The main concern with ITC removal in real estate transaction is the potential increase in real estate cash transactions leading to the possibility of increased tax evasion. Many critics point out that in its current form, real estate already features low levels of transparency and more formalisation in the sector is required.
As ITC benefit in real estate could be availed by builders and promoters only when backed by GST invoices, transparency and formalisation in the sector was increased. This in turn increased the possibility of better tax compliance and made tracking of tax payments easier. With the ITC benefit now being withdrawn in case of residential properties, unscrupulous promoters and builders might resort to cash deals which will decrease transparency and may increase tax evasion in the sector.