In a big relief to homebuyers, the GST Council on Sunday slashed tax rate on under-construction properties to 5 percent without input tax credit, from the existing 12 percent. On affordable housing, the council has cut the tax rate to 1 percent from the current 8 percent.
If the proposed changes are implemented, here's what the math will look like:
Prices for mid and affordable homes will NOT go down, as many claim. Mid-income homes Current
Let us assume the price of a house is Rs 5,000 per square foot. The homebuyer pays 12 percent GST to the builder amounting to Rs 600. Considering the builder's construction input cost as Rs 2,500 per square foot, he pays 18 percent GST amounting to Rs 450. As per current rule, the builder can adjust Rs 450 in Rs 600 and pay net Rs 150 as the final GST.
If the GST rate is slashed to 5 percent, the homebuyer will pay Rs 250 GST for the same house. Considering the construction input cost as Rs 2,500, the builder pays 18 percent GST amounting to Rs 450. However, as per the proposed changes, the builder will get nil input tax credit and will be required to pay the entire Rs 250 GST collected from the homebuyer to the government. Hence, his cost will go up by Rs 100, prompting him to increase the price for the unit.
Affordable housing Current
Considering that the price of a house stands at Rs 3,000 per square foot, the homebuyer pays 8 percent GST to the builder amounting to Rs 240 crore. Taking into consideration the builder’s construction input cost at Rs 1,800 per square foot, he will pay input tax at 18 percent amounting to Rs 324. In the current scenario, the builder can adjust Rs 240 in Rs 324 and will end up paying only Rs 84 as the final GST.
Under the proposed rate of 3 percent, the homebuyer will pay Rs 90 for the same house. The builder will pay 18 percent GST amounting to Rs 324 on construction input cost of Rs 1,800. However, under the proposed changes, the builder gets nil input tax credit due to which he will be required to pay Rs 90 collected from the buyer. With this, his cost goes up by Rs 6 on the housing unit, prompting him to increase the price.
Luxury homes get cheaper! Current
Let us assume the price of a house is Rs 20,000 per square foot. At the rate of 12 percent, the homebuyer pays GST of Rs 2,400 to the builder. Assuming the builder’s construction cost at Rs 4,000 per square foot, he pays an input tax at 18 percent amounting to Rs 720. Hence, he can adjust Rs 720 in Rs 2,400 and pays Rs 1,680 as the final GST.
Under the proposed changes, the homebuyer pays Rs 1,000 for the same house at the rate of 5 percent. Assuming the builder’s input cost at Rs 4,000, he pays Rs 720 as input tax at the rate of 18 percent. However, the input tax credit being nil, he now pays Rs 280 to the government.