In the wake of demands from real estate developers, the Goods and Services Tax (GST) Council is mulling a reduction of GST rates on under-construction buildings. However, the reduction might come along with a rider requiring developers to source 80 per cent of their materials from GST compliant vendors. Currently, 12 per cent GST is levied on under-construction property and no GST is levied on property for which completion certificate has been issued at the time of sale. However, developers have been claiming that the tax on under-construction property was putting home buyers off and that this was one of the reasons why sales have been poor. Developers have also stated that they are currently stuck with a huge unsold inventory of under-construction apartments which buyers are not interested in due to the high tax rate.
During the GST council meet on Saturday, finance minister Arun Jaitley had said that the GST Fitment Committee is looking into GST rates on real estate and that the discussions on the matter could be taken up at the next meeting slated for next month.
“Homebuyers feel they are not getting benefited under GST. Certain proposals have come before the Council and the law and fitment committee will look into the matter… it will come up in the next council meeting. There was a total consensus that something needs to be done,” Jaitley had said. According to the sources, there are two proposals currently in front of the council. One is a fixed lower 12 per cent GST rate with full input tax credit (ITC) being extended to the developer, which will make the effective GST rate around 8 per cent.
The other proposal is to bring down the rate on under-construction flats to 5 per cent, but without extending developers the benefit of ITC, on the condition that builders would need to purchase 80 per cent of the construction material going into the project from suppliers who are GST compliant. However, sources in the finance ministry say that the council during its deliberations on Saturday was in favour of the second proposal since developers have not been passing on the benefit of lower tax input to customers.
“If you calculate the ITC, which is refunded to the developers, the GST rate gets reduced to around 5-6 per cent. The government had asked developers to pass it on to the buyers, but they are not doing it. So, while buyers shell out 12 per cent GST while purchasing under-construction property, they do not enjoy the benefit of ITC. If the rate is reduced with the rider, it will benefit buyers, developers and government,” a senior official said.
The proposal to reduce the rate without ITC is also expected to promote the purchase of construction material from GST-complaint entities, which will benefit GST collection in the long run.
Cement too revenue heavy
The reason for the decision to keep GST on cement unchanged at 28 per cent was because it is a source of nearly H20,000 crore in revenue to the government, according to finance minister Arun Jaitley. Developers had expected a tax cut on the product this Saturday