GST’s impact on under-construction properties

The government has already declared all the new GST rates on most of the goods and services. However calculating its impact on the under-construction properties seems like a mammoth task. The GST has been introduced with the idea of a simplified taxation system and altogether eliminating the burden of double tax from the economy. Thus ideally it should not increase the prices of the goods and services.

Let’s take a look at the rates under the new regime – many construction materials are under 18 and 28 per cent slab. Steel and steel products fall under the 18 per cent segment while pre-fabricated components for building and cement are under the 28 per cent segment. However, with the input tax credit, the overall tax incidence should be neutralized hopefully.

Let’s take packaged cement as an example. According to an official release packaged cement attracts central excise duty of 12.5 per cent + Rs 125 PMT and a standard VAT rate of 14.5 per cent. Above this there is central sales tax, octroi and entry tax that vary from state to state. The total tax comes to 30-31 per cent. This is clearly 2-3 per cent more than the proposed GST rate for cement.

As far as the developers are concerned, the GST implementation is going to be a challenge for initial 6 to 9 months. With RERA Act starting too, the developers will really have a tough time aligning and streamlining their processes. As a result, the supply will slow down. The properties launched in the last three years have already been low. Developers should be able to obtain credit for various taxes paid on inputs if there is a proper application of the credit utilization mechanism. This will in long run decrease their overall costs. Only time will tell if the real tax incidence will be lower or higher. However, the big question still remains for the buyers, if the developers will pass on the benefit to them or not in the form of price correction despite the anti-profiteering clauses.

Any building or structure construction that is intended for sale to a buyer is subject to 12 per cent tax with full input tax credit (ITC), subject to no refund in case of overflow of ITC. As a result, basic construction cost may come down a little, but since the input tax credit is limited to 12 per cent, there may not be much saving in the high-end constructions. There is no doubt that with GST and the initial teething issues, it should further enhance India’s attractions as an investment destination. With transparency and ease of operations, it is bound to have a positive impact on the economy and consumers in the long run.