The GST Council’s approval of bringing down GST rate on under-construction properties, from the existing 12 per cent to 5 per cent, is helpful if viewed apparently. But the truth is that it will not benefit those looking for low and medium-priced properties due to the abolition of ITC (Input Tax Credit) if under-construction projects enter the 5% slab.
As announced by the country’s Finance Minister after the last meeting of the Council, the latter will throw light on the suggestion for reducing the GST rate in its upcoming meeting in January.
The interest of those purchasing homes within the price range of 7,000 rupees per square feet are likely to get hurt. The 5 per cent GST charge without the Input Tax Credit (ITC) isn’t a profitable deal as against the 12 per cent with ITC and the present standard construction cost.
Now, what is ITC and how does it benefit the buyer?
The Input Tax Credit (ITC) is the refund available to the individual paying tax during any raw material purchase. GST regime’s anti-profiteering laws demand the transfer of this ITC advantage to the buyers.
The 5 per cent GST rate will benefit buyers opting for square feet rates above 7,000 rupees.
With the present GST rate of 12 per cent, a flat costing 5,000 rupees per square feet becomes 5,600 rupees per square feet for the builder. The Input Tax Credit ranges between 450 and 540 rupees based on the present material costs and taxes. Thus, the construction cost varies between 2,500 and 3,000 rupees per square feet on an average. With most of the construction materials attracting 18 per cent GST, the builder can avail of 500 rupees ITC.
When the Input Tax Credit is passed on to the buyer, the latter has to pay 5,100 rupees per square feet for the flat.
At 12 per cent GST, the total cost per square feet would remain 5,600 rupees while it would come down to 5,250 rupees at 5 per cent GST, which is relatively higher in terms of the GST charged.
The bottom line is 5 % GST is advantageous to the prices of premium home with higher rates per square feet area. The medium priced and affordable homes will cause their buyers to pay more.
Besides, a change in the GST rate will create confusion for the under-construction projects that have been sealed already. As a result, the buyers would have to pay extra money if charged by builders.
If the new rate is applied then the builders who have bought raw materials will get deprived of ITC. This change in GST rate will affect the cost of mid-priced homes, thereby discouraging the buyers.
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