GST: Under-construction flats to cost more by 5-10%

Prices of under-construction apartments may rise by up to 5-10% when the Goods and Services Tax (GST) is rolled out. But, prices of completed apartments will not be affected as GST will not be applicable there.

If you have already bought a flat but the entire payment has not been made, you will be charged tax at the GST rate on the remaining amount to be paid, which is likely to be between 12% and 18%.

Amit Kumar Sarkar, partner in tax consultancy firm Grant Thornton, said the rise in prices will be due to an increase in the net tax incidence for apartments under construction.

In the new tax regime, if one books an apartment which is under construction, the cost of the apartment will be treated as value of services that the developer is going to deliver to you and will be taxed at the prevailing GST rate.

Under the present regime, under-construction apartments are treated as work contracts in which the land, goods such as cement and steel, and services are involved. Therefore, to tax its services portion only, an abatement of 60% of the total cost is allowed.

So, the net service tax liability is calculated at 15% on 40% of the total cost, which works out to be 6% of total cost. Besides this, a buyer also has to pay 1% VAT (value-added tax).

Pratik Jain, leader of indirect tax with consultancy firm PwC, said in the suggested framework of GST, work contracts as well as sales of under-construction apartments are treated as a service. The problem arises as no abatement is allowed in lieu of land and other commodities such as steel, cement and sand used for the construction.

Now, if the GST rate is fixed at 12%, the net tax incidence will increase by around 6% from the earlier level. But if the rate is fixed at 18%, the rise would be by around 12%.

The problem got compounded as stamp duty, which is levied by the local state government on the registration of the property, has not been subsumed in GST. Therefore, over and above service tax, the buyer will have also to pay a stamp duty of 5-8% in different states.

Credai president Getambar Anand said as stamp duty is levied on the real estate, the sector should be treated separately and abatement should be allowed to calculate GST, so that the net tax incidence does not rise.

SOURCE: ETRealty.com