The GST council that convened in March 2019 allowed real estate players to shift to lower GST rates of 5% (affordable residential houses) and 1% (non-affordable residential houses). However, the catch being that the builders will not be able to take Input Tax Credit (ITC).
The effective GST rates have been reduced to 5% from 12% for affordable house category and to 1% from 8% for non-affordable house category. Apart from the ITC not being made available, the builders will also have to make 80% of their building project-wise purchases from registered vendors only. One such item would be cement, which can only be purchased from registered vendors.
Now coming to the timelines. For a project that commenced on or after April 1st, the new GST scheme is mandatory wherein construction services are provided along with the transfer of land. For pure construction though, the existing rate of 18% will continue to apply. Commercial projects will still attract the same 18% GST rates and there will be no changes to it.
Now coming to ongoing projects. The builders will have an option to choose before May 20th, 2019, whether to avail the new scheme or continue charging the old GST rates. The decision would have a great impact on the cost structure and the future sales.
If the builder adopts the new scheme, the credit pertaining to booked units and installments paid have to be reversed for those units booked as on 31st March 2019. If the builders holds on to the old scheme, there is no commercial impact and they will be able to collect the same 8%/12% from customers. Further, the builder can collect credit on purchase and it will reduce the cost to some extent. However, the promoters who are already registered under RERA may not be able to revise the price for the booked flats also.
Here are a few scenarios,
1. If the price of the flat quoted to the customer is inclusive of taxes, then the new scheme may be beneficial for the builder. However, if the price quoted to the customer is exclusive of taxes, then the old scheme may be better for the builder.
2. If the project is almost completed i.e. 80%-90%, then it may be beneficial for the builder if he could pay GST under existing scheme. In this case a majority of inputs or input services would have been procured and credit on such procurement's would have been availed. However, if the project is in initial stages of construction where major part of inputs or input services is not procured, then it may be beneficial for the builder to opt for a new scheme.
3. If the project is at premium places wherein the essential cost component is due to premium value of land and construction cost and corresponding credit is not substantial, it may be ideal to go for a new scheme.
4. In case the expected flats to be sold before receipt of Completion Certificate are not many then the New Scheme could be chosen. This is because in such cases, even in the existing scheme, the credit attributable to unsold flats has to be paid back.
The decision should be made on a detailed analysis of figures on different aspects and also the qualitative aspects as to market conditions, customer relationship, clauses in the agreement, etc. may be seen.
As for consumers, the new scheme looks to be a booster if all the costs are not passed on by builders to the customers by increase in rates.