The Goods and Services Tax (GST) Council on February 24, 2019, once again revised tax rates on under-construction residential properties. The reduced rate now makes the tax rate 5 percent for the normal category and 1 percent for the affordable housing category. In both cases, builders will not be able to claim the input tax credit (ITC). The new rate gets applicable from April 1, 2019.
Taking into consideration all the concerns raised by the developers regarding the ITC, on March 19, the GST Council gave real estate developers an option to choose between the old tax rates and the new ones for under-construction residential projects. Which means, now builders can sell flats under either rate, as per his convenience. The industry experts hailed this decision and said that it will not only help the developers but will also boost the demand and increase sales of under-construction properties.
However, it now becomes important for the buyers to understand both the scenarios. Should they book flats with 12% GST or should they pick flats with 5% GST.
Let’s have a quick look at the pros and cons of 12% GST and 5%.
Under 12% GST with an ITC on under construction projects, builders generally allow buyers to partially pay the GST i.e. 6% and the remaining 6% they pay themselves. This also opens the room for negotiations for buyers. One can ask for more rebate in tax from the developer. However, if a buyer books the flat which is nearing completion, he may end up paying more. Therefore, under 12% rate, the buyer should go for projects that are recently launched. That way, they save money on the effective cost.
While, under 5% GST for under-construction homes without the benefit of the input tax credit, it increases the tax liability and impact the profit margins of developers. A flat 5% GST without ITC is the best suited to fence-sitting homebuyers. They can opt for projects which are nearing completion and are available at good locations.
This decision by the government and the GST Council has given many options to the buyers as they can purchase property as per their convenience without going heavy on their pocket. The reduction in tax rates has also removed the ambiguity around the input tax credit. However, the fundamentals of buying property remain the same, i.e. always do the due diligence before investing.