In an apparent bid to give a boost to housing, the government recently reduced GST on unfinished flats from 8% to 5% for all flats and to 1% for the affordable housing segment.
This move was advertised by the government as the one shove that is going to spur demand in housing!
However, when one reads the fine print, as usual, one has serious doubts about the mental capabilities of those of take such decisions.
Whilst they have reduced the GST for the consumer, simultaneously they have prevented the builder from availing of Input Tax Credit. Normally, when the builder (or any other business) buys raw material or services, they pay GST to the supplier.
Normally, they are allowed to offset this GST which they have paid against the GST that they collect from the flat buyers and pay the difference to the government.
Now, this ‘offset’ facility has been withdrawn. This means that the tax reduction has been passed on to the builder – the govt is not getting a lower tax amount, in fact, it may just get a higher amount!
This works out to around Rs.200 to Rs.300 per sq.ft.
Here are the various scenarios:
1. In cases where the cost per sq.ft is above Rs 10,000 or so, the builders are in a position to absorb this amount and they won’t pass on this increase to the buyers.
2. In areas where the prices are around Rs.5000 per sq.ft. In such areas, there are three scenarios
a. Where the builder has just launched the project and has not sold a substantial portion of the inventory, he will increase the rate by around Rs.250 per sq.ft.
b. Where the builder has just launched the project and has sold a substantial portion of the inventory, he will have made the costing of the flats sold assuming 8% GST and with benefits of Input Tax Credit. He is screwed. All those who have bought the flats will have paid only 10 – 20% of the total cost, with GST at 8%. They will pay the remainder amount at 1% GST. To make up for this loss, the builder will have to sell whatever flats he has left with him at a much higher price – nearly Rs.500 – 600 higher, not only to make up for the loss in the flats that he had not sold, but also to make up for the remainder payments for the flats that he had sold!
How does that affect those guys who have already bought flats in such a project? They have just got a 7% discount in the flat prices! The builder will have to bear the reduced amount of the GST. They should endeavor to register their flats at the earliest. If they decide to sell, they will get a better price for the flat as the builder will have increased the rates substantially.
c. Where the builder has sold the flats and already recovered 60 – 70% of the flat cost, the buyers are still benefitted as they will pay 7% less on the remainder amount, but it will not make much of a difference both for the builder or the buyer.
So, overall, the base rates will increase, though the overall cost of the flats may not go up too much (increase in base rate being offset by the reduction in GST).
A boost to the housing sector? That’s a stretch!
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