Real estate developers have to pay more taxes under Goods and Services Tax (GST) for residential projects, if they source a bulk of their inputs (like cement and capital goods) from unregistered dealers.
For residential projects started after April 1, 2019, the builder has to mandatorily charge customers a concessional rate of 5% or 1% (affordable residential apartments), as per the decision of the GST Council.
For ongoing projects, they were given an option to choose between the old rate of 12% or 8% for affordable housing and the new rates by May 20.
Under the old rate, builders were allowed to claim credit on input costs incurred on steel, cement and sand for under-construction buildings to offset their GST liabilities. The new rate comes without the input tax benefit.
According to advocate G. Natarajan, senior partner, Swamy Associates, there are more pain points for builders under the new concessional GST rates announced for the real estate sector.
Cost to go up
Though it was believed that the reduction in GST rates would reduce the price of apartments, it is not so, as the costs for the builder would go up due to denial of input tax credit, he added.
“Whatever the GST liability is, it has to be paid only in cash and you are not eligible to take input tax credit,” Mr. Natarajan said, addressing developers at a session on GST for the construction industry.
The event was organised by CREDAI Chennai in association with The Domotics.
Under the new tax rates, Mr. Natarajan pointed out that if a developer procures cement from an unregistered dealer, he will have to pay GST on cement at the rate of 28% under the reverse charge mechanism and no input tax credit will be available.
Generally, a supplier of goods or services pays the tax on supply. But in case of reverse charge, the receiver is liable to pay the tax. Similarly, he said that if the developer procured capital goods from an unregistered dealer, he would have to pay the tax at whatever rate was applicable for that category of capital goods.
Mr. Natarajan also said the developer had to make sure that 80% of all inputs and services were purchased from registered dealers. If not, the developer would have to pay tax on the shortfall value at the rate of 18%.
For example, if the value of input is ₹10 crore, the builder has to purchase ₹8 crore from registered users. If he purchases only ₹6 crore from registered users, for the remaining value of ₹2 crore, he has to pay GST of 18%.
At the event, J.M. Kennedy, Commissioner of GST, Trichy, released the book on demystifying GST for construction industry authored by Natarajan.