As GST does not apply to the resale of properties that have already obtained an Occupancy Certificate but applies to new and upcoming projects, we will focus our attention on the properties under construction. For these properties, GST has become mandatory from 1st July 2017. Even while they attract GST, the stamp duty will continue to stay and needs to be paid at the time of registration.
The simplification of tax structure reduces paper work and unnecessary wait at various state check posts while transporting materials. A single tax structure subsumes different taxes like vat, service tax, excise duty, entry tax etc. bringing down the administrative costs.
Before getting into the benefits that may accrue from the above, we need to understand the concept of “input tax credit” to get visibility on savings to the property buyers.
“Input Tax Credit” means the taxes paid by builders on procuring various materials for construction like iron, cement, bricks, sanitary ware etc. This can be adjusted against the GST charged on the final sale amount. The builder needs to deposit only the differential amount with the government resulting in reasonable savings.
Let us understand the two scenarios- “Pre-GST” and “Post-GST” through a simple calculation as below.
- Cement 1000 bags @ Rs.375/bag with 25% (Service Tax + Value Added Tax + Local) approximately = Rs.3.75 L+ Rs.0.94 L = Rs.4.69 L
- Apartment sold at Rs.20 L + 10% (Value Added Tax 5.5%+ 4.5% Service tax) = Rs.20 L+Rs.2 L = Rs.22 L
- Builder has already paid Rs.0.94 L for the cement procurement and the entire VAT, and Service tax of Rs.2 L collected on the final sale will be deposited with the government
- The strain on the end user’s pocket is Rs.2.94 L/-
- Cement 1000 bags @ 28% GST = Rs.3.75 L + Rs.1.05 L = Rs.4.8 L
- Apartment sold at Rs.20 L + 12% GST = Rs.20 L + Rs.2.4 L = Rs.22.4 L
- Builder must deposit only the differential amount to the Government which is Rs.1.35 L after adjusting the GST paid for cement i.e. 1.05 L (2.4 L – 1.05L = 1.35 L)
- The builder has recovered Rs.1.05 L which can be passed on to the end user by reducing the effective price of the apartment
We have just calculated one item in the value chain; once all supplier’s input tax is adjusted we are hoping to see some smiling faces in the industry.
The cement industry has quickly done their homework with 28% GST and passed on a 3% drop on their prices which is a direct saving on account of transportation and warehousing costs. The drop-in cost on transportation and warehousing will accrue to other stake holders in the value chain resulting in substantial savings for the construction industry finally benefiting the end user. Let’s keep our fingers crossed for the “Achhe Din”.
With ever changing norms and rules, as a residential property buyer, its best to check the property documents before buying a new property. To verify the documents of property you own or plan to buy, download the RealDocs App (Your Personal Property Lawyer on a Phone) from Google Play Store!