The goods and services tax (GST) on real estate projects under construction is squeezing the cash flow of realtors as many buyers are waiting for finished homes or opting for old ones to escape the tax, multiple stakeholders have told The Telegraph.
Buyers of under-construction properties, including flats, across the country are being asked to pay as GST 12 per cent of the agreement value. But no GST is levied after the project obtains the completion certificate.
The GST is actually paid to the government by the builder who gets a refund on his inputs. Under normal circumstances, the builder need not have passed on the entire GST to the buyer because of the refunds.
But the problem has arisen because of the way the project cost has been broken up. Land cost is fixed at one-third or 33 per cent of the project cost and is kept out of the GST rate.
But in cities and on their peripheries, land accounts for a bigger share of the cost. In a project where land cost is more than 33 per cent, the deduction continues to stay at one third of the cost. This means that builder gets taxed for a portion of the cost for which he does not get a refund, and he passes that on to the buyer.
The real estate market condition has ensured that the buyer can now afford to wait. A perceptible stagnation in the property market has convinced buyers that there is little risk in waiting for a project to be completed. In a rising market, consumers close deals as early as possible for fear that the prices will rise by the time a project is finished.
Along with the stamp duty and the registration fee of 7.1-8.1 per cent and the 12 per cent GST, the cumulative incidence of tax goes above 19 per cent for an under-construction project. Before the GST was launched, a service tax was levied in addition to the stamp duty and the registration fee. But the service tax rate was only 4.5 per cent.