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High-value realty to feel GST pinch

Apartments with a price tag of over Rs 3,000 per square feet may cost more under the goods & services tax (GST) regime, builders' body Credai has warned even as it demanded special treatment for the real estate sector.

By Sambit Saha in Calcutta
  • Published 25.05.17
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Calcutta, May 24: Apartments with a price tag of over Rs 3,000 per square feet may cost more under the goods & services tax (GST) regime, builders' body Credai has warned even as it demanded special treatment for the real estate sector.

Developers say the new taxation system, to be effective from July 1 nationwide, will not consider "abatement" - a reduction of taxation - for land, a key raw material for real estate development.

The GST Council has fixed a 12 per cent rate for this sector, less than the standard rate of 18 per cent, apparently to spare the affordable housing sector, a key thrust area of the Narendra Modi-government.

However, apartments in the middle, premium and luxury segments will not go unscathed where prices may rise around Rs 400 a square feet for units sold at Rs 10,000, a back-of-the-envelope calculation suggests.

The tax will go up in tandem with unit prices because of the large component of the land cost built into them. If Credai's fears are valid, property prices in all parts of Calcutta, barring the fringes of the city, will go up marginally.

Complex math

At present, builders pay VAT on construction material and service tax at 4.5 per cent of the total sale value. The service tax is arrived at after taking into consideration the abatement for the land component at 70 per cent of the total sale value. Both service tax and VAT will be abolished from July 1 and replaced by GST.

Builders will get input credit, so far unavailable under the VAT regime, for construction material such as cement and steel, thereby reducing the incidence of tax.

However, developers claim the benefit will be wiped out for high-priced projects as no abatement on land will be allowed. "The construction cost is between Rs 2,000 and Rs 3,000 per square feet, depending on the nature of the project. Units selling at Rs 4,000 per square foot will have more construction component and less of land. However, for projects above Rs 6,000 per square feet, the land component will outpace the construction cost. Since no abatement is allowed, tax incidence will go up," Sushil Mohta, managing director of Merlin Projects, said.

Tax experts concurred with the view of the builders. "The input tax credit is going to be available only on material. So, if the component of land is more than the material cost, the tax incidence will go up," Abhishek Jain, tax experts with E&Y said, adding that the 12 per cent tax have been arrived at keeping the land cost at one-third of the total cost.

Stamp duty

Builders also claimed that real estate will be subjected to double taxation since stamp duty, ranging from 5 per cent to 8 per cent paid during any land related transaction will not be subsumed under GST. So, a builder buying a plot for a project and paying stamp duty, calculated on the circle rate of an area by each state, would not get input credit under GST.

"Unless abatement for land is allowed, cost to the end-consumer will go up. Credai would urge the government to minimise the double taxation of real estate," Nandu Belani, president of Credai Bengal, said.