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Published on 9/12/2017 11:14:50 AM
Renegotiate, or bargain for lower price!
As GST allows developers to avail credit against taxes paid on construction inputs, they must pass on this benefit to customers.

Thus, existing buyers in projects under construction should approach their developer to renegotiate the price and avail a refund, while new buyers must bargain for lower prices in projects under construction!

Projects under construction

1. GST (Goods and Services Tax) allows developers to avail credit against the taxes paid on inputs like cement, steel, and work contracts.

2. The benefits must be passed on to customers. But, for this, existing buyer in a project under construction must approach the developer to renegotiate the price.

3. Price of a flat should be reduced according to the proportionate credit against taxes paid on inputs availed by the developer for the flat.

4. The buyer will have to pay 12% GST on the reduced price.

5. The benefit will depend on the stage at which construction had reached on July 1, when GST was enforced across the country.

6. Interestingly, in this mechanism, all buyers will get the same benefit as the new cost of the flats will be the same irrespective of the quantum of money they have already paid.

7. However, the tax amount that they will have to pay will depend on the amount of money left to be paid. Suppose a buyer purchases a flat of 2,000 sq ft for Rs 1 crore. He has already paid Rs 60 lakh. But only 30% of the construction of the project is complete.

For the remaining 70% construction, the developer pays a certain amount of GST on various items. All this will be refunded to him when he sells the flat and collects GST from the buyer.

Suppose that the developer pays Rs 2.5 crore in GST on inputs for the construction of the remaining 70% of the project.

The developer will have to divide the amount equally upon all the housing units in the project.

Thus, if 125 flats are being constructed in the project, each buyer gets a refund of Rs 2 lakh.

The developer must reduce the sale price of the flat by Rs 2 lakh, to Rs 98 lakh, from the pre-GST price of Rs 1 crore.

As the buyer in this case has already paid Rs 60 lakh, he will now have to pay the remaining amount of Rs 38 lakh and not Rs 40 lakh. But, the payment is to be made along with 12% GST. Therefore, the total amount paid by the buyer will be Rs 38 lakh plus Rs 4.56 lakh, as GST, at the rate of 12%. Therefore, the total payment a buyer in a project under construction makes is Rs 42.56 lakh.

In the earlier regime, he had to pay the remaining Rs 40 lakh along with 5.5% service tax and VAT, which worked out to Rs 42.20 lakh.

Projects nearing completion, completion certificate not received

1. In a project where construction was almost complete before July 1, when the GST was implemented, the Income Tax department has made a special provision to allow the developer to take credit against tax paid on inputs.

2. In this, if developers have invoices for excise taxes paid on inputs in the last one year, they will get the credit equal to the entire excise taxes paid.

3. If they don't have the invoices to prove the amount, the department has still allowed them to take credit which is equal to the 60% of CGST that the buyer will pay, provided GST is levied at 18%. (In this case, GST is 18% but, as 33% abatement is allowed, the net GST is 12%. Therefore buyer pays CGST at 6%.)

4. Therefore, the developer will get credit equal to 3.6% of the sale price as credit from the taxes paid by the buyer.

5. In effect, the developer should adjust for the input credit that he will be getting in his sale price so that a buyer gets the benefit.

Completed Projects

No GST will be levied on a completed project that has already received completion certificate and is ready for the registry.

Normally, a developer will increase the sale price of a flat in a project after it receives completion certificate.

This is mainly because in a flat under construction, the developer gets credit for the taxes on inputs paid when he sells it and collects GST from the customer.

Now, as the buyer is not paying any GST, the developer will not get any credit against the taxes paid on inputs. Therefore, the developer will have to absorb the amount that he was supposed to get as credit and, so, he will increase the sale price to that extent.

New projects

At the same time, for new projects, a developer will quote the price after adjusting for all the credit that he will get as tax credits against the taxes paid on inputs.

But, for new projects, the buyer will have to pay 12% GST on the sale price.