Financial Tax impact of GST on under construction projects

GST slabs for different goods and services have been fixed at 5%, 12%, 18% and 28%. Before we try to understand the financial tax impact of GST on under construction projects, we look at some of the most common terms in taxation world that shall help you understand the impact – 1) Input credit and 2) Abatement.

Input Credit: In construction world, it is the credit received by builder for paying for goods used for construction of a building. When the builder sells the building to a buyer, the tax on the sale need not be paid by builder to the tune of input tax credit. e.g. if builder pays 10 lakhs as excise duty on raw material for construction, he gets input credit of 10 lakhs. For any tax on sale of building, the can then deduct 10 lakhs. This input credit principle will be introduced as part of GST.

Abatement: It is the act of subsiding/reducing the burden of tax. e.g. Service tax on Basic sale price (BSP) is currently charged on 30% of total cost since service tax is applicable only on construction service and not on land which is a state subject (it is assumed that land cost and construction cost involved is 70% and 30% respectively of total cost of building)

For under construction flats, buyers currently pay service tax and other cess on BSP and other charges. The tax amount is currently 15% but considering abatement provided, the tax comes to 4.5% on BSP and 15% on other charges not related to construction like PLC, Club membership etc.

Now coming back to GST and its tax impact on under construction projects, below are the salient direct financial tax impact to be considered:

Buyer will have to pay 12% GST post introduction of GST. However, there are two things still lacking clarity.

  1. Since GST now becomes an integrated (state and central) tax affair, will there be any abatement provided on BSP (currently 30% i.e. 4.5% of 15% is payable as tax on BSP)?
  2. How effectively will concept of Input Tax credit be implemented.
    According to a quote from Business standard (business-standard.com), “There would be a liberal credit regime under GST and developers are required to pass on the benefits of increased credits to the customers, according to the anti-profiteering clause of the GST law.”
    Hence, if builder passes on input tax credit for say excise duty of almost 2%, then the buyer may have to pay less than 12%. However, there is no guarantee that this may happen.

But some clarity is expected on both the 2 concerns by mid of next month.

Worst case scenario

Assuming no abatement and Input tax credit benefit is provided, below will be the financial tax impact of GST on under construction projects.

Basic sale price + Parking + Lease Rent + EEC + FFC = from 4.5% to 12%

PLC and Club membership charges and Power Backup Charges= from 15% to 18%

Tax over Maintenance charges=15% to 18%.

Best case scenario

Assuming both abatement of approx 2% (on construction) and Input tax credit benefit are provided, below will be the financial tax impact of GST on under construction projects.

Basic sale price + Parking + Lease Rent + EEC + FFC = from 4.5% to 2.5%

PLC and Club membership charges and Power Backup Charges= from 15% to 18%

Tax over Maintenance charges = from 15% to 18%.

Last updated: May 29, 2017 at 18:00 pm

8 thoughts on “Financial Tax impact of GST on under construction projects

  • June 1, 2017 at 5:30 pm
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    Nice article.
    Any idea till when GST council will finalize whether land will be included in final flat cost or not to calculate 12 % tax under GST.

    I also tweeted so many times on twitter for same thing not to include land cost,as it will excess burden on us buyers.

    https://twitter.com/ashimrt/status/869782005180792835

    Reply
    • June 2, 2017 at 3:00 pm
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      Good job Asheesh. We could expect some directions by tomorrow but things would only be 100% clear by mid of this month.

      Reply
    • December 7, 2017 at 10:53 pm
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      Please do consider if land cost is included then the overall 12% GST is too heavy for the buyers because the builder is not selling the flat according to sub-register rate he will be selling according to market price so please do consider and keep posted

      Reply
  • June 8, 2017 at 8:19 pm
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    Sir ..
    My builder is saying to do pre payment as after 1st July GST will be 12% rather then current ST 4.5%

    My plan is 40:60
    Builder saying possession offer will be in 4 months from now and he will pay pre-emi till OOP

    What should I do, please suggest.

    Reply
    • June 14, 2017 at 11:33 am
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      Sir,

      Please respond, time is running out for me and lots of other buyers also

      Reply
  • June 14, 2017 at 6:34 pm
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    Every other day, there is a new story from the central government and there is no clear word on the abatement concern as yet. If govt. provides abatement, you may delay the payment to after GST comes into picture.
    You should wait till 29th at least and then if there is no abatement confirmation from govt. and if you have confidence in builder and status of work, you could pay on 30th June.
    By the way, what is the builder’s name?

    Reply
    • June 22, 2017 at 9:39 am
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      What is in the Name, you know almost every builder doing it.
      My Project in sector 2 opposite to Eco-village 1

      Reply
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