In early February 2018, the government announced that builders should not charge goods and services taxes on new affordable housing. The announcement came on the heels of a new concessional rate for affordable housing. With so many recent changes, home builders may be wondering what to do. Here’s an overview of the basics.
The Concessional Rate
During its January 2018 meeting, the GST Council decided to move housing into the 12% GST slab. This concessional rate was already in place for houses that were constructed as part of the Housing for All (Urban) Mission. This includes houses built in redeveloped slums as well as several other properties.
Credit Linked Subsidy Scheme
The Council also announced that first time home buyers who qualify for the credit linked subsidy scheme only have to pay 8% GST. To qualify for the CLSS, buyers need to have household income less than ₹18 lakh. Additionally, their homes need to have no more than 1,615 square feet of carpeted area, which is roughly equivalent to 2,200 total square feet.
Although most first time buyers fall under this income threshold, you may want to keep records so that you can prove why you offered the lower rate if you ever get audited.
The Effective GST Rate
Even in cases where you apply the 12% GST rate, the effective GST rate may actually only be 8%. This happens because you don’t assess GST on the land involved with the sale. As a general rule of thumb, the land is worth one third of the price, and when you subtract that amount and apply 12% to the cost of the home alone, the effective rate falls to 8%.
To illustrate, imagine that you are selling a property for ₹15 lakh; a third of the value to the land is ₹5 lakh. As a result, the house then costs just ₹10 lakh. When you apply 12% rate, the GST is ₹1.2 lakh. When you divide that by the full price of the property, you get the following equation: ₹1.2 lakh / ₹15 lakh =0.08. The effective GST is then just 8%.
No GST on Affordable Housing
About a month after the January meeting, the government announced that builders shouldn’t charge any GST on new affordable housing. But there is one key exception: you can charge GST on affordable housing if you take into account how your input tax credits affect the price before you apply GST.
According to the government, builders typically pay 18% to 28% on the materials they buy for a home. When you sell the home to a buyer, you can claim an ITC for those amounts. For instance, if you spend ₹500 on supplies for your building company, and you pay 28% GST, that brings your GST bill to ₹90. You can claim a credit for this business purchase and use that credit to cover other GST that you owe the government. For instance, some builders don’t pay the GST on construction services in cash but cover it with their ITC credits.
Keeping track of the constantly changing GST rates can be stressful, but when you invest in cloud-based accounting software, the work is done for you. Cloud-based accounting software such as QuickBooks Online is GST ready, and it can help you calculate taxes under the new regime, prepare reports, file returns, and more.