Decoding Input Cost Credit

While many argue that GST has been unfair to real-estate sector, according to Rahul Shah, CEO, Sumer Group, it is very important for the consumer to understand the concept of input cost credit The nation woke up to a new tax regime on the morning of 1st July 2017. The Goods and Service tax (GST) was finally rolled out across the nation. For a few months now, Indian Real-estate sector has faced momentous challenges- demand concerns, demonetization, RERA, supply side issues and GST. While these changes had a material impact on the launches and demand, many believe that the transparency will improve materially going forward. This will not only lead to higher consumer confidence but also weed out unorganized developers. Currently, GST is applied at the rate of 12% on the sale of a property excluding stamp duty and registration. At the first instance, this tax rate would look staggering, but many tend to forget that this will be offset by high input cost credit. If one were to go by pure textbook definition, input cost credit may be defined as the credit manufacturers received for paying input taxes towards inputs used in the manufacture of products. Now, this gets tricky when it comes to real-estate sale. Assume that a property is being sold for Rs. 100. From a consumer’s point of view, if he was to keep aside stamp duty and registration, he will pay Rs. 112 to the developer at the time of handing over the property. It is natural for any consumer to believe that he is paying at least 5-6% higher tax than it was during the previous tax regime. This is where, he will need to understand the concept of input cost credit.  

Cost of the property	100
GST @12%	12
Total cost excluding stamp duty and registration	112

  At the time of developing a property, a developer will be making use of numerous raw materials. For instance, all of us know that cement and steel are taxed at 28% and 18% respectively. Assume that the developer has paid Rs. 10 each to procure cement and steel.  

Cost of Cement	10
GST  @28%	2.8
Total Cost	12.8

 

Cost of Steel	10
GST @18%	1.8
Total Cost	11.8

  Therefore the total input tax paid by the developer is Rs. 4.6. It will only be fair to assume that by keeping a reasonable margin and profit the developer eventually decides to sell the property at Rs. 100 and after adding the GST the total amount the consumer has to pay comes to Rs. 112. Here, the developer has already paid an input tax of Rs. 4.6 which he can claim a credit for and deposit the difference that is Rs. 7.4 with the Government This will have to be eventually passed on to the end consumer. While rolling out GST, the Government has included an anti-profiteering clause under section 171 of the GST law. This would mean that it is mandatory to pass on the benefit tax reduction due to input tax credit to the final consumer. Thus, once the developer passes on the Rs. 4.6 benefit to the consumer, then the consumer would eventually be paying Rs. 107.4 to the developer. In percentage terms, he has paid 7.4% as tax. If one were not to consider input cost credit, it would have been 12%. This clearly shows how input cost credit has an offset effect on the GST rate. Therefore, with the RERA and GST kicking in, today’s consumers are more empowered and has made their decision making much simpler.