GST should not increase developers’ overall costs

SUBANG JAYA: The implementation of the goods and services tax (GST) should not increase developers’ overall costs, according to tax consultants.

The 6% GST due to be introduced in April 2015 will see an exemption on the sale, purchase and rental of residential properties.

“Commercial property is standard-rated, so whatever input tax that has been incurred by the property developer can actually be claimed back against the output tax. Whereas if it’s a residential property, whatever costs incurred include the input tax but developers are not able to recover anything. So that input tax becomes a cost for the developer,” Fennie Lim, tax executive director of Crowe Horwath, told The Edge Financial Daily.

Lim was a panelist at the 2014 Tax & Budget Outlook forum in Sunway Resort Hotel & Spa in Petaling Jaya on Oct 30.

Input tax refers to all the tax incurred in creating a product, for example, the tax on buying raw materials and paying for services. Output tax refers to the tax the developer charges the home buyer on their final product.

If the home buyer does not need to pay the GST, the tax which the developers have to pay in creating their products will be their own sunken costs, said Lim.

“I would love for all the property developers to calculate what the real impact on their bottom line is before they do any adjustments to their prices. As property developers, they are not only selling residential houses, they are also selling commercial properties. And for all the commercial properties, there will be more savings. So if you’re undertaking mixed developments, even though residential units may incur extra costs, and when you even out the two, the prices of the property should stay,” said Lim.

Lim: I would love for all the property developers to calculate what the real impact on their bottom line is before they do any adjustments to their prices.

She said in the current tax system, contractors pay a 10% sales tax on their raw materials. By contrast, under the new GST, they will only pay 6% tax and therefore their costs will reduce.

“Developers should get to know the ultimate price of contractors. Because of savings in raw material prices, the contractor may be able to give them some rebate. So savings should be passed on to the developers and they should be able to maintain their costs and therefore the prices,” Lim said.

On commercial properties, certain expenses which were part of the developer’s  costs, such as at 6% service tax on engineering and architecture bills, can now be claimed against the output tax as customers will be paying 6% in GST for the end product.

Lim stressed that developers should not increase their residential home prices to absorb their input tax but rather do a calculation before making any adjustments.

“It depends on how you as a property developer strategise the way you launch your project. It’s a strategy planning issue. Do an impact study,” she said.

Based on the global trend, Lim predicts property prices will increase over the next few months and result in a one-time inflation, and prices will stabilise eventually.

“If all the businessmen are honourable in adjusting their prices, they should not go up so much. There may be a slight adjustment, but it will not go up drastically,” she concluded.

This article first appeared in The Edge Financial Daily, on November 1, 2013.

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