Wednesday, October 22, 2014

HOW GST IMPACTS ON PROPERTY


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Recently, there has been concern on how the impending Goods and Services Tax (GST), effective April 1, 2015, will impact the property sector. The spike in property sales could be seen in the months leading up to April 1 next year to compensate for the pre-GST market downturn. Bank Negara Malaysia imposed a number of cooling measures last year to arrest rising property prices. These included putting in place more stringent criteria for mortgage loans. On the fiscal front, the government raised the Real Property Gains Tax (RPGT) to 30% for properties disposed of within three years. It also raised the value of properties that foreigners are allowed to buy from RM500,000 to RM1 million.

However, under the new GST implementation, all building materials and services (E.g. Contractors, engineers) will be subject to GST with a standard rate of 6%. This will invariably raise the production cost for developers. If you understand how GST works, you will notice that in most cases, the additional tax cost is simply passed on to the final consumer (Standard-Rated goods), or is claimed back from the government (Zero-Rated goods). But in this case (Exempt-Rated), the additional tax cost is borne by the party before the final consumer – The developer. The developer does not have a next “victim” in the supply chain. Although a developer cannot impose GST on the residentials, he would have paid GST on building materials and services. A RM1mil house would have a tax element of about RM30,000. He may absorb it and make less profit, if the market is soft. Overall, new residential properties may register a lower overall increase in tax burden compared to Commercial Properties that are Standard-Rated. This is because there still is the chance that developers may only transfer some and not all of their tax cost increases into the final retail price. The downside to this is that where pricing for new commercial properties will be cleaner (Sales Price + GST), pricing for new residential homes would look inflated. This, in turn, will undoubtedly have a knock on effect on prices in the secondary house market.


Some research and analysis on the market prices is recommend. If it is higher than the market price, people should be cautious and avoid to buy it. If people refuse to buy, the developers will correct their pricing structure and bring it down to a more reasonable level. Consumers should be more careful with their sales and purchase agreements. In the sales and purchase agreements, I will note two things. One is that the developer shouldn’t charge any GST [pre-GST]. Item two is, notwithstanding that the developer cannot charge the consumers GST on the property itself pre-implementation, but under the law, the developer can charge people GST on the extras (for projects completed after March 31, 2015). If property owners wish to sell their properties, it is wise to do so before the commencement of GST because it would take time for the market to absorb the initial impact of GST.


1 comment:

stsush said...

Nice Information about GST Impact On Property Prices.
How GST Will Impact On Property Prices - GharPravesh

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