Will GST Exemption Lower the Property Prices?

The expectation is quite high that an increase in the Real Property Gains Tax (RPGT) and an abolition of the developer interest bearing scheme (DIBS) will dampen the property market. But, there has been little attention on our government’s move to exempt residential properties from the Goods and Services Tax (GST), which is going to replace the current Sales and Service Tax (SST) effective from April 2015.

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Do you think the prices will drop or remain unchanged? To me, it is very unlikely. Why? First, there is a need to understand GST and the supplies that come under it. As for exempt supplies, the category in which the residential properties have been placed are not subject to GST. So, businesses providing exempt supplies cannot charge GST on the final product to their consumers. However, those developers who are not eligible to claim input tax from the government on GST paid will then be saddled with additional costs due to the 6% of GST which is payable on almost all its inputs such as construction cost, services, building materials, etc cannot be claimed from the government. Being business entities, they will most probably pass on the non-claimable tax to the consumer end.

Second, the developer currently pays a certain amount of SST on, e.g, consultant fees but that would be a portion of the input tax for the cost of construction and infrastructure which would be accounted for up to 40% to 50% of the total cost of a development. So, how can housing prices drop? Inevitably, the developers will need to pay a great amount on GST compliance. In relation to that, consumer is the one who will pick up the tab for this added cost. Still, it is very unlikely for the government to declare property development as a zero rated supply. In fact, all development companies are paying sales and service tax even now. So, the property price in Malaysia will remain consolidate in short term view but will increase in long term basis.

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