GST on Real Estate

From 1st July 2017 Government of India imposed Goods and Services Tax (GST) which repealed the existing laws related to indirect taxes.  It’s one of the most important reforms in the field of Indirect taxes in India. The GST (Goods and Service Tax) is a significant reform in the field of indirect taxes in our country. It has replaced the system of multiple tax collection by state and central government smoothly.

Since its execution in 2017, GST has created a huge impact in the real estate market of India. GST has simplified the taxation structure in comprehensive manner and brought significant changes for the benefit of buyers and sellers. Mentioned here are the aspects to understand the concept of GST when it comes to real estate transactions.

GST Applicability on Real Estate Transactions

1.    GST is based on the concept of supply. Under Section-7(1) of the GST Act, the term “supply” consists of-

(2) Notwithstanding anything contained in sub-section (1), -

Under Schedule – II of the GST Act, 2017, the following activities in relation to the Land and Building shall be treated as supply:





Under Schedule – III states the following activities or transactions which shall be considered neither as a supply of goods nor a supply of services:

2.    On the collective reading of Section-7, Schedule – II and Schedule – III of the GST Act, the following position comes out:

A.    GST on Sale of Under-Construction Properties: GST is applicable on the sale of under-construction properties if consideration is received before issuance of completion certificate by the competent authority (wherever applicable) or before its first occupation.

B.    GST on Land and Completed Properties: Sale of Land, resale of property and sale of ready to move in property are exempt from GST.

 

GST Rates on Properties

1.    Below are the GST Rates for under construction property pertaining to sale of the Flats/houses by builder/developer before obtaining the completion certificate.

A.    Residential Properties: With effect from 01-04-2009, the GST rate for under-construction residential properties is 5% without Input Tax Credit (ITC) for non-affordable housing segment. However, in case of on-going project, the promoter can choose either to opt for 5% without ITC or opt to pay GST at 12% and avail ITC on input/ input services subject to fulfilment of conditions. However, in the later case, promoter is expected to pass the benefit of the credit availed by him to the buyer.

B.    Affordable Housing: For affordable housing segment, the GST rate is 1% without input tax credit. Affordable residential apartment has been defined by law as the apartment having carpet area upto 60 square meter in metropolitan cities and 90 square meter in other than metropolitan cities and the gross amount charged by the builder is not more than INR 45 lakhs.

C.    Commercial Properties: For construction of commercial property, GST rate is 12% and builder and developer is eligible to claim ITC.

Implication on sellers

1.    GST Compliance: In case of ongoing projects prior (i.e. stated prior to 01-04-2009) where the Builder/ Developers has opted to pay 12% GST, they are required to pass on the benefits of input tax credit to the buyers. However, in case of projects started on or after 01-04-2009, the GST rate is 5% without ITC. Therefore, the builder/ developers must comply with strict documentation for all projects with respective GST rates and its timely GST payments.

2.    Choice of Tax Scheme: In case of projects started on or after 01-04-2009, the GST rate is 5% without ITC, there is no option for any other tax rate. In case of ongoing projects (i.e. stated prior to 01-04-2009), the builder/ Developers can opt between below two tax schemes:

A.    With Input Tax Credit (ITC): The developer can pass on the credit of tax paid on inputs to the buyer, but the GST rate will be higher (12%).

B.    Without Input Tax Credit (ITC): The developer can opt for lower GST rate (5% for residential properties, 1% for affordable housing) but cannot claim input tax credit.

Other Areas

1.    GST on Stamp Duty & Registration: Stamp duty varies from state to state and is usually calculated as a percentage of the transaction value or the market value of the property, whichever is higher. Stamp duty and registration charges are not covered under GST and remain outside its purview. These charges are paid separately by the buyer to the state government.

2.    GST on Services Related to Real Estate

A.    Real Estate Agents: GST is applicable on the commission or fees charged by real estate agents at the rate of 18%.

B.    Legal and Consultancy Fees: Any professional services such as legal and consultancy fees associated with real estate transactions are also subject to GST.

3.    GST on RERA-Registered Projects: The GST framework is integrated with the Real Estate (Regulation and Development) Act, 2016 (RERA). Properties in RERA-registered projects to comply with GST regulations and are subject to the applicable GST rates.

4.    Impact of GST on Resale Properties: If the property is being sold after completion certificate or possession, GST does not apply. The sale is treated as a transfer of ownership of the asset and falls outside the scope of GST.

Conclusion

1.    Buyers:

A.    GST is applicable only on under-construction properties, and stamp duty is charged separately

B.    For non-affordable housing segment, GST rate is 5%

C.    For affordable housing, the GST rate is lower (1%)

2.    Sellers/Developers:

Builder/ Developers are required to charge GST @5% without ITC on the under-construction residential projects started on or after 01-04-2009.   

A. For ongoing projects (i.e. prior to 01-04-2009), Builder/ Developers can opt for the scheme with or without input tax credit (affecting the final price of the property)

B. Developers are obligated to pass on ITC benefits to the buyer if 12% GST rate is opted in case of ongoing projects (i.e. prior to 01-04-2009).

C. Builder/ Developers are required to charge GST @12% on construction of commercial properties.

Understanding the impact of GST on real estate transactions help both buyers and sellers to make informed decisions and avoid unforeseen costs.