From 1st July 2017 Government of India imposed Goods and Services Tax (GST) which repealed the existing laws related to indirect taxes.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-
(a) All forms of supply of goods or services or both such as barter, transfer, sale, licence, rental, exchange, lease or disposal made or granted for a contemplation by a person in the course or furtherance of business.
(b) It consists of import of services for a consideration whether in the course or advancement of business;1[and].
(c) The activities mentioned in Schedule I, made or granted without a contemplation.
(d) The activities which are treated as supply of goods or supply of services as described in Schedule II.
(2) Notwithstanding anything contained in sub-section (1), -
(a) activities or transactions stated in Schedule III; or
(b) such activities or transactions handled by the state, Central Government, or any local authority as public authorities, as may be notified by the Government on the recommendations of the Council,
shall be considered neither as a supply of goods nor a supply of services.
Under Schedule – II of the GST Act, 2017, the following activities in relation to the Land and Building shall be treated as supply:
5. Supply of services
Mentioned here are the keys which are considered as supply of services, namely: —
(a) renting of fixed property.
(b) In supply of services, civil structure, construction of a complex, building, or a part thereof, including a complex or building kept for sale to a buyer, wholly or partially, except where the entire deliberation has been received after the allocation of completion certificate, required, by the competent authority or after its first occupation, whichever is earlier.
Explanation — For the purposes of this clause —
(1) the expression “competent authority” means the Government, or any authority has the power to allocate the completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely: —
(i) an architect enlisted with the Council of Architecture formed under the Architects Act, 1972 (20 of 1972); or
(ii) a chartered engineer enlisted with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority.
(2) the expression “construction” includes additions, changes, replacements or reconstruction of any existing civil structure.
Under Schedule – III states the following activities or transactions which shall be considered neither as a supply of goods nor a supply of services:
5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
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 to the sale of under-construction properties (residential or commercial). This tax is levied on the value of the property.
B. GST on Land and Completed Properties: Land and completed properties (including flats) are exempt from GST. Therefore, if a property is ready for possession and is being resold, it is not subject to GST.
GST Rates on Properties
1. Since GST is only applicable to under construction property hence only rates of GST are applicable to sale of the Flats/houses before obtaining the completion certificate. Below are the GST Rates:
A. Residential Properties: The GST rate for under-construction residential properties is 5%. However, this is applicable to properties that do not come with an input tax credit (ITC). If the developer opts for this scheme, the buyer cannot claim any input tax credit. If the developer wants to take the input tax credit, he needs to charge 18% GST.
B. Affordable Housing: For affordable housing (as defined by the government), the GST rate is 1% without input tax credit. Affordable housing typically refers to homes that cost less than ?45 lakhs with carpet area restrictions and having an area of not more than 60 sqm in non-metro cities and 90 sqm and metro cities.
C. Commercial Properties: For under-construction commercial properties, GST is typically charged at a rate of 18%. This is a higher rate compared to residential properties.
Implication on sellers
1. GST Compliance: Developers are required to pass on the benefits of any input tax credit to the buyers, which has led to lower prices for properties under construction. However, developers must comply with strict documentation and timely GST payments.
2. Choice of Tax Scheme: Developers can choose between 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 may charge a lower GST rate (5% for residential properties, 1% for affordable housing) but cannot claim input tax credit.
3. Input Tax Credit (ITC)
- What is ITC? Input Tax Credit allows a buyer or builder to claim a refund on the GST paid on the inputs (like construction materials) used to build the property.
- Impact on Construction Costs: Builders can claim ITC on construction materials, which helps reduce the overall tax burden, making the final price of the property lower than if ITC was unavailable.
- No ITC on Residential Properties: Under the current GST structure for residential properties, the buyer cannot claim ITC if the builder opts for the reduced tax rate (1% or 5%). However, in the case of commercial properties, builders may pass on the ITC benefits to the buyer.
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, typically at 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 are more likely 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 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. Buyers cannot claim input tax credit for residential properties bought under the current GST scheme (1% or 5% rate)
C. For affordable housing, the GST rate is lower (1%)
2. Sellers/Developers:
A. Developers must decide whether to 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 wherever applicable.
C. GST on under-construction properties is a part of the overall cost, so pricing strategies must factor in these taxes.
Understanding the impact of GST on real estate transactions help both buyers and sellers to make informed decisions and avoid unforeseen costs.
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