Here’s everything you need to know about the Goods and Services Tax and how it will affect you financially. In India, buyers of under-construction properties such as flats, apartments, and bungalows must pay a Goods and Services Tax (GST) of 1% for affordable housing & 5% for non-affordable housing. The GST is also applicable on the purchase of developable plots in real estate.

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GST on apartment purchase

Those purchasing flats and apartments in under-construction projects in India’s megacities will be subject to GST on flat purchases beginning in 2022. It should be noted that GST on flat purchases does not apply to completed projects. A completed project is one that has received a certificate of completion from a competent authority.

 

2022 GST rate on flat purchase

Property type	GST rate till March 2019	GST rate from April 2019
Affordable housing*	8% with ITC	1% without ITC
Non-affordable housing	12% with ITC	5% without ITC

 

While the new tax rate without the ITC will apply to all new projects, builders were given a one-time option to choose between the old and new rates for their ongoing projects by May 20, 2019. This offer was only valid for projects that were still unfinished as of March 31, 2019. The government made the decision after the developer community expressed concerns about tax liability in the absence of ITC.

 

Taxes Prior to GST Implementation

Prior to the implementation of the GST in 2017, a number of state and central taxes were levied on buildings during the construction of a housing project. While these taxes increased the cost of project development for developers, no credit against the output liability was available to builders. Prior to the implementation of the GST, real estate developers were required to pay the following taxes:

• VAT (Value Added Tax) (VAT)
• The Central Excise
• Entry Fee
• LBT
• Octroi
• Service Tax, and so on.

 

The cost of these taxes was then passed on to the buyer of the property.

Furthermore, the complexities involved in the rate applicability of the various taxes allowed developers to manipulate numbers in order to charge buyers more. Finding out the VAT, Central Excise, Entry Tax, LBT, Octroi, and Service Tax rates applicable to property construction used to be a difficult task for the average buyer.

 

Following GST implementation

The GST, which went into effect on July 1, 2017, was billed as India’s largest tax reform since independence. The GST merged several indirect taxes to provide taxpayers with a unified system. Several changes have been made to the bracket under which real estate is taxed under the GST regime since its inception.

 

Types of central and state taxes absorbed by GST

The following are the types of state and central taxes that the GST replaced when it went into effect in July 2017:

Central taxes

• Excise Duty
• Customs Duties
• Customs’ Special Additional Duty
• Tax on Services
• Central Sales Tax (CST)
• Central charge & cess on the supply of goods or services

 

State taxes

• Tax on Entertainment
• The Luxury Tax
• Excise Duty in the State
• Surcharges and cessations imposed by the state on the supply of goods & services
• Advertisement taxes
• Tax on purchases
• Lottery, gambling, and betting taxes

 

What qualifies as affordable housing under the GST?

According to the government’s definition, affordable housing is defined as housing unit’s worth up to Rs 45 lakhs. However, in order to qualify as affordable housing, the unit must also meet certain dimensions. A housing unit in a metropolitan city is considered affordable if it costs up to Rs 45 lakhs & measures up to 60 square metres (carpet area). The Delhi-National Capital Region, Chennai, Bengaluru, Hyderabad, the Mumbai-Mumbai Metropolitan Region, & Kolkata are all metropolitan cities. A housing unit in any other city in India, other than the ones mentioned above, qualifies as an affordable house if it costs up to Rs 45 lakhs & has up to 90 square metres of carpet area.

 

What is GST input tax credit (ITC)?

The ITC system, which distinguishes the GST law from India’s previous tax system, is a distinguishing feature of the GST law. A real estate developer pays tax on the purchase of goods & services multiple times from the start of a housing project until it is completed. The builder would receive input tax credit under the GST regime when he paid his output tax.

 

Example:

A developer must pay a tax of Rs 25,000 on his finished product. Steel, cement, & paint have already cost the builder Rs 21,000 in input tax. After adjusting the input tax credit, he would have to pay only Rs 4,000 as output tax in this scenario.

 

GST calculation for low-cost property

Here’s how to calculate GST on flat purchases in the affordable housing segment before and after the April 1, 2019 rate change:

Affordable housing	GST on affordable housing before April 1, 2019	GST on affordable housing after April 1, 2019
Cost of Property per sq ft	Rs 3,500	Rs 3,500
GST rate on flat purchase	8%	1%
GST	Rs 280	Rs 35
ITC benefit for material cost of Rs 1,500 at 18%	Rs 270	Not applicable
Total	Rs 3,510	Rs 3,553

 

Effect of GST on high-end real estate

Buyers of luxury homes will save more than they might have previously under the new GST rates. Here’s an example about how to calculate GST on the purchase of a luxury apartment:

Luxury housing	Before April 1, 2019	After April 1, 2019
Property cost per sq ft	Rs 7,000	Rs 7,000
GST rate on flat purchase	12%	5%
GST	Rs 840	Rs 350
ITC benefit for material cost of Rs 13,000 at an average of 15%	Rs 126	Not applicable
Total	Rs 7,714	Rs 7,350

 

GST on government housing programmes

According to the government, under the new regime, government-led massive residential development aimed at the common person will be subject to only 1% GST. The Jawaharlal Nehru National Urban Renewal Mission, the Pradhan Mantri Awas Yojana, the Rajiv Awas Yojana & state government housing schemes are among these housing schemes.

 

Construction services are subject to GST.

While real estate in India is not directly subject to the GST regime, certain activities & services in the sector are taxable under the new regime. The following are the rates at which related activities in the construction industry are taxed in India under the GST regime:

Under-construction house purchased through the PMAY Lending Subsidy Scheme (CLSS)	8%
Under-construction home bought without the subsidy	12%
Works contract for affordable housing	12%

 

Building and construction material GST rates

Because all components in use in development work are subject to GST, the Goods and Services Tax (GST) appears to apply to real estate in India through work contracts, along with building & construction work. Simply put, the regime applies to the Indian construction industry, which persists to be taxed heavily through a combination of levies levied on the purchase of various building construction equipment.

 

GST on housing society maintenance fees

If a flat owner pays their housing society at least Rs 7,500 in maintenance costs, they are required to pay 18% GST on residential property. Housing societies or residents’ welfare associations (RWAs) that collect Rs 7,500 per month per flat must also pay an 18% tax on the total amount. Housing societies with an annual turnover of less than Rs 20 lakhs, on the other hand, are exempt from paying GST Both conditions must be met for the GST to be applicable: each member should pay more than Rs 7,500 per month in maintenance costs, and or the RWA’s annual turnover has to be greater than Rs 20 lakhs.

The government has also stated that any charges that exceed Rs 7,500 per month per member are taxable. For example, if the recurring monthly charges per member are Rs 9,000, the 18 percent GST on flats is due for payment on the entire sum of Rs 9,000, not on Rs 1,500. (Rs 9,000-Rs 7,500). Furthermore, owners who own multiple flats in the same housing society will be taxed separately for each unit.

RWAs, on the other hand, can claim ITC on taxes paid on capital goods (generators, lawn furniture, water pumps  and so on), goods (pipes, taps, other sanitary/hardware fittings, & so on), and input services like repair and maintenance.

 

Rent subject to GST

GST-registered tenants who lease a residential unit to be used as a guesthouse and accommodation for their employees will be required to pay 18% tax on the rent amount following an amendment announced by the GST Council on July 13, 2022. Previously, renting a home for residential purposes was exempt from the GST regime.

Currently, the GST regime considers renting residential property for business purposes to be a supply of services. Under the new regime, an 18 percent GST rent on residential flats is levied on such rental income if it exceeds Rs 20 lakhs per year. Landlords must register in this case in order to pay GST on rental income. A GST of 18 percent is levied on commercial property rentals.

 

Home loan GST

Whereas the GST on home loan reimbursement is not appropriate to the lender, financial institutions offer a variety of “services” as part of home loans. As these are services, GST applies.  As a result, when you apply for a mortgage, the bank will apply GST to the processing fee, legal fee & technical valuation fee.

 

Did you know… about GST?

• Residential projects with up to 15% commercial space are taxed as residential properties.
• The effective GST rate on commercial property is 12%.
• You do not have to pay GST on plot purchases.
• When you buy a ready-to-move-in flat, you do not have to pay any GST.
• Unless the tenant is a business, landlords are not required to pay GST.
• GST on house registration: GST does not include stamp duty or registration fees; you must still pay these fees when purchasing a home.
• GST is levied on the services provided by banks as part of a home loan, such as processing fees and legal fees.
• GST has absorbed at least a dozen those certain taxes.
• Sellers raise the price of ready-to-move-in properties to account for the GST cost.
• Despite the fact that GST is applicable, under-construction homes are less expensive than ready-to-move-in homes.

 

GST Facts You Should Know

GST does not apply to ready-to-move-in flats; it only applies to under-construction flats.

It should be noted that the GST doesn’t really apply to a real estate industry. The applicable tax rate on a property building is charged under ‘work contracts.’ This is why a developer cannot levy GST on the sale of ready-to-move-in homes. A property is designated as ready-to-move-in after completion & receipt of the occupancy certificate and is no longer entitled to the work contract. In short, the GST would be levied on the sale of unfinished properties that have yet to receive OCs. It’s also worth noting that under the previous regime, buyers had to pay service tax on ready-to-move homes.

However, because the developer/owner has already paid GST as part of the purchase, he will eventually include this expense in the overall cost of the property. Therefore, even though ready-to-move-in homes are exempt from Tax, the buyer is still responsible for paying it.

GST on builders’ one-time maintenance deposit

According to the Gujarat bench of the Authority for Advance Rulings (AAR), the GST is applicable to the one-time maintenance deposit that builders collect from home buyers. This charge, according to the authority, falls under the category of supply of services and is non-refundable. The AAR, on the other hand, stated that the GST will be deducted from the maintenance amount when it is actually spent on maintenance work in the future.

 

Remember that most real estate developers collect a one-time maintenance deposit from home buyers prior to the formation of residents’ welfare associations or cooperative housing societies, which take over maintenance responsibility from the builder. After the RWA and CHS are formed, they are solely responsible for maintenance work and can devise their own set of rules for calculating maintenance charges. The builder would no longer have any say in the matter.

This individual liability of home buyers is calculated based on the size of the property – home buyers must pay a certain per sq ft rate. The entire amount collected as a one-time maintenance charge from buyers is then deposited into a common fund and used for the intended purposes as and when needed.

Because there has been a complete lack of clarity on the laws governing the collection of this levy, there have been numerous instances where disputes between buyers and developers have arisen regarding the applicability of GST on the one-time maintenance charge.

Developers have a common practice of deducting GST at the rate of 18% immediately after collection and depositing the remaining amount into the common fund. Following the AAR ruling, developers will be required to deposit the entire amount without any GST deduction.

Also, prior to the implementation of the GST regime in 2017, builders were not required to pay service tax on such maintenance deposits.

With the AAR’s decision, RWAs and CHSs can now collect GST from society members as and when the time comes to use it, because the builder would charge this levy initially. As far as home buyers are concerned, it is essentially just a payment deferral.

 

Land transactions are exempt from GST.

The sale of land is also exempt from the GST on construction services because it does not involve the transfer of any goods and services. Because the cost of land is a significant factor in determining property prices, GST provides a standard abatement of 33% of the total contract value for taxable real estate transactions.

Assume a builder sells an unfinished property to a buyer for Rs 100. To calculate the GST on building, the land value of Rs 33 will be deducted, and the GST on construction will apply only to the remaining Rs 77.

 

GST rate on developable land

If they invest in developable plots, buyers must pay 18 percent GST. Prior to the GST regime, the sale of immovable property was exempt from the value-added tax, so only direct taxes such as stamp duty & registration charges were paid during such transactions.

 

What exactly is developable land?

This begs the question: Can’t all plots be developed? No, it does not. Only developable plots are those where the owner has obtained all necessary permissions from local and municipal authorities to carry out future development over the land parcel. The owner must also develop the basic infrastructure to facilitate future development. If any or all of the following activities have been completed on the land parcel, it qualifies as developable land:

• Plot demarcation
• Ground evaluating
• Building a boundary wall
• Road development
• Overhead tank construction
• Water pipeline construction
• Underground sewer line construction
• Installation of a water harvesting facility
• Construction of sewage treatment plants
• Creation of landscaped gardens
• Installation of a drainage system

 

GST on the plot

While the sale of plots is also exempt from the GST regime, any minor construction on the plot would be subject to GST. In the event of the sale of such a plot, one-third of the plot’s value will be excluded, & GST will be levied on the remaining two-thirds of the land’s value.

 

GST on the sale of developable plots

While there are no GST implications for the sale of plots, this is not the case if the land parcel for which the transaction is documented qualifies as developable land.

Prior to the Gujarat Authority for Advance Rulings (AAR) ruling that the sale of developed plots was a ‘service’ and thus taxable under the current regime, the general understanding was that the sale of developable land was exempt from the GST. This is due to a provision in Schedule-III of the CGST Act stating that the sale of land and buildings will not be treated as either a supply of goods or a supply of services.

 

The effect of GST on stamp duty & registration fees

Despite repeated calls since the implementation of the GST regime to abolish stamp duty and registration fees on real estate, the government has made no progress. As a result, stamp duty & registration fees continue to apply to property transactions in India. While states charge stamp duty ranging from 5% to 10%, the registration fee is either 1% of the property value or a flat fee.

 

GST on apartment registration

There is no GST on registration fees paid when registering a property. But, in the future, can we expect GST to replace stamp duty & registration fees? Experts do not believe so.

“In India, stamp duty on real estate transactions contributes greatly to state revenue.” If states stopped collecting this revenue, the federal government would suffer far bigger losses than it is already. “This fact leads us to believe that the possibility of the GST absorbing the two charges is nil, at least in the near future.”

 

GST Estate Timeline

2000- Atal Behari Vajpayee, the then-prime minister, convenes a panel to develop a GST model.

2004- Vijay Kelkar, then-finance ministry advisor, recommends that GST replace the existing tax system.

2006- In his budget speech, former finance minister P Chidambaram sets April 2010 as the deadline for GST implementation.

2011- The government introduces the 115th Constitution Amendment Bill in the Lok Sabha on March 22.

2014- Cabinet approves the 122nd Constitution Amendment Bill to GST on December 18.

-FM on December 19th the Constitution (122nd) Amendment Bill is introduced in the Lok Sabha by Arun Jaitley.

2015- The GST Constitutional Amendment Bill is passed by the Lok Sabha on May 6.

-The Rajya Sabha receives the Amendment Bill on May 12.

2016- September 2: The GST Bill is ratified by 16 states, and the President signs it.

-Cabinet approves the formation of the GST Council on September 12.

-The GST Council convenes for the first time on September 22-23.

-November 3: The Council decides on a four-tiered tax structure of 5%, 12%, 18%, and 28%, with additional cess on luxury and sin goods.

2017- The GST is implemented on July 1; an 8% rate is proposed on under-construction properties.

2019- On February 24, the government reduces the GST rate on under-construction property from 12% to 5%, and on affordable housing from 8% to 1%.

 

 

 

 

 

 

 

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