Applicable GST on real estate transactions

While purchasing under-construction homes in India, such as flats, apartments, and bungalows, buyers must pay a Goods and Services Tax (GST) at a rate of 1% for affordable housing and 5% for the non-affordable property. The GST is also applicable to the purchase of developable plots in real estate.

GST for a flat purchase

GST on flat purchases will become mandatory in India in 2023 for those purchasing apartments and flats in ongoing development projects. If you purchase a home in a project that has already been finished, take note that GST on flat purchase is not applicable. A project is considered to be finished legally after it has been granted a completion certificate by an appropriate body.

GST on flat purchase  2023

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

Notably, builders were granted a one-time option to select between the old and the new rates by May 20, 2019, for their ongoing projects, even though the new tax rate without input tax credit (ITC) will apply to all new projects. Only projects that were uncompleted as of March 31, 2019, qualified for this offer.

Taxes before the introduction of the GST

At the various stages of a housing project’s construction cycle, a number of state and central taxes were levied on buildings prior to the introduction of the GST single tax in 2017. Although these taxes raised the cost of project development for developers, builders were not eligible for a credit against this tax on the output liability. Prior to the implementation of the GST, real estate developers were required to pay taxes such as:

• Entry Tax
• LBT
• Octroi
• Service Tax, etc.
• Value Added Tax (VAT)
• Central Excise

The property buyer was then charged for the builders’ tax expenses. Due to the intricacy of the rates for the various taxes, developers were also able to alter numbers to raise prices for customers. Finding out the rates of VAT, Central Excise, Entrance Tax, LBT, Octroi, and Service Tax that apply to the construction of a home used to be a challenging feat for the average buyer.

After the introduction of GST 

The GST, which became effective in India on July 1st, 2017, was regarded as the country’s largest tax reform since independence. Several indirect taxes were merged under the GST to give taxpayers a unified system. The GST regime’s real estate tax category has seen a number of modifications since it was first introduced. 

Types of state and federal taxes that the GST absorbed

These are the types of federal and state taxes that the GST replaced when it became effective in July 2017:

Central taxes 

1. Service Tax
2. Central Sales Tax
3. Central surcharge and cess on supply of goods and services
4. Excise Duty
5. Customs Duty
6. Special Additional Duty of Customs

State taxes 

1. State surcharge and cess on supply of goods and services
2. Taxes on advertisement
3. Purchase tax
4. Taxes on lotteries, gambling and betting
5. State Value Added Tax
6. Entertainment Tax
7. Luxury Tax
8. State Excise Duty

What is affordable housing, in terms of GST?

Housing units worth up to Rs 45 lakh qualify as affordable housing by the government’s definition. Yet in order to qualify as affordable housing, the unit must also meet other requirements. If a housing unit in a metropolitan area costs up to Rs. 45 lakhs and is at least 60 square metres in size, it is considered to be an affordable home. Metropolitan cities include Delhi-National Capital Region, Bangalore, Chennai, Hyderabad, Mumbai-Mumbai Metropolitan Region, Kolkata, and Chennai. If a housing unit costs up to Rs 45 lakh and has up to 90 sq m of carpet area, it qualifies as an inexpensive dwelling in any other Indian city besides the ones stated above.

What is input tax credit (ITC) under GST?

The ITC system, which distinguishes the GST law from India’s prior tax structure, is one of its distinctive features. A real estate developer incurs various tax payments on the purchase of products and services during the course of a housing project. The builder would receive an input tax credit under the GST system when he paid his output tax.

Example:

A developer must pay tax on his completed project of Rs 25,000. When buying goods like steel, cement, paint, etc., the builder already paid Rs. 21,000 in input tax. After correcting for the input tax credit, he would only be required to pay Rs 4,000 in output tax in this case.

GST on reasonably priced real estate

Here is an example of how to compute GST on affordable housing segment flat purchases both 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
Property cost 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

Luxury property buyers would save more than they would have previously under the new GST rates. Here is an example of how to compute GST on a luxury apartment purchase:

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

Tax on public housing initiatives

The government has made it clear that under the new system, only 1% GST will apply to government-led mass housing projects intended for the average individual. These housing schemes include the Rajiv Awas Yojana, the Pradhan Mantri Awas Yojana, the Jawaharlal Nehru National Urban Renewal Program, and housing scheme of state governments.

GST on building services

While the GST regime does not directly apply to real estate in India, a range of the sector’s operations and services are subject to taxation under the new system. The rates at which related activities in the construction sector are assessed under India’s GST system are as follows:

Under-construction home bought under the PMAY Credit-Linked Subsidy Scheme (CLSS)	8%
Under-construction home bought without the subsidy	12%
Works contract for affordable housing	12%

GST rate on construction and building materials

While all materials used in the development work are subject to GST, the Goods and Services Tax (GST) applies to real estate in India through works contracts, building, and constitution activities. Simply defined, the new regime covers the Indian construction sector, which continues to be subject to high tax rates through a variety of levies imposed on the purchase of different building construction supplies.

Applicable GST housing society maintenance fees

If a flat owner pays their housing society at least Rs 7,500 in maintenance fees, they are subject to paying 18% GST on residential property. Housing societies or residents’ welfare associations (RWAs) must also pay 18% tax on the total money collected if they collect Rs 7,500 a month per unit. However, housing societies are excluded from paying the GST if their yearly revenue is less than Rs 20 lakhs. Both requirements must be met for the GST to be applicable, i.e., each member must pay more than Rs 7,500 per month in maintenance fees and the RWA’s annual revenue must exceed Rs 20 lakhs.

In addition, the government has made it clear that the entire sum is taxable if the monthly fees for each member exceed Rs 7,500. For instance, the 18% GST on flats will be payable on the total value of Rs 9,000 and not on Rs 1,500 (Rs 9,000-Rs 7,500) if the maintenance fees are Rs 9,000 per month per member. Also, owners of numerous flats in the same housing society will pay taxes separately for each unit.

RWAs, on the other hand, are eligible to claim ITC on taxes they pay on input services like repair and maintenance services as well as capital goods like generators, water pumps, lawn furniture, and taps.

GST on rent 

When is the tenant liable for paying GST?

Tenants who are GST-registered and rent a residential unit must pay an 18% tax on the rent amount. On July 13, 2022, the GST Council announced a change in this regard. The new rule is applicable to both businesses with an annual revenue over Rs 40 lakh and individual service providers who make more than Rs 20 lakh. GST registration becomes mandatory in both the instances for the individual/business. 

When the Landlord is liable GST?

Residential property rentals for commercial purposes are considered a supply of services under the GST scheme. If the annual rent exceeds Rs 20 lakh, an 18% GST rent on residential units is levied against the landlord under this regime. Landlords are required to register in this situation in order to pay the GST on their rental income. A GST of 18% is charged on commercial property rentals.

GST on a mortgage

Financial organisations provide a number of “services” as part of house loans, even though the borrower is not subject to the GST on loan repayment. Since that these are services, the GST’s application becomes relevant. As a result, the processing cost, technical valuation fee, and legal fee would all be subject to GST if you apply for a housing loan with the bank.

Facts about GST 

• The GST treats residential projects that contain up to 15% commercial space as residential properties.
• On commercial property, the actual GST is 12%.
• For the acquisition of plots, there is no GST due.
• When you purchase a ready-to-move-in flat, there is no GST due.
• Unless the tenant is a business company, landlords are exempt from GST obligations.
• GST and home registration: If you’re purchasing a property, you’ll still be required to pay stamp duty and registration fees. However, GST does not cover these costs.
• GST is applied to the processing fees, legal fees, and other services provided by banks as part of house loans.
• Around a dozen different taxes have been merged into the GST.
• To account for the GST cost, sellers raise the price of properties that are ready for occupancy.
• Homes that are still being built are less expensive than completed residences, even with the GST being applicable.
• GST is only applicable to apartments that are still being built; it does not apply to ready-to-move-in apartments.

It is significant to note that the real estate industry is not included in the scope of the GST. The “work contracts” system is used to determine the tax rate that applies to a property building. For this reason, a developer is not permitted to add GST to the price of residences that are ready to be occupied. A property is labelled as ready-to-move-in upon completion and after acquiring the occupancy certificate, and is no longer bound by a work contract. In other words, the GST would be applicable to the sale of properties that are still under construction and are awaiting Occupancy Certificates. The previous administration required buyers to pay service tax on the purchase of ready-to-move properties, which deserves to be included here as well.

The developer/owner would eventually include this cost as part of the total price of the property, though, given he has already paid GST as part of the acquisition. This essentially means that even if GST is not applicable to ready properties, the buyer still has to pay it.

GST charged by builders on a one-time maintenance deposit

The one-time maintenance deposit that builders take from home buyers is subject to the GST, according to the Gujarat bench of the Authority for Advance Rulings (AAR). The authority claims that this charge is non-refundable and belongs to the category of supply of services. However, the AAR also stated that, in the future, when this money is actually used to pay for maintenance work, the GST will be subtracted from the maintenance price.

Remember that before the foundation of the residents’ welfare groups or cooperative housing societies, which take over responsibility for maintenance from the builder, most real estate developers collect a one-time maintenance deposit from home buyers. After the RWA and CHS are established, they take exclusive responsibility for the maintenance tasks and are permitted to establish their own set of guidelines for determining maintenance fees. It would made builders unable to interfere in the matter. 

This particular liability for home buyers is based on the size of the property; they are required to pay a specific amount per square foot.

There have been numerous cases when conflicts have developed between buyers and developers regarding the applicability of GST on the one-time maintenance payment since there has been a complete lack of clarity regarding the laws governing collection of this levy.

Developers frequently transfer the remaining funds into the common fund after deducting GST at the rate of 18% immediately following the collection. After the AAR decision, developers would be required to deposit the entire sum without any GST deductions.

Furthermore take notice that before the GST regime came into force in 2017, builders were not required to pay service tax on these maintenance deposits.

Although the builder would have initially charged this fee, the AAR’s decision now allows RWAs and CHSs to collect the GST from society members as needed. In essence, from the perspective of home buyers, it is just a delay in the payment.

Land transactions are exempt from GST

Since the sale of land does not entail the transfer of any goods or services, it is also not included in the GST on construction services. For taxable real estate transactions, the GST offers a standard abatement of 33% of the entire contract value towards the value of land because the cost of land is an important factor in property prices.

Example: How to calculate the GST on a flat that is under-construction

Let’s say a builder sells a buyer a Rs 100 house that is still under-construction. In order to determine the GST on construction, the land value of Rs 33 will be subtracted from the total, leaving Rs 77 for which the GST on construction would be charged.

GST rate for developable land

If you buy developable plots, there won’t be any GST to pay. This was established by a circular the Central Board of Indirect Taxes and Customs (CBIC) released on August 3, 2022, which said that even if some basic infrastructure has been completed, plot sales are not subject to GST. Recently, a similar decision was also passed by the Karnataka AAR.

Before, certain state officials adopted a conflicting viewpoint. For example, the Madhya Pradesh Appellate Authority of Advance Ruling (AAAR) ruled in July 2022 that land sold after involving in development activities will be subject to an 18% Goods and Services Tax (GST). The Gujarat Authority of Advance Ruling issued a similar decision in 2021.

Prior to the implementation of the GST system, sales of immovable properties were not subject to the value-added tax, and as a result, only direct taxes, such as stamp duty and registration fees, were paid.

What is developable land?

Only those plots qualify as developable plots if the owner has all the necessary approvals from local and municipal authorities to carry out future development over the land parcel. The owner must develop the fundamental infrastructure as well in order to facilitate future development. 

The land parcel would qualify as developable land if any or all of the following had been done there:

1. Laying work of water pipelines
2. Laying work of underground sewerage lines
3. Setting up of water harvesting facility
4. Setting up of sewage treatments plants
5. Development of landscaped gardens
6. Setting up of a drainage system
7. Demarcation of plot
8. Ground leveling
9. Boundary wall construction
10. Road construction
11. Construction of overhead tanks

GST on the plot 

Even if the selling of plots is exempt from the GST regime, any little construction on the plot would be subject to the tax. In the event that such a plot is sold, one-third of the plot’s value will be deducted, and GST will be applied to the remaining two-thirds of the land’s value.

GST on developable plot sales

If the land parcel for which the transaction is recorded meets the criteria for developable land, there are GST ramifications even though the sale of plots is exempt from them.

The sale of developed land was formerly believed to be exempt from the GST until the Gujarat Authority for Advance Rulings (AAR) specifically said in a judgement that it was a “service” and hence taxable under the existing system. This is so that the sale of land and the sale of buildings will not be recognised as either a supply of goods or a supply of services, according to a listing in Schedule-III of the CGST Act.

Applicable GST on farmer compensation: Karnataka AAR

The Karnataka Authority of Advance Ruling (AAR) has declared that the compensation given to farmers for giving their land while a project is being completed is subject to goods and services tax.

The AAR has ruled that reimbursement of land compensation amounts paid to farmers and landowners during the execution of work is taxable as GST since the applicant does not meet the criteria to be a pure agency.

Impact of GST on registration fees and stamp duties

With the implementation of the GST regime, there have been repeated calls for the government to stop charging stamp duty and registration fees for real estate, but nothing has come of these calls. Thus, stamp duty and registration fees are still associated with real estate transactions in India. The registration price is either 1% of the property value or a specified fee, while states charge stamp duty in the range of 5% to 10%.

GST on flat registration

The registration fees paid while registering a property are not subject to GST. But can we anticipate that in the future, GST would also include registration fees and stamp duty? Experts don’t concur.

“Stamp duty on real estate transactions provides a significant portion of the income received by Indian states. The exchequer would suffer significantly greater losses if states chose to forfeit this money than it already does. This aspect makes us think there is little chance the GST will combine the two fees, at least not in the near future, said Lucknow-based attorney Prabhansu Mishra.

GST return on cancellation of a flat purchase

It’s possible that the GST regulations will be altered to allow homebuyers to get their money back if they decide not to buy the property for which they previously paid the tax. The new tax system does not currently provide a method that enables unregistered organisations, such as homeowners, to request a GST refund. At its 48th meeting on December 17, 2022, the GST Council suggested that the CGST Regulations, 2017, be amended and that a circular be issued outlining the process for unregistered buyers to file refund applications in such circumstances.

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