Impact of GST on real estate: The Impact Goods and Services Tax, or GST on flats, is one of the many taxes that home buyers must pay when purchasing a home. Many changes have already been made to this tax regime in the short time since it went into effect in July of 2017. In this article, we look at how the GST affects real estate in general and home buyers in particular.
Taxes before GST implementation
Prior to the implementation of the GST, a number of state and central taxes were levied on buildings during the course of a housing project’s construction. While these taxes increased the cost of project development for developers, there was no credit available to builders against the output liability for this tax. Prior to the implementation of the GST, real estate developers had to pay taxes such as Value Added Tax (VAT), Central Excise, Entry Tax, LBT, Octroi, Service Tax, and so on. The cost of these taxes incurred by builders was then passed on to the property buyer.
Furthermore, since consumers had little understanding of the different taxes and applicable prices, developers were able to manipulate numbers to their advantage. Finding out the VAT, Central Excise, Entry Tax, LBT, Octroi, and Service Tax rates applicable to property construction would have been a difficult task for the average buyer.
After GST implementation
On July 1, 2017, the GST regime was introduced in India with great fanfare. The GST, billed as India’s largest tax reform since independence, consolidated multiple indirect taxes into a single system for the tax payer. The GST on real estate was initially higher, but the Narendra Modi-led government, which introduced the revolutionary tax regime, reduced the rates in 2019. This was done in order to make properties more accessible to the average person and to help the government meet its ambitious ‘Housing for All by 2022′ deadline.
GST rate on real estate
The government has significantly reduced the GST rate on property transactions in order to simulate demand during a prolonged slowdown. According to analysts, this could reduce the buyers’ pay-out by 4% to 6% on the total 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 input tax credit (ITC) would apply to all new projects, builders were granted a one-time option to choose between the old and new rates for their ongoing projects by May 20, 2019. This offer was only available for projects that were still unfinished as of March 31, 2019. The government made the decision after the developer group expressed concerns about tax liability in the absence of ITC.
What is input tax credit (ITC) under GST?
The GST law’s ITC system distinguishes it from India’s previous tax system. A real estate developer pays tax on the purchase of goods and services several times from the inception of a housing project before it is completed. When the builder pays his production tax under the GST regime, he will receive an input tax credit.
As an example:
A developer must pay a tax of Rs 25,000 on his finished product. The builder has already paid Rs 21,000 in input tax on materials such as steel, cement, and paint. In this case, after adjusting the input tax credit, he would have to pay only Rs 4,000 in output tax.
GST on construction services
While real estate in India is not directly subject to the GST regime, certain activities and services in the sector are taxable under the new regime. The following are the rates at which related activities in the construction sector are taxed in India under the GST regime:
| 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
The Goods and Services Tax (GST) applies to real estate in India through work contracts, as well as building and construction work, because all components used in development work are subject to GST. Simply put, the new regime applies to the Indian construction industry, which continues to attract high rates of taxation through a combination of levies imposed on the purchase of various building construction materials.
What is affordable housing as per GST?
Housing units worth up to Rs 45 lakhs qualify as affordable housing, according to the government’s definition. However, 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 and has a floor area of up to 60 square metres (carpet area). Metropolitan cities include the Delhi-National Capital Region, Bengaluru, Chennai, Hyderabad, the Mumbai-Mumbai Metropolitan Region, and Kolkata. 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 and has up to 90 square metres of carpet area.
GST on maintenance charges for housing societies
Flat owners must pay 18% GST on residential property if they pay at least Rs 7,500 in maintenance fees to their housing society. Housing societies or residents’ welfare associations (RWAs) that collect Rs 7,500 per month per flat must also pay 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 the GST. For the GST to be applicable, both conditions must be met: each member must pay more than Rs 7,500 per month in maintenance fees, and the RWA’s annual turnover must be greater than Rs 20 lakhs.
The government has also stated that if the charges exceed Rs 7,500 per month per member, the entire amount is taxable. For example, if the monthly maintenance charges are Rs 9,000 per member, the 18% GST on flats is payable on the entire amount of Rs 9,000, not on Rs 1,500. (Rs 9,000-Rs 7,500). In addition, owners who own multiple flats in the same housing society will be taxed separately for each unit.
RWAs, on the other hand, are eligible to claim ITC on taxes paid on capital goods (generators, water pumps, lawn furniture, and so on), goods (taps, pipes, other sanitary/hardware fittings, and so on), and input services such as repair and maintenance services.
GST on rent
Landlords are exempt from paying GST on real estate rental income if their properties are rented out for residential purposes only. The GST regime, on the other hand, treats renting out residential property for business purposes as a supply of services, bringing rental income under its purview. Under the new regime, an 18 percent GST on residential flats is levied on such rental income if it exceeds Rs 20 lakhs per year. In this case, landlords must also register in order to pay GST on their rental income.
Unlike under the Service Tax regime, the threshold limit for GST applicability has been raised from Rs 10 lakhs to Rs 20 lakhs per annum. As a result, many landlords who were subject to the Service Tax regime will be exempt from the GST’s indirect tax net. A GST of 18% is levied on the rental of commercial properties.
No GST applicable on rent received from backward classes welfare department, rules AAR
The Karnataka Authority of Advance Ruling (AAR) has ruled that GST does not apply to rent received from the backward classes welfare department. The AAR’s decision was based on an application in which one Sri Puttahalagaiah had rented his property to run a post-metric girl’s hostel for a monthly rent of Re 1 under an agreement with the extension officer of the backward classes welfare department.
GST on home loan
While the GST on home loan repayment is not applicable to the borrower, financial institutions provide several “services” as part of home loans. Because these are services, the applicability of GST enters the picture. As a result, if you apply for a home loan, the bank will charge GST on the processing fee, technical valuation fee, and legal fee.
GST on govt housing schemes
The government has stated that government-led mega housing projects aimed at the common man will be subject to only 1% GST under the new regime. Among these housing schemes are the Jawaharlal Nehru National Urban Renewal Mission, the Rajiv Awas Yojana, the Pradhan Mantri Awas Yojana, and state government housing schemes.
Impact of GST on affordable property
The presence of multiple taxes prior to the GST may not have had a significant impact on property prices. Nonetheless, it made tax computation a time-consuming task for the home buyer. As a result, few buyers would investigate the various taxes that contributed to the final cost of the property. Although there are still some teething problems, the effect of GST on property is that it provides home buyers with more clarity about their tax liability than the previous regime. Buyers would have more faith in the taxation of property transactions in India if the GST impact on the real estate sector resulted in greater transparency. Furthermore, even if interest rates are only marginally reduced, properties may become more affordable. Here’s how to calculate GST on the purchase of a flat in the affordable housing segment:
| 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 |
Following a peak at the start of the 2010s, sales of under-construction housing units have slowed. Since then, the government has stepped in to boost this segment by lowering the GST and increasing the tax deduction limit on home loan interest repayment to Rs 3.50 lakhs. The government included a new Section 80EEA in the Interim Budget 2019 to provide an additional benefit of Rs 2 lakhs to first-time buyers of affordable properties. GST and these cost savings are expected to gradually improve buyers’ sentiment in the real estate market.
Remember that excise duty, value-added tax, customs duty, inputs and service tax on approval charges, architect professional fees, labour charges, legal charges, and entry taxes on raw materials were among the costs that builders in India had to bear on housing project development.
For developers, an increase in demand would allow them to sell off their inventory and avoid paying inventory taxes. In India’s eight most prominent residential markets, over 7.23 lakh homes remain unsold, according to PropTiger.com data.
Impact of GST on luxury property
Buyers of luxury properties will save more under the new GST rates than they would have previously. Here’s an example of how to calculate GST on a luxury flat 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 |
How GST tweak may help revive sales in the times of Coronavirus?
While the government has already reduced GST rates for real estate and there may be no further reductions in rates for the sector, industry experts believe that lowering rates on other goods and services may prompt investments in real estate at a time when home sales have declined due to the economic crisis caused by the Coronavirus pandemic.
ASSOCHAM and NAREDCO have asked for a 50% reduction in GST on various goods and services. “The simplest option for ‘money to spend’ is to reduce GST on various goods and services. Due to lower GST impacts, money will flow to more sellers and producers, ultimately increasing demand and improving production. This will not only increase job opportunities across sectors, but will also drive raw material demand,” NAREDCO president Niranjan Hiranandani was quoted in the media as saying. “This step has the potential to improve the overall rate of recovery.” In the case of real estate, it will incentivize “fence sitters” to stop procrastinating and make a “buy” decision, he says.
GST as a tool to revive sales
Caught in the midst of a five-year demand slowdown and high levels of inventory, cash-strapped builders in India had very little room for price reductions during the post-Coronavirus lockdown period. However, in order to make home purchases more appealing to buyers, the majority of them offered a complete exemption from GST Impact during the holiday season in order to boost sales. Most developers who were approached by this writer for quotes on festive sales said they had offered complete GST and stamp duty waivers to attract buyers during the much-discussed festive season, which was instrumental in helping the economy recover to some extent after the lockdown.
GST fact check: Did you know?
- Residential projects with up to 15% commercial space, are treated as residential properties under GST.
- The effective GST on commercial property is 12%.
- You do not have to pay any GST on the purchase of plots.
- You do not have to pay any GST on buying a flat that is ready-to-move-in.
- Landlords do not have to pay GST, unless the tenant is a business company.
- GST on house registration: GST does not subsume stamp duty or registration charges; you still have to pay these duties while buying a property.
- GST is applicable on the services that banks offer, as part of the home loan, including processing fee, legal fee, etc.
- GST has subsumed at least a dozen other taxes.
- Sellers increase the cost of ready-to-move-in properties, to factor in the GST cost.
- Despite the applicability of GST, under-construction homes are cheaper than ready homes.
Must-know facts about GST
GST is not applicable on ready-to-move-in properties; it is applicable on under-construction properties only
It is important to note that the GST does not apply to the real estate sector. Building a property is taxed under ‘work contracts.’ This is why a developer cannot levy GST on ready-to-move-in houses. The property becomes ready-to-move-in after receipt of the occupancy certificate, and the contract no longer applies. In short, the GST would apply to under-construction properties that do not have their occupancy certificates yet. Previously, buyers of ready-to-move-in homes had to pay service tax.
However, because the developer/owner paid GST as part of the purchase, he would eventually include this expense in the overall cost of the property. This essentially means that, while ready homes are exempt from GST, the buyer must still pay it.
GST is not applicable on land transactions
Because the sale of land does not involve the transfer of any goods or services, it is also exempt from the Impact of GST on construction services. Because the cost of land is an important factor in determining property prices, GST provides a standard abatement of 33 percent of the total contract value for taxable real estate transactions.
Example: How to calculate GST on under-construction property
Assume a builder sells an under-construction property worth Rs 100 to a buyer. For GST calculations on building, we deduct 33 rupees for land, and the remaining 77 rupees for construction.
GST impact on stamp duty and registration charges
The government has reportedly made no progress since the implementation of GST to eliminate stamp duty on real estate. As a result, property transactions in India continue to be subject to stamp duty and registration fees. The registration fee ranges from 1% of the property value to 5% of the property value.
Take note of the GST on flat registration: There is no impact of GST on registration fees paid when registering a property.
Can we except GST to subsume stamp duty and registration charges in future? Experts do not think so.
“Stamp duty on property transactions accounts for a sizable portion of the revenue earned by Indian states. If states gave up this revenue, the exchequer would suffer far greater losses than it already does. The GST is unlikely to include these two charges anytime soon”, says Lucknow-based lawyer Prabhansu Mishra.
GST real estate timeline
2000
The then PM Atal Behari Vajpyee sets up a panel to design a GST model.
2004
The then finance ministry’s advisor Vijay Kelkar recommends that GST replace the existing tax system.
2006
Former finance minister P Chidambaram sets April 2010 as the deadline for GST implementation in his budget speech.
2011
March 22: Government tables 115th Constitution Amendment Bill in the Lok Sabha, to introduce the GST.
2014
December 18: Cabinet approves 122nd Constitution Amendment Bill to GST.
December 19: FM Arun Jaitley introduces the Constitution (122nd) Amendment Bill in the Lok Sabha.
2015
May 6: Lok Sabha passes GST Constitutional Amendment Bill.
May 12: The Amendment Bill is presented in the Rajya Sabha.
2016
September 2: 16 states ratify the GST Bill; President gives assent to the Bill.
September 12: Cabinet clears formation of the GST Council.
September 22-23: The GST Council meets for the first time.
November 3: The Council decides on a four-slab tax structure of 5%, 12%, 18% and 28%, plus additional cess on luxury and sin goods.
2017
July 1: GST is rolled out; 8% rate proposed on under-construction properties.
2019
February 24: Government reduces the GST rate on under-construction property to 5% from 12%, and 1% from 8% on affordable housing.
May: Government gives builders a one-time option to choose between the old GST rate with ITC or new lower GST sans ITC. Those not making a choice are automatically switched to the new regime after May 20.
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Could we expect further GST cut in 2021?
In order to boost housing sales, developers offer GST-free deals since pre-COVID-19 discounts were not available. However, because the GST on affordable housing is already at its lowest level, there is little room for further reduction. Some rate adjustments for the luxury segment could boost demand in light of the slowdown in demand.
