The Goods and Services Tax (GST) has significantly impacted the real estate sector in India, streamlining various indirect taxes into a single, unified structure. However, understanding GST’s implications in the real estate sector can be challenging due to its complexity. This article delves into the GST applicability, tax rates, and how it affects home buyers, builders, and other stakeholders in the real estate industry.

Overview of GST in Real Estate

Prior to the implementation of GST in July 2017, the real estate sector was subject to multiple indirect taxes, such as VAT, service tax, stamp duty, and registration fees, all of which added complexity and uncertainty for both developers and buyers. GST simplified this by subsuming many indirect taxes under one system, aiming to reduce the overall tax burden and create transparency in the real estate market.

Applicability of GST in Real Estate

GST is applicable on the supply of services related to the construction of properties. It is important to note that GST is not charged on the sale of completed properties or ready-to-move-in properties, as these are considered immovable assets. However, GST is applicable in the following scenarios:

1. Under-Construction Properties

GST is applicable when a buyer purchases an under-construction property from a developer. The property is classified as a service under GST law, making the transaction taxable. The rate depends on factors like whether the property falls under the affordable housing segment or not.

2. Works Contracts

A works contract in real estate refers to any contract where both goods and services are supplied for the construction of an immovable property. Under GST, a works contract is classified as a service, and GST is levied at 18% on these contracts. This applies to contracts related to construction, renovation, or repairs of properties.

3. Sale of Land and Completed Buildings

The sale of land and fully constructed buildings that have received a completion certificate does not attract GST. These transactions are outside the scope of GST because they are considered the sale of immovable property, not a service.

4. Input Tax Credit (ITC)

Builders and developers can claim Input Tax Credit (ITC) on goods and services used during the construction process. This helps reduce their overall tax liability. However, ITC is not available for completed projects or projects sold after obtaining a completion certificate.

GST Rates on Real Estate

The GST Council has prescribed different rates for real estate transactions, which vary based on the type of property (affordable housing vs. non-affordable housing) and the nature of the project (under construction vs. completed property). Below are the applicable GST rates:

1. Affordable Housing Projects

• GST Rate: 1% (without ITC).
• Definition of Affordable Housing: A residential unit with a carpet area of up to 60 square meters in metropolitan cities or 90 square meters in non-metropolitan cities, and the total price of the property does not exceed ₹45 lakhs.

This concessional rate was introduced to promote affordable housing as part of the government's "Housing for All" initiative.

2. Non-Affordable Housing Projects

• GST Rate: 5% (without ITC).

This rate is applicable to residential properties that do not qualify as affordable housing. The 5% GST rate is charged on the sale of under-construction properties but without the benefit of claiming Input Tax Credit (ITC) for the builder.

3. Commercial Properties

• GST Rate: 12% (with ITC).

For commercial properties, such as shops, offices, or commercial spaces that are under construction, a GST of 12% is applicable. Builders can avail ITC on these transactions, reducing their overall tax liability.

Impact of GST on Home Buyers

For home buyers, the introduction of GST brought both clarity and confusion, depending on the type of property they were purchasing. Here’s how GST affects buyers:

1. Under-Construction Properties

For buyers purchasing under-construction properties, the GST payable is either 1% or 5%, depending on whether it falls under the affordable or non-affordable housing category. This is simpler than the earlier system, where multiple taxes like VAT and service tax were charged. However, since builders cannot claim ITC under the new GST rates, they may pass the cost of inputs onto buyers, potentially increasing property prices.

2. Completed or Ready-to-Move-In Properties

There is no GST applicable on completed properties that have received a completion certificate. This has made ready-to-move-in properties a more attractive option for buyers who want to avoid paying GST altogether.

3. Lower Prices or No ITC?

The removal of ITC for builders under the 1% and 5% GST rates for under-construction properties was intended to simplify the system. However, the inability to claim ITC means that builders may increase prices to recover the costs of materials and services, potentially diminishing the benefit of lower GST rates for buyers.

Impact of GST on Builders and Developers

Builders and developers face both opportunities and challenges under the GST regime:

1. Input Tax Credit (ITC)

Before the revision of GST rates, builders could avail ITC on goods and services purchased during construction and pass on the benefits to buyers. The withdrawal of ITC under the concessional rates (1% and 5%) has made it more challenging for developers, as they can no longer claim credit for the GST paid on inputs, such as raw materials, machinery, and construction services. As a result, developers may need to adjust their pricing strategies to absorb these additional costs.

2. Compliance

GST compliance has streamlined tax reporting for builders. However, the need to accurately calculate and report taxes for under-construction properties, works contracts, and commercial real estate projects adds complexity. Builders need to keep accurate records of GST paid on goods and services to ensure compliance and avoid penalties.

Key Considerations for the Real Estate Sector

With the introduction of GST, the real estate sector has experienced a shift towards greater transparency and standardization. Some important considerations include:

• Project Timelines: For under-construction properties, buyers and builders need to account for GST payments. Delayed completion or occupancy certificates can affect GST liability.
• Exemption for Completed Projects: Properties with a completion certificate are GST-exempt, making them a popular choice for buyers wanting to avoid GST payments.
• Affordable Housing: The reduced GST rate for affordable housing (1%) has encouraged both builders and buyers to participate in this segment, aiding government initiatives for housing development.

The implementation of GST in the real estate sector has created a more structured and transparent tax regime. While GST simplifies the tax structure for under-construction properties, the removal of Input Tax Credit for builders has led to mixed reactions in the industry. For home buyers, understanding the GST rates applicable to their property purchase is essential to making informed decisions. Similarly, builders and developers must adapt their strategies to remain competitive and compliant in the evolving GST landscape.

With its advantages and challenges, GST has reshaped real estate transactions in India, contributing to a more efficient market while also addressing the government’s aim to promote affordable housing.