Applicability of GST on Real Estate
The consumption of goods or services is subjected to the destination-based Goods and Services Tax. In terms of employment creation, the real estate sector is second to the IT sector in India, with a GDP contribution of 6 to 8%. The supply of goods and services related to both movable and immovable property is also subject to the GST tax. With several taxes previously in place, such as service tax and VAT, the indirect taxation in this industry has undergone a total revamp with the implementation of GST. In this blog, we will take a look at the scope of GST applicability on the real estate sector.
Is GST Applicable to Immovable Property?
Section 7(2)(a) of the CGST legislation of 2017 states that the sale of land and buildings must not be regarded as a supply of goods or services. Numerous services that are related to real estate are subject to GST.
For instance, any lease or letting out of an entire or partial building, such as a commercial, industrial, or residential complex for a business or trade; any tenancy, easement, or permission to occupy the land. The real estate-related services that are subject to the GST are listed below:
- Rentals of Immovable Property and any lease, tenancy, or easement: Rental services for business purposes are included in the definition of supply in Section 7(1), which refers to “all sorts of supply.” The GST council establishes the GST rate for renting an immovable property as a business for a certain time period. Residential real estate used exclusively for residential purposes will not be subject to taxation. The GST will be applied to the tenancy premium. After paying a fee, the tenant is granted the right to occupy the property.
- Until the entire compensation is paid after the competent authority issues a completion certificate or after the first occupation, whichever comes first, real estate project construction is taxed in accordance with schedule II. It stipulates that finished projects are free from GST and that only properties that are still under development are taxed. Only when partial or full payment is made prior to the first occupation or the issuance of the completion certificate, whichever comes first, is GST due.
The Pre-GST Taxability of Real-Estate Transactions
The table given below shows the applicability of taxes on real-estate transactions in the pre-GST era:
| Nature Of Duty | Rate Of Tax | When Was Tax Required To Be Paid? |
| VAT | 1 to 4% | On Sale Of Under Construction Properties |
| Service Tax | 4.5% | On Sale Of Under Construction Properties |
| Registration Charges | 0.5 to 1% | On Sale Of Under Construction Properties |
| Stamp Duty Charges | 5 – 7% | On Sale Of Under Construction Properties |
*State-to-state differences exist for stamp duty, VAT, and registration fees. Under the former indirect tax system, VAT was not applied to finished or ready-to-sell assets, and Cenvat credit on the input used to construct a building or other civil structure, or any portion thereof, was restricted.
Taxability of Real Estate Transaction Under GST
The table given below shows the applicability of GST on real-estate transactions:
| Particulars | Applicability | Rate Of Tax | Input Tax Credit |
| On Ready-To Move properties for which completion certificates are issued | Not Applicable – Because the sale of the building is treated as an activity or transaction which shall be treated neither as a supply of goods nor a supply of service as per schedule III of CGST act, 2017 | – | Not Available |
| On Under Construction Properties (For Homes Purchased Under Credit-Linked Subsidy Scheme) | Applicable as the supply of service as per schedule I of CGST Act, 2017 | 8%* | Available |
| On under-construction properties (other than above) | Applicable as the supply of services as per schedule I of CGST Act, 2017 | 12% | Available |
| On resale properties | Not Applicable | – | Not Available |
| On Land Purchase and sale | Not Applicable. As per schedule III, the sale of land is neither supply of goods nor services. | – | Not Available |
| Works Contract | Applicable | 18% | Available |
| Composite supply of works contract – For use by the general public | Applicable | 12% | Available |
| Composite supply of works contract – For use by the general public | Applicable | 12% | Available |
| Composite supply of works contract – Affordable housing | Applicable | 12% | Available |
Note: The homes purchased under the credit-linked subsidy scheme (CLSS) attract 12% GST rates. The applicable rate will be 8% after cutting the ⅓ amount towards the land cost.
Impact on Buyers
When purchasing properties that were still being built, buyers were required to pay stamp duty, registration fees, VAT, and service tax. Additionally, the cost of properties differed from state to state due to VAT, registration fees, and stamp duty. Construction properties are subject to a single tax rate of 12% under the GST.
At the same time, GST is not applicable on completed, or ready-to-sale properties under construction and GST is not on completed or ready-to-sale properties, as was the case in the previous law. As a result, consumers will benefit from the GST price reductions.
Impact on Developers/Builders/ Contractors
As a result of the availability of input tax credits, several taxes are consolidated under GST, greatly lowering the developer’s building costs. Additionally, a decrease in the cost of logistics will be advantageous. There will be an increase in the margin as a result. The drawback is that developers must perform numerous calculations to determine ITC before passing it on to customers.
Impact on Other Stakeholders
The effects on related industries, including labour, material suppliers, service providers, etc. It depends on whether the tax imposed on these goods and services rises or falls. The real estate sector would be adversely affected by this. The following list of commodities has a connection to the construction sector’s GST rates:
| Product | Rate Of GST |
| Sand | 5% |
| Sand and fly ash bricks | 12% |
| Steel | 18% |
| Paints | 18% |
| Marble and granite | 28% |
| Cement | 18% |
Reverse Charge Mechanism (RCM) and Its Impact
The scope of RCM has significantly expanded in GST, which may adversely impact the developers.
- If products or services are obtained from a party who is not registered under GST, a registered person under GST is required to pay GST on all such deliveries. This is a substantial addition to RCM under the GST statute.
- A developer is required to pay the GST in circumstances where services are provided by municipalities, the government, or other local authorities, such as those that transport goods, provide legal services, or other situations where the services are provided by an individual or corporation (subject to exclusions).
- Additionally, under GST, the developer is not permitted to offset the tax due under RCM with the input credit made possible by the GST paid on inputs. It must be paid in cash or by bank transfer instead.
Applicability of Stamp Duty
Stamp duty and registration fees are not included in the calculation of the GST. Similar to the pre-GST regime, stamp duty will continue to be charged on both finished and unfinished properties.
Conclusion
The Goods and Services Tax (GST) has had a significant impact on the real estate sector in India since its implementation in 2017. The applicability of GST on real estate depends on various factors, such as the type of property, the stage of construction, and the nature of the transaction.
While the introduction of GST has led to some challenges for the real estate industry, such as increased compliance requirements and higher tax rates in certain cases, it has also brought about greater transparency and simplification in tax administration. As the sector continues to adapt to the new tax regime, it is important for businesses to stay up-to-date with the latest regulations and compliance requirements to ensure smooth operations and avoid any penalties or legal issues.
