Here is everything home buyers need to know about the Goods and Services Tax regime and how it will impact them financially.
Home buyers in India have to pay a Goods and Services Tax (GST) on the purchase of under-construction properties like flats, apartments and bungalows, at the rate of 1% for affordable housing and 5% for non-affordable housing. In real estate, the GST is also applicable on purchase of developable plots.
GST on flat purchase
Those buying flats and apartment in under-construction projects in India’s mega cities are also liable to pay GST on flat purchase in 2022. Note that GST on flat purchase is not applicable on completed projects. A completed project is that which has received a completion certificate from a competent authority.
GST rate on flat purchase 2022
|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|
Note that while the new tax rate without input tax credit (ITC) will apply on all new projects, builders were given a one-time option to pick between the old and the new rates by May 20, 2019, for their ongoing projects. This offer was valid only for projects which were incomplete as on March 31, 2019. The government’s decision came, after the developer community raised concerns on the tax liability in the absence of ITC.
Taxes before GST implementation
Before the GST came into force in 2017, a variety of state and central taxes were imposed on buildings, through the course of the construction of a housing project. While these taxes increased the cost of project development for developers, no credit against this tax was available to the builders against the output liability. Some of the taxes that real estate developers had to pay before the GST came into force included:
- Value Added Tax (VAT)
- Central Excise
- Entry Tax
- Service Tax, etc.
The cost incurred on these taxes by builders was, then, transferred to the property buyer.
Moreover, the complexity involving rate applicability of the numerous taxes also made it possible for developers to manipulate numbers to charge more from buyers. For a common buyer, it used to be an uphill task to find out the VAT, Central Excise, Entry Tax, LBT, Octroi and Service Tax rate applicable on property construction.
After GST implementation
Launched in India on July 1, 2017, the GST was touted to be the biggest tax reform in India after Independence. The GST subsumed multiple indirect taxes, to offer a uniform regime to the taxpayers. Since its launch, various changes have been made with regard to the bracket under which real estate is taxed under the GST regime.
Types of central and state taxes that GST subsumed
Listed below are the types of central and state taxes that the GST subsumed when it became operational in July 2017:
- Excise Duty
- Customs Duty
- Special Additional Duty of Customs
- Service Tax
- Central Sales Tax
- Central surcharge and cess on supply of goods and services
- State Value Added Tax
- Entertainment Tax
- Luxury Tax
- State Excise Duty
- State surcharge and cess on supply of goods and services
- Taxes on advertisement
- Purchase tax
- Taxes on lotteries, gambling and betting
What is affordable housing as per GST?
According to the government-determined definition, housing units worth up to Rs 45 lakhs qualify as affordable housing. However, the unit must also conform to certain measurements to qualify as affordable housing. A housing unit in a metropolitan city qualifies to be an affordable house, if it costs up to Rs 45 lakhs and measures up to 60 sq metres (carpet area). The Delhi-National Capital Region, Bengaluru, Chennai, Hyderabad, the Mumbai-Mumbai Metropolitan Region and Kolkata are categorised as metropolitan cities. A housing unit in any other city barring the ones mentioned above in India, qualify to be an affordable house, if it costs up to Rs 45 lakhs and has up to 90 sq metres of carpet area.
What is input tax credit (ITC) under GST?
A unique characteristic of the GST law is its ITC system, which makes it different from the previous tax system in India. From the start of a housing project, till its completion, a real estate developer pays tax multiple times on the purchase of goods and services. Under the GST regime, the builder would get input tax credit when he pays his output tax.
A developer has to pay Rs 25,000 as tax on his final product. The builder has already paid Rs 21,000 as input tax, while purchasing materials such as steel, cement, paint, etc. In this scenario, he would have to pay only Rs 4,000 as output tax, after adjusting the input tax credit.
GST calculation on affordable property
Here’s a look at how to calculate GST on flats’ purchase in the affordable housing segment, before and after the change in rate in April 1, 2019:
|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|
Impact of GST on luxury property
Under the new GST rates, buyers of luxury properties will save more than they would have earlier. Here’s a look at how to calculate GST on flat purchase in the luxury segment:
|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 schemes
The government has clarified that government-led mega housing projects meant for the common man, will attract only 1% GST under the new regime. These housing schemes include as the Jawaharlal Nehru National Urban Renewal Mission, the Rajiv Awas Yojana, the Pradhan Mantri Awas Yojana and housing schemes of state governments.
GST on construction services
While real estate in India does not directly fall under the purview of the GST regime, various activities and services in the sector are taxable under the new regime. Following are the rates at which associated activities in the construction sector are taxed, under the GST regime in India:
|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) covers real estate in India through works contracts and building and constitution works, as all components used in the development work attract GST. To put it simply, covered under the new regime is the Indian construction industry, which continues to attract high rates of taxes through a blend of levies imposed on the purchase of various building construction materials.
GST on maintenance charges for housing societies
Flat owners are liable to pay 18% GST on residential property, if they pay at least Rs 7,500 as maintenance charge to their housing society. Housing societies or residents’ welfare associations (RWAs) that collect Rs 7,500 per month per flat, also have to pay 18% tax on the entire amount. Housing societies which have an annual turnover of less than Rs 20 lakhs are, however, exempted from paying the GST. For the GST to be applicable, both the conditions should apply – i.e., each member should pay more than Rs 7,500 per month as maintenance charge and the annual turnover of the RWA should be higher than Rs 20 lakhs.
The government has also clarified that the entire amount is taxable, in case the charges exceed Rs 7,500 per month per member. For example, if the maintenance charges are Rs 9,000 per month per member, the 18% GST on flats will be payable on the entire amount of Rs 9,000 and not on Rs 1,500 (Rs 9,000-Rs 7,500). Also, owners with multiple flats in the same housing society will be taxed for each unit separately.
On the other hand, RWAs are entitled to claim ITC on tax paid by them on capital goods (generators, water pumps, lawn furniture, etc.), goods (taps, pipes, other sanitary/hardware fittings, etc.) and input services such as repair and maintenance services.
GST-registered tenants, who lease a residential unit to be used as a guesthouse or an accommodation for their employees, will have to pay 18% tax on the rent amount after an amendment in this regard was announced by the GST Council on July 13, 2022. Before that, renting of homes for residential purposes was exempted under the GST regime.
As it is, the GST regime treats renting of residential property for business purposes as supply of services. An 18% GST rent on residential flats is charged on such rental income under the new regime, if the rent amount per year exceeds Rs 20 lakhs. In this case, landlords have to register themselves, to pay the GST on their rental income. On letting-out of commercial properties, a GST at 18% is levied.
GST on home loan
While there is no applicability of the GST on home loan repayment as far as the borrower is concerned, financial institutions offer several ‘services’ as part of home loans. Based on the fact that these are services, the applicability of GST comes into picture. Consequently, if you are taking a housing loan, the bank would charge GST on the processing fee, technical valuation fee and legal fee.
GST fact check: Did you know?
Must-know facts about GST
GST is not applicable on ready-to-move-in flats; it is applicable on under-construction flats only
It is important to note that the GST does not cover the real estate sector under its ambit. The tax rate applicable on a property building is charged under ‘work contracts’. This is precisely why a developer cannot charge GST on the sale of ready-to-move-in homes. Upon completion and after receiving the occupancy certificate, a property is categorised as ready-to-move-in and is out of the purview of work contract. In short, the GST would apply on the sale of under-construction properties that have yet to receive the OCs. It also begs mention here that in the previous regime, buyers also had to pay service tax on the purchase of ready-to-move homes.
However, since the developer/owner has paid GST as part of the purchase, he would eventually package this expense as part of the overall cost of the property. This basically means that while there is no GST applicability on ready homes, the buyer ultimately pays it anyhow.
GST on one-time maintenance deposit collected by builders
The GST is applicable to the one-time maintenance deposit that builders collect from home buyers, the Gujarat bench of the Authority for Advance Rulings (AAR) has said. According to the authority, this charge falls in the category of supply of services and is non-returnable in nature. The AAR, however, added that the GST will be deducted from the maintenance amount when this money is actually spent in carrying out maintenance works in future.
Recall here that most real estate developers collect a one-time maintenance deposit from home buyers, before the formation of the residents’ welfare associations or cooperative housing societies that take over the responsibility of maintenance from the builder. After the formation of the RWA and CHS, they become solely responsible for the maintenance work and can come up with their own set of rules for calculating maintenance charges. The builder would no longer be able to have a say in the matter.
This individual liability of home buyers is calculated on the basis of the size of the property – a certain per sq ft rate has to be paid by the home buyers. The entire amount collected from buyers as a one-time maintenance charge is then deposited into a common fund and is used for its intended purposes as and when required.
Since there has been an absolute lack of clarity on laws governing collection of this levy, there have been various instances, where disputes have arisen between buyers and developers on the applicability of GST on the one-time maintenance charge.
It has been a common practice among developers to deduct GST at the rate of 18%, right after the collection and then deposit the remaining amount into the common fund. After the AAR ruling, developers will have to deposit all the amount without any GST deduction.
Also note that builders were not liable to pay service tax on such maintenance deposits before the GST regime became applicable in 2017.
With the AAR’s ruling, RWAs and CHSs can now collect the GST from society members as and when the time to utilise this amount comes, since the builder would charge this levy initially. In essence, it is only a deferral of the payment, as far as home buyers are concerned.
GST is not applicable on land transactions
Sale of land is also outside the purview of the GST on construction services, as the sale does not involve the transfer of any goods or services. As the cost of land is a crucial factor that determines property prices, GST provides a standard abatement of 33% of the total contract value, towards value of land for taxable real estate transactions.
Example: How to calculate GST on under-construction flat
Suppose that an under-construction property worth Rs 100 is sold by a builder to a buyer. To calculate the GST on building, Rs 33 will be counted out as the land value and the GST on construction would apply only on the remaining Rs 77.
Rate of GST on developable land
Buyers will have to pay 18% GST, if they are investing in developable plots. Before the GST regime, sale of immovable properties was excluded from the purview of the value-added tax and thus, only direct taxes like stamp duty and registration charges were paid during such transactions.
What is developable land?
This begs the question: Are not all plots developable? The answer is, no. Only those plots, where the owner has obtained all the necessary permissions from local and municipal authorities to carry out future development over the land parcel, qualify as developable plots. To facilitate the future development, the owner also has to develop the basic infrastructure. If any or all of these activities have been performed on the land parcel, it would qualify as developable land:
- Demarcation of plot
- Ground leveling
- Boundary wall construction
- Road construction
- Construction of overhead tanks
- Laying work of water pipelines
- Laying work of underground sewerage lines
- Setting up of water harvesting facility
- Setting up of sewage treatments plants
- Development of landscaped gardens
- Setting up of a drainage system
GST on plot
While the sale of plots is also outside the purview of the GST regime, any small construction on the plot would attract GST. In case of the sale of such a plot, one-third of the value of the plot will be excluded and GST will be levied on the remaining two-third value of the land.
GST on sale of developable plots
While there are no GST implications on the sale of plots, the same is not true if the land parcel for which the transaction is recorded qualifies as developable land.
Before the Gujarat Authority for Advance Rulings (AAR) in a ruling specified that the sale of developed plot was a ‘service’ and thus, taxable under the current regime, the general understanding was that the sale of developable land was out of the purview of the GST. This is because a listing in Schedule-III of the CGST Act establishes that the sale of land and the sale of buildings will be treated neither as supply of goods nor as supply of services.
GST impact on stamp duty and registration charges
Despite the demands made from time to time, ever since the GST regime into force, to discontinue stamp duty and registration charges on property, the government has made no move on this front. Hence, property transactions in India continue to attract stamp duty and registration charges. While states levy stamp duty in the range of 5%-10%, the registration charge is either 1% of the property value or a standard fee.
GST on flat registration
There is no GST on the registration charges that are paid while registering a property. But, can we except GST to subsume stamp duty and registration charges in future? Experts do not think so.
“A large part of the revenue earned by states in India, is through stamp duty on property deals. If states were to let go of this income, the exchequer would suffer much higher losses than it already does. This fact leads us to believe the possibility of the GST subsuming the two charges are nil, at least in the foreseeable future,” says Prabhansu Mishra, a Lucknow-based lawyer.
GST real estate timeline
The then PM Atal Behari Vajpyee sets up a panel to design a GST model.
The then finance ministry’s advisor Vijay Kelkar recommends that GST replace the existing tax system.
Former finance minister P Chidambaram sets April 2010 as the deadline for GST implementation in his budget speech.
March 22: Government tables 115th Constitution Amendment Bill in the Lok Sabha, to introduce the GST.
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.
May 6: Lok Sabha passes GST Constitutional Amendment Bill.
May 12: The Amendment Bill is presented in the Rajya Sabha.
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.
July 1: GST is rolled out; 8% rate proposed on under-construction properties.
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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