Here is everything home buyers need to know about the Goods and Services Tax regime and how it will impact them financially among the many taxes that home buyers have to pay on property purchase is the Goods and Services Tax or GST on flats. Many changes have already been made in this tax regime, in a short span of time since it came into force in July 2017. In this article, we examine the implications of the GST for real estate in general and home buyers, in particular.
Taxes before GST implementation
Before the GST came into force, 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, LBT, Octroi, Service Tax, etc. The cost incurred on these taxes by builders was then transferred to the property buyer.
Moreover, as buyers had very little clarity over the various taxes and the applicable rates, developers were also in a position to manipulate numbers, to keep the deal to their best advantage. For a common buyer, it would have been 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
With much fanfare, the GST regime was launched in India on July 1, 2017. Touted to be the biggest tax reform in India after Independence, the GST subsumed multiple indirect taxes, to offer a uniform regime to the taxpayer. Initially, the GST for real estate was kept higher but the Narendra Modi-led government, which launched the revolutionary tax regime, reduced the rates in 2019. This was done, in a bid to make properties more affordable to the common man and to boost its ambitious ‘Housing for All by 2022’ target.
GST rate on real estate
With the intent to simulate demand amid a prolonged slowdown, the government has reduced the GST rate on property transactions significantly. This could potentially lower the buyers’ pay-out by 4%-6% on the overall purchase, believe experts. 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 of March 31, 2019. The government’s decision came, after the developer community raised concerns on the tax liability in the absence of ITC.
What is an 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 an input tax credit when he pays his output tax.
Example: A developer has to pay Rs 25,000 as a 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 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.
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. 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 meters (carpet area). The Delhi-National Capital Region, Bengaluru, Chennai, Hyderabad, the Mumbai-Mumbai Metropolitan Region, and Kolkata are categorized as metropolitan cities. A housing unit in any other city barring the ones mentioned above in India qualifies to be an affordable house if it costs up to Rs 45 lakhs and has up to 90 sq meters of carpet area.
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 on rent
Landlords do not have to pay GST on real estate rental income, as long their premises are let out for residential purposes. However, the GST regime treats renting out the residential property for business purposes as a supply of services, thus, including rental income under its purview. An 18% GST 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 also have to register themselves, to pay the GST on their rental income.
Unlike under the Service Tax regime, the threshold limit for applicability of GST has been increased from Rs 10 lakhs per annum to Rs 20 lakhs. So, many of the landlords who were covered under the Service Tax regime will go out of the indirect tax net, under the GST. On letting-out of commercial properties, a GST at 18% is levied.
GST on a 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 the 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 on govt 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 the Jawaharlal Nehru National Urban Renewal Mission, the Rajiv Awas Yojana, the Pradhan Mantri Awas Yojana, and housing schemes of state governments.
Impact of GST on affordable property
The presence of multiple taxes prior to the GST may not have impacted property prices excessively. Nevertheless, it made tax computation a tedious process for the home buyer. Consequently, not many buyers would venture to find out the various taxes that added up to the final cost of the property. Although several teething issues remain, the effect of GST on the property is that it offers better clarity to home buyers about their tax liability than the previous regime. With the GST impact on the real estate sector resulting in greater transparency, buyers would have more faith in the taxation of property transactions in India. Moreover, properties could become more affordable, even if the rates are reduced marginally.
The sales of under-construction housing units have witnessed a slowdown after a peak at the start of the 2010s. The government has since, stepped in, to give this segment a boost by reducing the GST and increasing the tax deduction limit on home loan interest repayment to Rs 3.50 lakhs. In the Interim Budget 2019, the government inserted a new Section 80EEA, to offer an additional benefit of Rs 2 lakhs, to first-time buyers of affordable properties. The GST impact on the real estate sector, combined with these cost advantages, is gradually expected to boost buyer sentiments.
Recall here that among the costs that builders in India had to bear on housing project development were excise duty, value-added tax, customs duty, inputs and service tax on approval charges, architect professional fees, labor charges, legal charges, and entry taxes on raw materials.
For developers, an increase in demand would help them to sell off their stock and thereby, not have to worry about paying taxes on inventory. Data available with PropTiger.com show that real estate developers in India’s eight prime residential markets are sitting on unsold stock of over 7.23 lakh homes.
While the government has already slashed the GST rates for real estate and there might be no scope for further lowering of rates for the sector, industry experts are of the view that lowering of rates on other goods and services, may trigger investments in real estate at a time when home sales have dipped, because of the economic crisis following the Coronavirus pandemic.
Industry bodies, such as the ASSOCHAM and NAREDCO, have already suggested that the government reduce the GST on various goods and services by up to 50% for a fixed tenure. “For ‘money to spend’, the simplest option is to reduce GST on various goods and services. Money going to more sellers and producers, as a result of lower GST, will result in more transactions, effectively boosting the demand-side, in turn creating a need to produce more. This will not just increase jobs across segments but also fuel demand for raw materials,” NAREDCO president Niranjan Hiranandani was quoted by the media as saying. “This step has the potential to positively impact the overall rate of recovery. For real estate, it will incentivize the ‘fence-sitters’ to stop procrastinating and take a ‘buy’ decision,” he added.
Must-know facts about GST-
GST is not applicable to ready-to-move properties; it is applicable to under-construction properties 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, the property is categorized as ready-to-move-in and is out of the purview of the work contract. In short, the GST would apply to 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.
GST is not applicable to land transactions
The 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 the value of land for taxable real estate transactions.
Example: How to calculate GST on under-construction property
Suppose that an under-construction property worth Rs 100 is sold by a builder to a buyer. To calculate the GST on the building, Rs 33 will be counted out as the land value and the GST on construction would apply only on the remaining Rs 77.
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 the 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.
Note: GST on flat registration: There is no GST on the registration charges that are paid while registering a property.
Can we expect GST to subsume stamp duty and registration charges in the 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 is nil, at least in the foreseeable future,” says Prabhansu Mishra, a Lucknow-based lawyer.
The latest news on GST-
GST cut not always beneficial for the industry: Finance secretary
November 3, 2020: Finance secretary Ajay Bhushan Pandey has said that GST rate cuts send a wrong signal to domestic business/industries, as well as international investors. Keeping that in view, a rate cut should be done once a year after an intensive analysis of all sectors, he said, adding that a rate reduction does not necessarily benefit industries.
Signature Builders guilty of not passing the benefit of additional ITC to home buyers
October 26, 2020: The National Anti-Profiteering Authority (NAA) has found Signature Builders guilty of not passing the benefit of additional ITC to the home buyers. The NAA, however, imposed no penalty on the builder since no penalty provisions were in existence between 2017 and 2018 when the builder violated the provisions of Section 171 (1). Under the GST law, penalties for violation of rules are prescribed under Section 171 (3A).
SOURCE – https://housing.com/news/gst-real-estate-will-impact-home-buyers-industry/