Planning to invest in the real estate sector? Here’s all you need to know about the new GST rates applicable on under construction properties and affordable housing projects.
The Real Estate Industry is a tower of strength when it comes to the contribution in the Indian economy. This growth of the realty sector is strongly complemented with the growth of the citizens and the country at large. It stands second after the IT Industry, contributing 6-8% to India’s Gross Domestic Product (GDP). With a number of changes in the taxation industry entering the economy, especially the Goods and Services Tax (GST) which came into effect on July 1, 2019, the real estate market has witnessed a significant transformation, which has put taxpayers and dealers in agony due to its conformities and compliances.
The 33rd GST Council Meeting held on 24th February 2019, announced the implementation of new GST rates for residential projects which was enacted on 1st of April 2019.
Below are the new proposed GST rates for residential real estate projects:
- For affordable housing projects – GST is charged at 1% without Input Tax Credit (ITC)
- For residential properties other than affordable housing – GST is charged at 5% without ITC
- For commercial projects – GST is charged at 12% with ITC, other than specified ones which will be charged at 5%
|Type of Real Estate Property||
(in effect till 31st March 2019)
(from 1st April 2019 onwards)
|Affordable Housing||8% with Input Tax Credit (ITC)||1% without ITC|
|Non-affordable Housing||12% with ITC||5% without ITC|
|Commercial Properties||12% with ITC||12% with ITC (Unchanged)|
What is Affordable Housing?
As a part of the GST Council Meeting, the applicability criteria for Affordable Housing in residential properties was announced. To be recognised as Affordable Housing, a residential space must meet the following key aspects:
- The total price of the residential property must not exceed Rs 45 lakh in both metropolitan or non-metropolitan areas.
- The total carpet area of the residential property must not exceed 60 square metres in metropolitan areas.
- The total carpet area of the residential property must not exceed 90 square metres in non-metropolitan areas.
Input Tax Credit
After the introduction of GST, the Input Tax Credit (ITC) was created for real estate builders for various inputs like cement, bricks, sand, labour, etc which are a part of the construction process. ITC allows the suppliers of goods and services to reduce their tax burden by gaining tax credit on inputs used to produce those goods and services. The sole purpose for the establishment of ITC was to prevent a tax on tax situation where the GST charged at each stage can be offset by the ITC received on the GST charged in the preceding stage.
The Pre-GST Taxability of Real Estate Transactions
|Name of Duty||Rate of Tax|
|VAT||1 to 4%|
|Registration Charges||0.5 to 1%|
|Stamp Duty Charges||5 to 7%|
Stamp Duty and Registration
It’s a known fact that a significant decision like purchasing a property involves a lot of running around to fulfill legal formalities. These legal documents come with a tax levied by the government called Stamp Duty. This tax along with the Registration Charges remains in place and differs from state to state. Both Stamp Duty and Registration Charges will be applicable on both under construction as well as already constructed properties. However, GST will only be applicable for under construction properties.
Taxability of Real Estate under GST
|Particulars||Applicability||Rate of Tax||Input Tax Credit|
|Ready-to-move (RTM) properties for which completion certificates are issued||Not applicable||–||Not available|
|Under Construction Properties (For Homes Purchased Under Credit-Linked Subsidy Scheme)||Applicable||5%||Available|
|Under Construction Properties (Other than above)||Applicable||5%||Available|
|Resale properties||Not applicable||–||Not available|
|Land purchase and sale||Not applicable||–||Not available|
|Composite supply of works contract||Applicable||18%||Available|
|Composite supply of works contract to Government Authorities||Applicable||12%||Available|
|Composite supply of works contract for use by general public||Applicable||12%||Available|
|Composite supply of works contract – Affordable Housing||Applicable||12%||Available|
Impact on Buyers
A home is a place full of love and care. A place where families come together, laugh together, eat together and stay together. Then whether it is a small cozy studio apartment or a big fancy palace like 4 BHK – a home to each individual is their paradise on earth. But these 4 walls of brick, where memories are created is not earned easily.
In fact, a few years ago taxes like VAT, Service tax, Registration charges, and Stamp Duty would haunt all purchasers of under construction properties. To further worsen the scenario, VAT, Registration Charges and Stamp Duty were state-imposed due to which property prices differed from one state to another. Add to this, the payment of duties like sales tax (CST), Custom Duty, OCTROI were borne by the developers for which there was no credit. Investing in real estate and making it your home almost felt like a dream. Until the introduction of GST.
With GST coming into the picture, only a sole tax of 5% is applicable to all normal housing properties and 1% to all affordable housing projects. Moreover, GST is not applicable to a completed real estate project. In turn, GST on real estate has benefited the buyer with the reduction and simplification in taxes. GST has also been more acceptable by buyers as the input tax credit received by the developer is passed on to the buyer.
Impact on Developers / Builders / Contractors
What if we told you that every time you build something there will be multiple taxes ready to knock your door. Like excise duty, VAT, Customs duty, Entry taxes, etc. on raw materials and Service Tax on varied services such as approval charges, architect professional fees, labor charges, legal charges. This unending list is enough to make you want to bang your head against the wall. This is exactly what a developer goes through whenever he plans on constructing a new real estate project.
But the implementation of GST has proven to be like a saviour for all builders. It has not only aided to reduce the plethora of taxes and decreased the construction cost but, has also been beneficial in improving the cost margins. GST has also safeguarded the interest of the buyers as all the tax burdens were transferred to the buyer by the developer with an increase in real estate prices- but that’s not the case anymore. Along with that, the availability of credit on inputs and cloud storage of invoicing has resulted in under-recording of expenditure with GST.
The only downfall of GST’s impact on contractors is the development of ITC. Several calculations are needed to be done because of which the ITC is always submitted to the buyer at the final stage which in turn lacks transparency and would make the buyer indecisive of his purchase decision.
Impact on other Stakeholders
Constructing a real estate project is an interdependent process. For instance, the cost of labour, material suppliers, service suppliers relies on the increase and decrease in the taxes charged on the related goods and services. These ups and downs on construction commodities will create an impact on the real estate industry. For instance, earlier the tax on cement was 27-31% but under GST cement is taxed at 28%. Thus, a high or low tax on cement will increase or decrease the cost of construction.
GST rates on Construction Materials
|Crude Granite/Marble Rubble||5%|
|Fly Ash blocks||5%|
|Prefabricated structural components for building||18%|
|Glass for construction purposes||18%|
|Natural Sand (for construction)||5%|
|Marble/Granite (other than blocks)||18%|
|Sand & Fly ash Bricks||12%|
GST on Construction Services
|Under construction properties under Credit Linked Subsidy Scheme||8%|
|Under construction properties (excluding those under Credit Linked Subsidy Scheme)||12%|
|Composite supply of works contract to government agencies/local govt. bodies||12%|
|Composite supply of works contract for affordable housing||12%|
|Composite supply of works contract (other than government agencies/local govt. bodies/ affordable housing)||18%|
|Works Contract (other than govt. bodies)||18%|
Latest Update on GST in Real Estate: Option to Real Estate Builders
In order to resolve ITC concerns, the GST Council proposed an option to real estate builders for under-construction residential projects to choose between old tax rates and new tax rates. This means that developers will have to pay 1 percent GST on affordable housing and 5 percent on other housing projects without Input Tax Credit. As for old rates, builders will have to pay 8 percent GST on the construction of affordable housing and 12 percent on other housing projects with Input Tax Credit.
This change will help resolve any issues, differences and disputes arising due to computation such as pricing or loss on Input Tax Credits. In order to provide further clarity, the GST Council also clarified that projects upto 15 percent commercial space like restaurants, clubs, etc would be accounted as Residential Property.
As for ongoing projects, the Council decided that the real estate developers will get one time option to remain paying tax at the old rates, in order to take the advantage of input tax credit.
“Ongoing Projects” are defined as those projects where construction and actual booking began before April 1, 2019 and will not be completed by March 31, 2019.
The real estate builders have been given time till May 20, 2019 to inform their respective jurisdictional officers about their decision. In case of failure in doing so, the officers will automatically assume that they have opted for new rates of GST.
GST on Rental Properties
GST will not be levied for those earning a rental income through residential properties. On the contrary, GST of 18 percent is levied on owners who have rented their premises for commercial or industrial purposes.
The GST rate cut on Residential Properties is sure to benefit all the buyers out there. Buyers can be rest assured that their interest is protected as the Input Tax Credit benefits will not be passed to the real estate builders. This simplification in the tax structure will lead to compliance from builders. Further, the GST rate reduction to 1 percent on affordable housing and resolved issue of unused Input Tax Credit provides an economical pricing to buyers. Considering all of the above factors, the market promises to be favourable for buyers looking to invest.