GST on Real Estate Sector in India

Real estate is one of the most dynamic sectors in India, significantly contributing to the country’s GDP and employment. With the introduction of the Goods and Services Tax (GST) in July 2017, the indirect taxation structure for the real estate sector underwent a significant transformation. GST aimed to bring uniformity, eliminate the cascading effect of taxes, and simplify compliance. However, its application in the real estate industry has remained complex due to the nature of construction services, joint development agreements, transfer of development rights, and classification of properties. This article provides a complete understanding of GST on real estate in India, including its applicability, tax rates, input tax credit (ITC) rules, and implications for various stakeholders.

Meaning of Real Estate Sector

The real estate sector refers to the industry involved in the development, buying, selling, leasing, and management of land and buildings. It includes residential, commercial, industrial, and infrastructure properties. This sector plays a crucial role in economic growth, employment generation, and urban development. Real estate includes not only the construction of new properties but also activities like renovation, brokerage, and property investment. It is regulated by laws like the Real Estate (Regulation and Development) Act, 2016 (RERA) to ensure transparency and protect the interests of buyers and developers.

Taxability of Real Estate Transactions under GST

GST on Works Contract and Development Rights:

The implementation of GST has brought clarity and uniformity in the taxation of works contracts and development rights, both of which are key components in the real estate sector.

GST on Works Contract

1. Nature: Treated as a supply of service under GST, even if it involves both goods and services.

2. GST Rate: Charged at 18% for most works contracts (commercial & private sector).

3. Affordable Housing Projects: Attract a concessional rate of 12% under specific government schemes.

4. Input Tax Credit (ITC):

(a) Allowed for commercial and government works.

(b) Not allowed for residential real estate projects (post-April 1, 2019).

5. Scope: Applies to all construction, repair, renovation, and maintenance of immovable property.

6. Sub-contractors: Also charge GST; the main contractor may claim Input Tax Credit (ITC) (if eligible).

GST on Development Rights

1. Nature: Involves the transfer of Development Rights (TDR) or Floor Space Index (FSI) by landowners to developers.

2. GST Rate: Attracts 18% GST on transfer of development rights.

3. Joint Development Agreements (JDA):

(a) Common in real estate, landowners give land, developer constructions.

(b) GST is paid by the developer under Reverse Charge Mechanism (RCM).

4. Residential Project Exemption:

(a) No GST if flats are sold after receiving the Completion Certificate (CC).

(b) If sold before CC, GST is applicable on both TDR and sale of flats.

5. Monetary or Non-Monetary Consideration: GST applies whether the consideration is cash or built-up area.

These GST provisions aim to streamline taxation, promote transparent dealings, and avoid double taxation in real estate transactions.

Impact of GST on Real Estate Sector

The implementation of Goods and Services Tax (GST) in India marked a significant shift in the taxation structure of the real estate sector. Before GST, the real estate market was burdened with multiple indirect taxes like VAT, service tax, stamp duty, and registration charges, which varied across states. GST aimed to simplify this by introducing a unified tax regime. Here's how GST has impacted the real estate industry:

1. Simplified Tax Structure: One of the most notable impacts of GST is the simplification of the tax structure. Instead of dealing with multiple taxes, developers and buyers now deal primarily with a single tax – GST. This has improved compliance and reduced the cascading effect of taxes.

2. Cost to Buyers: Under the current GST regime, under-construction properties attract GST at 5% (without input tax credit) for normal housing and 1% for affordable housing. However, completed properties (with Completion Certificate) are exempt from GST. This has pushed many buyers to prefer ready-to-move-in properties to avoid the tax burden, affecting the demand for under-construction projects.

3. Input Tax Credit (ITC) Restrictions: Earlier, builders could claim input tax credit (ITC) on raw materials like cement, steel, etc., which helped reduce the overall project cost. However, with the revised GST rates (from April 2019), ITC has been disallowed for residential projects, impacting developers’ profitability and possibly leading to higher project costs.

4. Increased Transparency and Accountability: GST has brought in more transparency by mandating proper invoices and tax payment at every stage. This has curtailed the use of black money and informal transactions, bringing more accountability to real estate regulatory authority (RERA) dealings.

5. Impact on Construction Services: GST applies to construction services provided by builders and contractors at 18%. This affects the cost of developing real estate projects, especially when ITC is not available, thus increasing the financial burden on developers.

6. Affordable Housing Boost: GST at a concessional rate of 1% on affordable housing has positively impacted this segment, encouraging both developers and buyers. The government’s focus on "Housing for All" is being supported through this tax incentive.

7. Land and Ready Property Remain Outside GST: The sale of land and fully constructed property (after obtaining the Completion Certificate) continues to remain outside the ambit of GST. However, stamp duty and registration charges still apply, keeping the overall transaction cost high in such cases.

GST Implications for Homebuyers

1. Under-Construction Properties: Attract 5% GST (1% for affordable housing) without input tax credit (ITC), increasing the effective cost.

2. Ready-to-Move-in Homes: Exempt from GST if the Completion Certificate (CC) is issued, making them a preferred choice.

3. No ITC Benefit: Builders cannot claim ITC, so tax paid on inputs like cement/steel may be passed to buyers.

4. Affordable Housing Boost: Lower 1% GST rate helps middle-income buyers but still no ITC, impacting developer pricing.

5. Additional Charges: Stamp duty and registration fees apply separately and are not subsumed under GST.

6. Greater Transparency: GST mandates proper invoices, reducing under-the-table dealings and increasing accountability.

7. Shift in Buyer Behavior: More buyers prefer ready properties to avoid GST, impacting on demand for under-construction homes.

GST Exemptions on Real Estate sector

1. Sale of Completed Properties (with CC): If a Completion Certificate (CC) has been issued before the sale, GST is not applicable. Such sales are considered transactions involving immovable property, which is outside the scope of GST. This provides cost relief to homebuyers of ready-to-move-in homes.

2. Sale of Land: The sale of land is completely exempt from GST, as land is neither good nor does it provide services under the CGST Act. Buyers only pay stamp duty and registration fees, making land purchases outside GST’s ambit.

3. Renting for Personal Residential Use: When a residential property is rented for personal use, it is exempt from GST, even if the landlord is registered under GST. This exemption helps lower the housing cost for tenants in personal use scenarios.

4. Renting Commercial Use or to Business Entities: If a residential property is rented to a business entity, GST becomes applicable under the Reverse Charge Mechanism (RCM). The business tenant, not the landlord, is responsible for paying the tax.

5. Transfer of Development Rights (TDR), FSI, or Lease Premium in JDAs: In Joint Development Agreements (JDAs) for residential projects, the transfer of TDR, FSI, or lease premium is exempt from GST if the constructed flats are sold after the Completion Certificate. This avoids double taxation on the same project.

6. Affordable Housing Projects: Projects classified under affordable housing enjoy a concessional GST rate of just 1%, but without input tax credit (ITC). This encourages development and purchase of low-cost housing, aligning with the government’s housing schemes.

7. Long-Term Lease of Land to Government Bodies: A long-term lease (30 years or more) of land provided to government authorities for public infrastructure projects is exempt from GST, supporting nation-building activities and reducing costs for public development.

These explained pointers highlight how GST exemptions are structured to protect homebuyers, encourage affordable housing, and promote transparent and cost-effective real estate practices.

Final Thought

The introduction of GST has undoubtedly brought transparency and uniformity to India's indirect tax system. For real estate, while it has reduced multiple tax burdens and improved accountability, it has also raised concerns about cost efficiency and compliance complexity. Understanding the nuances of GST application—from rates and exemptions to compliance obligations—is critical for builders, developers, and buyers alike. With continuous updates and policy fine-tuning, GST is expected to gradually bring in long-term benefits to the real estate ecosystem.

If you have any queries regarding GST on Real Estate, then you can connect with Compliance Calendar LLP experts through email info@ccoffice.in or Call/Whatsapp at +91 9988424211.

Frequently Asked Questions

Q1. What Are the New GST Rates for Residential Construction?

Ans. The new GST rate is 5% without ITC on under-construction homes and 1% for affordable housing. Ready-to-move-in homes with a Completion Certificate are exempt from GST.

Q2. What is a residential Real Estate Project?

Ans. A residential real estate project refers to the development of buildings or apartments intended primarily for residential use, including housing units, common areas, and related infrastructure.

Q3. What is the GST rate on under-construction residential properties?

Ans. Under-construction residential properties attract 5% GST without Input Tax Credit (ITC). For affordable housing, the rate is 1% without ITC.

Q4. Is GST applicable on the sale of completed or ready-to-move-in properties?

Ans. No, GST is not applicable if the Completion Certificate (CC) is issued before the sale. Only stamp duty and registration charges apply.

Q5. Do buyers have to pay GST on the resale of property?

Ans. No, GST does not apply to the resale of completed property. These are treated as transactions in immovable property and fall outside the GST scope.

Q6. Is Input Tax Credit (ITC) available to builders on residential projects?

Ans. ITC is not available for residential projects under the reduced GST rates. However, it is allowed in commercial real estate projects.

Q7. What is the GST rate on commercial real estate?

Ans. Commercial properties attract 18% GST, and ITC is available on inputs used in construction or development.

Q8. Is GST applicable on the sale of land?

Ans. No, the sale of land is exempt from GST because land is neither classified as goods nor services under GST law and thus falls outside the scope of taxable supply.

Q9. Are rental incomes subject to GST?

Ans. Residential rentals for personal use are exempt. However, if rented to a business entity, GST is applicable under Reverse Charge Mechanism.

Q10. Is GST applicable on joint development agreements (JDA)?

Ans. Yes, GST applies on Transfer of Development Rights (TDR), FSI, or lease premium in JDAs. In residential projects, it is exempt if the flats are sold after CC.