Analysis of GST on Real Estate Sector
Post on 07-July-2021.
Vizag
The concept of GST was introduced on 1st July, 2017 after years of deliberations and promotion of related concepts like co-operative federalism. This year marks the completion of 4 years of the GST regime. Let us understand the nuances of GST and the impact of GST on real estate transaction. This article will provide an analysis of GST on real estate sector.
Let us look at GST and Real Estate as two separate entities. We will understand each concept individually and then analyse the impact of one on the other.
What is GST?
- Goods & Services Tax is a universal indirect tax for the whole of the nation.
- Before GST regime, there were a number of indirect taxes which were levied by both the centre and the state.
- With the implementation of GST, all the Goods and services have come under an umbrella taxation system. This was aimed to reduce the burden on the tax-payer.
The main features of the GST system:
- The GST is applicable only on the supply-side as against the previous system which was applicable on both the supply and demand sides.
- It is a destination-based taxation system.
- It is a dual GST system where the states levy SGST and the Centre levies CGST.
The reforms brought about by the GST system:
- Creation of a common national market
- Reduces tax burden
- Increased transparency due to its self-policing character
- Mitigation of cascading effect
- Making Indian products and services more competitive
The GST implications on Real Estate transactions is a very confusing topic, let us understand it in detail so you will be able to make informed decisions in the future.
What is Real Estate?
Real estate in simpler terms means Property in the form of land in isolation or both land and building taken together.
Real Estate project means construction and development of a land into saleable property. This is done by builders who play a role in the construction and realtors who play a role in the sale of the said real estate project.
The GST is levied on all levels of development of the project right from construction (on construction materials, and the like) till the sale (GST on sale or purchase of the property, transaction costs, etc.)
According to the GST Act 2016, the following tax regime has been introduced for residential real estate transactions w.e.f 01-04-2019. Let us understand the provisions briefly.
- GST to be charged at 5% without input tax credit for properties that are not part of the affordable housing segment.
- GST to be charged at 1%without ITC for properties that come under affordable housing.
- GST for under construction properties is 12%
- GST is not applicable on resale of old properties or projects that have been already completed.
- Builders receive ITC on materials used for construction from suppliers and manufacturers, they were expected to transfer it back to the buyers, however this has not happened.
The GST Council has announced the criteria for a residential property to come under the affordable housing segment:
- The Total carpet area of the residential property cannot exceed 60 square metres in metropolitan areas.
- The total carpet area of the residential property cannot exceed 90 square metres in non-metropolitan cities and towns.
- The total value of the property cannot exceed Rupees 45 Lakhs in both metropolitan and non-metropolitan areas.
The GST on real estate transactions has been reduced, this benefits both the builders/sellers and buyers. Benefits of GST rate cuts on residential properties:
- Simpler tax structure which means greater compliance by the builders
- Interests of buyers are protected due to the fact that the ITC is expected to be transferred to the buyers.
- Optimum prices of the properties are guaranteed due to the ITC of 1% in affordable housing segment.
- The unused ITC is not added to the project costs which will ultimately result in fair pricing of the properties.
GST is not applicable in case of
- Sale of Ready to move-in flats
- Resale of old property
- Sale/Purchase of Land
Registration and Stamp Duty
The Registration and Stamp duty have remained unaffected by the GST. The states have their own rate of GST which is levied based on their rules and regulations. The sale or purchase of completely constructed property or under construction property attract registration and stamp duties. The GST implications on real estate transactions have no effect on stamp duties and registration charges, whatsoever.
GST implications on real estate
Though initially the GST on real estate transactions was maintained high, the changes which came into effect in 2019 brought out the necessary reforms. The GST on real estate reduced, bringing affordable housing closer to the buyers. The reforms in GST on real estate transactions have been incorporated in-line with the target of “Housing for All by 2022”.
While real estate in India does not directly come under the GST regime, many activities like construction, and building materials like cement, steel, etc. used for construction come under the regime. Various activities and services are now taxable under the regime.
Let us see some segments where home buyers are likely to pay GST or not pay GST.
|
GST on |
||
|
Housing Maintenance Charges |
Likely to pay 18% |
If it is >7500 per month |
|
Rent |
No GST |
If rented for residential purposes |
|
Home Loan |
No GST for buyers |
GST on processing fee, legal fee, etc. |
|
Affordable Housing |
1% GST without ITC |
On a brighter note, with the GST regime being slowly incorporated into all the transactions, the realtors, builders and buyers are getting the maximum benefits from the same. The increased demand for residential properties has pushed up the transaction rate. As of now, the GST implications on real estate transactions cannot be accurately gauged and it will be clearer with more time.