Goods and Services Tax (GST) was a significant step toward transforming India’s indirect tax structure, including within the real estate sector. Prior to GST, property transactions were subject to multiple state and central taxes, causing a lot of confusion and a lack of transparency.
The idea of GST was to provide some clarity and simplify the older system under one tax structure. With respect to the definition of the tax treatment of property transactions, GST was an attempt to simplify the older indirect taxation system.
This blog provides an in-depth analysis of GST on real estate, covering the GST on the sale of property, GST on residential property, GST on immovable property, and GST on the sale of commercial property, along with topics including the latest rules and FAQs pertinent to buyers, developers, and investors.
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Understanding GST on Real Estate
Under the GST regime, real estate transactions are treated as services based on the nature of the property. Construction services attract GST, while finished and immovable property is exempt. Accordingly, GST applies only to under-construction properties and not to ready-for-occupancy units.
This distinction is made by virtue of the Completion/Occupancy Certificate issued by the competent authority. Where any consideration is received prior to such a certificate being issued, GST shall apply.
GST on Sale of Property
GST on property sale is applicable only under a construction property sale at the time. In such a case, this transaction would be treated as a supply of construction services.
When GST Applies for:
- Sale of an under-construction residential property
- Sale of under under-construction commercial property
- Instalment-based payments received really before project completion
When GST does not apply:
- Sale of ready-to-move property with OC/CC
- Sale of land/plots
- Resale of completed property by an individual owner
It is also important to note that GST will be levied only on that portion of the value of the property built and will not be it on the value of the land, as land is exempt from GST by law.
See also: Market Value of Property in India: What It Means
GST on Residential Property
Goods and Services Tax on Sale of Residential Property
GST on residential property will depend on whether the unit qualifies as affordable housing, non-affordable housing, or under construction.
Applicable GST Rates
- Affordable residential housing: 1% (without Input Tax Credit)
- Other residential property: 5% (without Input Tax Credit)
These rates are applicable for under-construction residential units only. If the property is completed and certified, GST will not apply anymore.
Criteria for Affordable Housing:
A residential unit is considered an affordable unit if:
The total value of the property is below ₹ 45 lakh
Carpet area does not exceed:
- 60 square meters in metro cities
- 90 square meters in other cities
Failure to comply with these results in the application of the standard residential GST rate.
See also: What Is Immovable Property? Meaning, Rights & Examples
GST on Immovable Property
Property is classified as immovable if it comprises land and buildings that aren’t supposed to be detached from the earth. Under GST:
- The sale of land is outside the scope of GST
- The sale of fully completed buildings with OC/CC is exempt from GST
- The sale of under-construction buildings is taxable
The purpose of this distinction is to ensure that GST is applied only to the enhancement of value through construction and not to the transfer of ownership of completed immovable properties.
GST on Sale of Commercial Property
The imposition of GST for selling commercial properties is less complicated than for residential properties, as it attracts higher taxes.
Rate of GST on Real Estate
12% GST for an under-construction commercial property
This includes:
- Office spaces
- Shops
- Commercial complexes
- Business parks
On the other hand, the commercial real estate developers may avail Input Tax Credit (ITC) on construction inputs, therewith being answerable to the GST provisions.
GST is not applicable to completed commercial properties sold post-issuance of OC/CC.
See also: Capital Gains Tax in Bangalore Bring Tremendous Changes in Real Estate Market
Input Tax Credit (ITC) in Real Estate
Currently, under GST:
- Residential projects with a tax of either 1% or 5% are out of the purview of ITC.
- Commercial projects with taxation at 12% are entitled to claim ITC.
Withdrawal of ITC for any residential project was introduced to further simplify taxation, with no disputes, but it is bound to push up project costs for developers.
Who Pays GST on Real Estate Transactions?
Many property transactions often involve the prime issue of GST payment.
- A builder or developer is legally bound to collect the GST and deposit with the government.
- The buyer finally pays GST since GST is included in the total consideration of the property.
Therefore, GST charges must be clearly mentioned in the agreement and reflected in tax invoices raised by the developer, so buyers are safe.
Other Charges Attracting GST on Real Estate
Depending on the rules, certain ancillary charges may still attract GST, irrespective of whether GST applies to completed properties or not, such as:
- Preferential location charges
- Club membership fees
- Parking charges (if charged separately)
- Maintenance charges before handover
These services typically attract GST at the applicable rates of service tax.
Recent Developments and Regulatory Direction
GST in real estate is still evolving. The key focus areas of government are as follows:
- Simplifying tax structures
- Enhancing compliance
- Reducing cascading taxes with respect to construction materials
Long-term policy measures on rationalizing GST on important construction inputs are expected to benefit housing affordability and growth in the sector.
See also: How to Buy a Flat in Bangalore: Complete Homebuyer Guide
Conclusion: GST on Real Estate
The implementation of the Goods and Services Tax has helped greatly to clarify and standardize the framework for taxation applicable to real estate. The applicability of GST on real estate, more specifically GST on the sale of property, GST on residential property, GST on immovable property and GST on sale of commercial property will define the decision-making.
Prior to entering into any kind of transaction, buyers and investors should act with utmost diligence and ascertain the nature of the project, type of property and any possible tax implications. It is always prudent to obtain professional advice on legal and taxation matters, so as to enable real estate investments that are legally compliant and financially sane.
FAQ’s
GST rates depend on the type and stage of the property. Affordable housing calls for GST at 1%; other under-construction residential properties are taxed at 5%, and under-construction commercial properties call for GST at 12%. Completed or ready-to-move-in properties are exempt from GST.
Purchasing a ready-to-move-in residential property having a valid Occupancy Certificate or Completion Certificate can avoid GST. GST is also not applicable to land purchases or the resale of completed residential units.
The builder or developer is tasked with collecting and depositing the GST with the government, but ultimately it is the buyer who bears the tax as part of the total property consideration.
GST can be levied upon a residential property provided that the property is in the process of construction at the time of sale. Completed residential properties are beyond the scope of GST.
The current GST framework thus retains the reduced GST rates for residential properties without input tax credit benefits, clearly exempting land and completed properties from GST, and sets stringent compliance obligations on developers and builders.