Real estate is one of the most prominent sectors in the Indian economy and contributes to nearly 6 % - 8 % of the Gross Domestic Product (GDP). GST, which came into effect on July 1, 2022, had a profound impact on real estate. Under the previous taxation system, the buyers had to pay multiple taxes like VAT, service tax, stamp duty, registration charges and more when a property that was under construction was bought. However, if the property was purchased after it was completed, VAT and service tax was not applicable. In that case, the property buyer has to pay stamp duty and registration charges only.
Now, under GST (Goods and Services Tax), a uniform tax rate of 12% was payable on properties under construction. On the other hand, GST on under construction commercial property is not levied for completed or ready-to-sell properties.
The current GST rate on property is explained in the article. In 2019, the GST Council decreased the GST rates from 12 % to 5 % on residential properties and from 8 % to 1% for the affordable housing sector.
Let’s now talk about the effect of GST on real estate, more specifically the impact of GST on housing and rented property.
Did you know?
The GST rate on ready-to-move-in properties is 18%. But, one-third of this rate is deemed as the value of land supplied to the buyer of the property. Thus, the GST rate reduces to 5 per cent on under-construction properties or commercial properties with complete input tax credit.
Also Read: Effect of GST on the Indian Economy
GST Impact on Real Estate
Under the previous regime, if a property under construction was sold, then the following rates of taxes were applicable -
- VAT - 1 % to 4 %
- Service Tax - 4.5 %
- Stamp Duty - 5 % to 7 %
- Registration Charges - 0.5 % to 1 %
Changes in Real Estate Sector Under GST
Real Estate industry is the second biggest employer after the IT industry in India. GST has been significant in bringing vast improvements to this sector and solving the problems and challenges faced by the Indian taxpayers and property owners. The Goods and Services Taxation System has also been instrumental in bringing about transparency and accountability in the property and real estate business.
Since the multifarious taxes such as VAT, service taxes, etc. have been removed, the GST system has been a boon for home buyers purchasing property before its completion. Developers also had to pay excise duty, custom duty, CST, Entry Tax which was included in the cost which subsequently raised the price of the property. Post GST, the developers can now claim Input Tax Credit on the taxes paid by them which will decrease the cost for the developers and can, in turn, be passed on to the buyers.
- A GST of 5 percent will be levied on all properties with no input tax credit.
- GST will not be applied to properties after sale or ready-to-move-in buildings.
- Home buyers pay a GST of 1% for affordable housing on under construction properties like flats, houses, etc. The GST rate 2022 is 5 % for non-affordable housing.
Positive Impact of GST on Real Estate Sector
- GST simplified the complexities present under the previous taxation system and eliminated the problem of cascading of taxes.
- Many compliance issues faced by developers and sellers have been removed by a uniform tax rate under GST.
- Transparency has increased in the real estate business leading to higher trust and more ethical business practices.
- Taxes such as VAT, Service Tax, Excise Duty, Entry Tax, Octroi etc. have been removed which has consequently raised the margins for the developers by reducing construction costs, the benefit of which is passed on to the property buyers.
Also Read: Impact of GST on Insurance and Banking
Rates and Applicability of GST for Various Properties
Let’s take a brief look at the different Real Estate GST rates in 2022 for various properties under the Goods and Services Taxation -
|
Type of Property |
Whether GST applicable |
Rate of Tax |
Whether ITC Available |
|
Ready to Move properties |
No |
- |
No |
|
Under Construction Properties (For houses purchased under CLSS*) |
Yes |
8%** |
Yes |
|
Under Construction Properties (other than above) |
Yes |
12% |
Yes |
|
On Resale properties |
No |
- |
No |
|
On buying and selling land |
No |
- |
- |
|
Works Contract |
Yes |
18% |
Yes |
|
Composite Supply of Works Contract |
Yes |
18% |
Yes |
|
Composite Supply of Works Contract to Government |
Yes |
12% |
Yes |
|
Composite Supply of Works Contract for general public use |
Yes |
12% |
Yes |
|
Composite Supply of Works Contract for Affordable housing |
Yes |
12% |
Yes |
* CLSS - Credit Linked Subsidy Scheme
** A 12% GST is levied on all properties bought under the Credit-Linked Subsidy Scheme (CLSS) . However, a rate of 8% will be applied after deducting the 1/3rd amount towards the cost of land.
How will Developers, Builders and Contractors be affected?
In the previous regime, the contractors and developers had to pay service tax for various types of services such as legal fees, labour charges, professional fees and approval fees among others. Moreover, input tax credit was not available for CST (Central Sales Tax), Customs Duty, Entry Tax. etc which increased the price of the property, which was often borne by the buyers.
The cost of construction of property is greatly reduced as now the developer can avail of ITC under GST regime.
This leads us to the next important question -
How will Home Buyers be affected under GST?
- The Central Government had enacted the Affordable Housing Policy in 2015 to address the housing requirements of middle and low income groups in India.
- In its 33rd Council Meeting, the GST Council decreased the GST rates from 8% to 1% for properties that are under ₹ 45 lakhs.
- Housing Schemes such as Jawaharlal Nehru National Urban Renewal Mission, the Rajiv Awas Yojana, the Pradhan Mantri Awas Yojana and housing schemes of state governments will attract only 1% GST.
- GST is not applicable on purchase of plots.
- GST is applied on services as a part of the home loans, such as processing fees, legal fees, etc.
- Under construction properties are effectively cheaper than ready-to-move-in properties.
- A home buyer has to pay house registration charges including GST on stamp duty and registration.
- GST is not applicable on ready-to-move-in flats and only applied on under-construction homes.
- The maintenance charges will be leviable on GST on real estate only if they are more than Rs. 7500 per month per member.
GST Impact on Housing 2022
|
Type of Property |
Previous GST Rates (Till March 2019) |
GST Rates from April 2019 |
|
Affordable Housing |
8 % (ITC available) |
1% (ITC not available) |
|
Non-affordable Housing |
12% (ITC available) |
5% (ITC not available) |
GST on Rented Property
If the property is rented for residential purposes, the landlord does not have to pay GST on their rental income. However, when the property is rented out for commercial purposes or business purposes, the GST on commercial property will be charged at the rate of 18% if the rental income is more than ₹ 20 lakhs per year.
Conclusion
GST has proved beneficial for the real estate industry as well as its allied sectors including cement and steel industry. The new tax regime has added to the profits of property developers and contractors and has also added to the growth of the economy. Despite the prices of properties being controlled by the market forces, GST rates have had a significant role to play as explained in the article above.
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