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What is the GST impact on real estate transactions?

What is the GST impact on real estate transactions?

11-Mar-2025

GST

Answer By law4u team

The Goods and Services Tax (GST) has a significant impact on real estate transactions in India. It applies to under-construction properties but not to the sale of completed or ready-to-move-in properties. GST Impact on Different Real Estate Transactions Under-Construction Properties GST Rate: 5% on residential properties and 1% for affordable housing (without ITC - Input Tax Credit). Applies to flats, apartments, and houses under construction at the time of sale. Ready-to-Move-in Properties No GST is applicable if a property has received a Completion Certificate (CC) from the local authority before the sale. Such transactions are treated as the sale of immovable property and attract stamp duty and registration charges instead. Land Purchase & Sale No GST is applicable on the sale of land as it is not considered a "supply of goods or services" under GST law. Works Contract (Construction by Developer) If a developer constructs a property for a buyer under a works contract, 18% GST applies on the contract value. Input Tax Credit (ITC) Restrictions Developers cannot claim ITC on inputs like cement, steel, and labor under the new GST regime for residential projects. For commercial properties, ITC is available if sold before completion. Rental Income and GST Residential property for rent: No GST. Commercial property for rent: 18% GST if annual rent exceeds ₹20 lakh (₹10 lakh in special category states). Conclusion GST applies only to under-construction properties at 5% (residential) or 1% (affordable housing). No GST on ready-to-move-in properties or land sales. Works contracts attract 18% GST. Rental income on commercial properties above ₹20 lakh attracts GST at 18%.

Answer By Anik

Dear client, The implementation of the Goods and Services Tax (GST) in India on July 1, 2017, significantly transformed the taxation framework for real estate transactions. Prior to GST, the real estate sector was subject to a mix of various indirect taxes, including service tax, VAT, and stamp duty. The introduction of GST aimed to create a more streamlined, efficient, and transparent tax regime. Below, we delve into the impact of GST on real estate transactions in the Indian legal context. Unified Tax Regime: GST replaced multiple indirect taxes with a single tax on the supply of goods and services. For real estate, this means that transactions are now taxed under GST instead of service tax and other local taxes. This simplification reduces the tax burden of compliance and minimizes the cascading effect of taxes, which previously involved different tax rates at the central and state levels. Construction and Development: Under GST, the sale of under-construction properties and properties sold after completion but not paid fully up-front are taxable events. The GST rates for residential real estate are set at 1% for affordable housing and 5% for non-affordable housing, subject to eligible input tax credits. This contrasts with the earlier structure of service tax applied only during the construction phase, which was at 12%. Commercial Real Estate: GST for commercial properties is rate-fixed at 18%. The clear demarcation of rates ensures that buyers can estimate costs accurately, benefiting financial planning in real estate purchases. One of the most significant benefits of GST for real estate transactions is the availability of Input Tax Credit (ITC). Developers and builders can now claim ITC on the taxes paid on inputs used in the construction process, such as cement, steel, or other raw materials. This credit can be utilized to offset the output GST liability, effectively reducing costs and promoting fiscal efficiency in project execution. However, it's worth noting that as of the current GST framework, ITC cannot be claimed on residential real estate unless the buyer chooses to make full payment for the property. For commercial property, ITC is applicable, adding a financial incentive for commercial transactions. The implementation of GST has implications for property pricing. Although buyers might initially perceive price increases due to the additional GST on property purchases, the overall clarity and reduction in the complexity of taxes can make pricing more predictable. For developers, claiming ITC may reduce the overall cost of construction, potentially leading to more competitive pricing. With GST now applicable to real estate transactions, buyers and sellers must ensure compliance with new regulatory requirements. Documentation, including tax invoices and GST registration, has become mandatory. The need for systematic accounting increases operational efficiency but also imposes a burden on smaller developers who may lack the infrastructure for rigorous compliance. We hope this clarifies your query. Please feel free to reach out for further assistance. Thank you.

Answer By Ayantika Mondal

Dear client, 1. GST on Under-Construction Properties GST is applicable on the purchase of under-construction properties, while completed and ready-to-move-in properties are exempt. • GST Rates for Under-Construction Properties: o Affordable Housing: 1% (without Input Tax Credit) o Non-Affordable Housing: 5% (without Input Tax Credit) According to government definitions, affordable housing includes: • For metropolitan cities: Homes with a carpet area of up to 60 square meters and a value not exceeding ₹45 lakh. • For non-metropolitan cities: Homes with a carpet area of up to 90 square meters and a value not exceeding ₹45 lakh. These revised rates, implemented from April 1, 2019, aim to make home-buying more affordable by reducing the tax burden on buyers. 2. Exemption for Ready-to-Move Properties GST does not apply to the sale of completed properties (where the Completion Certificate is issued). Such transactions are treated as the sale of immovable property and fall outside the GST regime. Buyers of ready-to-move-in properties only need to pay stamp duty and registration charges, which vary across Indian states. 3. Input Tax Credit (ITC) and Its Removal Initially, developers could claim Input Tax Credit (ITC) on goods and services used in construction. However, under the revised GST regime (post-2019), the ITC benefit was withdrawn to curb misuse and ensure tax collection aligns with actual prices. While this removal reduced compliance complexity, it increased the construction cost for builders, potentially affecting property prices. 4. GST on Land Transactions GST is not applicable on the sale of land as it is classified as immovable property. However, if a developer offers a service such as the development of a plotted project, GST may be applicable on the development portion of the sale. For joint development agreements (JDAs), where a landowner partners with a developer to construct and sell property, GST is levied on the consideration received by the developer in the form of constructed units or revenue share. 5. GST on Leasing and Renting • Residential Properties: Renting a residential property for personal use is exempt from GST. • Commercial Properties: Renting out commercial spaces attracts 18% GST if the annual rental income exceeds ₹20 lakh. This applies to office spaces, shops, and other commercial premises. 6. Impact on Buyers and Developers • For Buyers: Reduced GST rates on under-construction properties have lowered the upfront tax burden. However, the withdrawal of ITC means that buyers may indirectly bear increased construction costs. • For Developers: The removal of ITC increases project costs. Developers must manage cash flow carefully and comply with complex GST reporting requirements. The exclusion of completed properties from GST encourages developers to complete projects to attract tax-free buyers. We hope this clarifies your query. Please feel free to reach out for further assistance. Thank you.