Planning to buy a property or looking forward to making an investment in Indian Real Estate Market. If yes, then it becomes important for you to understand how GST and its implications on Real Estate will affect you.
The government of India rolled out Good and Services Tax (GST) in July 2017 in a bid to reduce tax evasion, make tax laws easier and remove unnecessary hurdles.
The real estate sector was also brought under its purview as it was burdened by various indirect taxes such as VAT, Service Tax, excise, stamp duty and registration fees. However, ever since the implementation of GST in India, there has been a lot of confusion regarding rates and benefits.
Let’s have a look at the GST rates on real estate and under-construction properties.
What are the GST Rate On Real Estate in India:
Indian Real estate sector will invite GST at the rate of 12% with full input tax credit.
According to the schedule of GST rates for services, as approved by the council, real estate sector will comprise “construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. The value of land is included in the amount charged from the service recipient.”
These will be charged at 12 percent with full input tax credit.
What does it mean?
In simple terms, all under-construction properties will invite a GST of 12 percent. However, GST will not be applicable for ready-to-move-in properties.
There are still some variations for under-construction properties and confusion regarding the same, considering there are various stages for under-construction properties and GST will be dependent on it.
I have purchased a property after the completion certificate was issued to the builder. How much GST do I need to pay?
If you are buying a property,flat or apartment, after the completion certificate has been issued to the builder, the GST will not be applicable as it is considered a ready-to-move-in property and there is no transfer or supply of goods and services.
Hence, if you are buying a completed flats/property or ready-to-move-in property, then you may save the GST cost.
I have made payment to the builder in part or In full before the rollout of GST regime. What happens next?
If you have made the payment for the property to the builder in part of full before the rollout of GST regime i.e 1st July 2017, then GST will not be applicable in such situation.
However, as the transaction was done before the implementation of GST, service tax @ 4.5% has to be payable by the buyer in this regard.
What is the GST on under-construction residential properties (apartments, flats etc.) or commercial properties?
For all under construction properties, residential or commercial, the actual GST rate is 18 percent. Though one-third of this 18 percent GST is deemed as the value of land or undivided share of land supplied to the buyer of the property. Hence, GST rate lowers down to 12 per cent on under-construction flats, properties or commercial properties with full input tax credit.
I want to Resale my property or flats, how much GST will it invite?
The properties for Resale are considered as ready-to-move-in properties, thus they will not invite GST taxation.
I am purchasing property under Credit-Linked Subsidy Scheme (CLSS), what will be the GST?
The Credit-Linked Subsidy Scheme (CLSS) has been introduced to provide affordable houses to the lower and weaker sections of the society. The GST rates on such houses will be effectively 8 percent and not 12 percent as one-third will be deduction towards the cost of the land.
What is Credit-Linked Subsidy Scheme (CLSS)?
If you purchased the property under the schemes like:-
- Economically Weaker Sections (EWS)
- Lower Income Group (LIG)
- Middle Income Group-1 (MlG-1) or Middle Income Group-2 (MlG-2) under the Housing for All (Urban)
- Mission/Pradhan Mantri Awas Yojana (PMAY Urban).
I am purchasing a house under affordable housing, how much GST is there for affordable housing?
On February 7, 2018, the Government of India has directed the builders not to charge any Goods and Services Tax (GST) from home buyers for affordable housing.
The effective GST rate on almost all affordable housing projects is 8percent, which can be adjusted against the input credit. Builders can levy GST on buyers of affordable housing projects, only if they reduce the apartment prices after factoring in the credit claimed on inputs.
The GST Council, in its earlier meeting on January 18, 2018, had extended the concessional rate of 12 percent GST, for construction of houses under the Credit-Linked Subsidy Scheme (CLSS) to promote affordable housing, which has been given infrastructure status in 2017-18 Budget.
The effective GST rate, however, comes down to 8 percent, after deducting one-third of the amount charged for the house/flat, towards the land cost. This provision was effective from January 25, 2018.
Reverse Charge Mechanism has been introduced to GST, what is Reverse Charge Mechanism or RCM in GST?
The mechanism in which the recipient of services pays the service tax is called as ‘reverse charge mechanism’ (RCM). This has been borrowed from Service Tax with wider applications. Under GST, a person who is registered under GST, who gets supplies of goods or services from a person who is not registered under GST, will have to pay the GST under the reverse charge mechanism.
What will be the impact of Reverse Charge Mechanism (RCM) introduced in GST on construction cost?
A developer has to pay GST on services availed, like those provided by a person who is located in a non-taxable area, services provided by goods transporters, legal services provided by an individual or firm, etc. The developer also has to pay GST under the reverse charge mechanism, on the services provided by government or local authorities, like municipalities, etc. Nevertheless, some of the services provided by the government, like renting of premises, specific services provided by the postal authorities, transport of goods by railways or by state transport undertakings, etc., are outside the scope of the GST, similar to the service tax regime.
A significant departure under the GST laws, compared to the erstwhile service tax provisions, is that under the reverse charge mechanism in GST, a person who is registered under the GST has to pay GST on all the services and goods that are procured from a person who is not registered under GST.
This has significantly expanded the scope of the reverse charge mechanism for all taxable persons and it will adversely affect the developers. Moreover, the tax payable under the reverse charge mechanism under the GST, cannot be adjusted by the developer against the input credit available from the GST paid on the inputs, but has to be paid by cash/bank payment.
So, under the GST, the builders are worse off, due to the dual effect of the levy of GST on the services availed from an unregistered person, as well as the requirement to discharge the reverse tax on goods received from unregistered suppliers.This will certainly increase the costs for the developer, especially the small developers who were availing goods and services from unregistered suppliers earlier and were not bearing the cost of taxes to that extent.
Will GST impact the property rentals?
Yes, GST will impact the property rentals, residential or commercial. Credit/set-off of input GST is available to a developer if the sale is executed prior to obtaining the completion certificate or prior to the first occupancy. However, this credit is not allowed if the developer chooses to rent out the property. This may cause a spike in commercial property rentals. Renting of residential property, for use as an accommodation will also attract GST.
How the GST will impact the tax computation on rental income:
Unlike under the service tax regime, the threshold limit for applicability of GST has been increased from Rs 10 lakhs to Rs 20 lakhs.
For the purpose of computing the aggregate limit of Rs 20 lakhs under the GST, all the taxable, as well as exempt goods and services supplied, shall be taken into account. So, under the GST, the value of all the service and goods supplied in India, as well as exported, whether taxable or exempt, are taken into consideration for the Rs 20-lakh limit.
What are the GST rates for commercial property renting?
The GST is proposed to be levied at 18 percent, on the letting-out of commercial properties.
Will GST make home loans expensive?
Before evaluating the likely impact of the GST on home loan costs, it is important to understand the components that will be impacted by the increased rates under the GST. The main cost of taking a home loan, is the interest payment on the money. This cost will not change, as there is no service tax or GST on it. Similarly, any stamp duty charged in connection with the documentation of the home loan, will not change with the GST, as stamp duty is not subsumed under the GST.
However, for the processing fee that is paid at the time of taking the home loan, there is GST of 18 percent, which was 15 percent earlier. The banks may also recover other charges like advocate fees, valuation charges, etc., in connection with the home loan, which will go up proportionately.
Like the processing fee paid at the time of application, you may have to pay prepayment charges. For floating rate home loans, banks cannot levy any prepayment charges. Housing finance companies can, however, levy the prepayment charges, if you decide to shift the home loan to another lender. However, for payment of the home loan from your own resources, the housing finance companies cannot levy any prepayment charges.
The lenders can also charge you for any EMI default, either due to the return of the cheque or ECS return, on which the GST rates will go up. So, it is practically on all the charges that are recovered by the lenders that the GST will be charged at 18percent.
what are the benefits of GST to builders/ real estate developers and buyers?
During the construction of a residential property or a commercial property, a real estate developer or builder has to pay various indirect taxes and duties. The real estate developer passes on this cost to the property buyer.
With the GST, all these taxes have been combined into one, and thus has resulted in lowering the cost of the property. The move is expected to boost real estate sales in India.
For buyers, though GST of 12 percent is on a higher side, there is clarity and uniformity in taxation which they would appreciate and hopefully embrace GST fully.