At the 33rd GST Council Meeting held on 24th February 2019, new GST rates have been introduced for residential real estate which will come into effect from the 1st of April 2019. The new GST rates on residential real estate transactions have been proposed as follows:
- GST to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment.
- GST to be charged at 1% without ITC on residential properties that are included in the affordable housing segment.
GST on real estate in case of under construction properties is 12%. GST does not apply to sale of completed properties (where completion certificate has been issued) or to the resale of old properties. Builders receive input tax credit on the materials purchased from suppliers/contractors and under the current GST structure, were expected to pass it on to home buyers. However this has not happened so far. As a result there may be changes in the GST regime with respect to real estate in the future.
Real Estate has historically been a preferred investment choice for many Indians and the sector has been driven to a large extent through investments made in the residential property segment. A joint report from JLL and CREDAI (Confederation of Real Estate Developers’ Associations of India) has estimated that housing sector investments in India since 2014 amounted to Rs. 59,000 crore and accounted for approximately 47% of the total investments in the sector with projections indicating further increase in the coming years.
During the pre-GST era of taxation, multiple taxes were applicable to real estate namely VAT, stamp duty charges, registration charges and service tax each of which featured different rates and also varied from one state to another. Implementation of GST on real estate has played a significant role in simplifying the taxation of Real Estate in India and can range from 5% to 18% depending upon some key factors. In the following sections, key aspects of GST on real estate are discussed.
GST Rate Comparison before and after 1st April 2019
As mentioned in an earlier section, GST on residential property has been slashed and the new rates will come into effect from the 1st of April 2019. The following is a comparison of the real estate GST rates as applicable before and after the 1st of April 2019:
|Type of Real Estate Property||GST Rate
(in effect till 31st March 2019)
(from 1st April 2019 onwards)
|Residential Property (affordable housing segment)||8% with Input Tax Credit (ITC)||1% without ITC|
|Residential Property (non-affordable housing segment)||12% with ITC||5% without ITC|
|Commercial Properties||12% with ITC||12% with ITC (unchanged)|
GST Council Definition of Affordable Housing Segment
The GST Council has announced the applicable criteria for eligibility of a residential property in the affordable housing segment as part of the 33rd GST Council Meeting press release. The following are the key affordable housing segment qualifying criteria for a residential property in India:
- Total carpet area of the residential property cannot exceed 60 square meters in metropolitan areas.
- Total carpet area of residential property cannot exceed 90 square meters in non-metropolitan cities and towns.
- Total value of property cannot exceed Rs. 45 lakh in either metropolitan or non-metropolitan areas.
For purposes of this definition, metropolitan areas in India include Delhi NCR (limited to Delhi, Noida, Gurgaon, Faridabad, Ghaziabad and Greater Noida), Kolkata, Chennai, Hyderabad, Bengaluru and Mumbai (entire Mumbai Metropolitan Region).
Expected Benefits of the GST Rate cut on Residential Properties
The reduction in GST rates on real estate proposed by the GST council will be implemented from 1st April 2019 and are expected to provide the following benefits:
- Simpler tax structure leading to greater compliance from builders.
- Fair price of property for buyer due to GST rate reduction to 1% on residential properties in the affordable housing segment.
- The problem of ITC benefits not getting passed to property buyers is eliminated. Hence, interest of buyers gets protected.
- Better pricing of residential properties as the problem of unused ITC being added to project cost is eliminated.
GST Rates for Construction Materials
There are two key aspects of GST applicability in real estate. The first is the goods aspect i.e. applicable GST on various construction material and the second is the services aspect i.e. the service of construction itself. Both of these contribute to the final cost of the property for the end user (owner) and different rates are applicable at different stages. The total GST applicable is calculated by adding the SGST (state GST) and CGST (central GST), thus 18% GST = 9% SGST + 9% CGST. 12% GST = 6% SGST + 6% CGST and so on. The following is a snapshot of how GST rates on real estate construction materials is applicable:
|GST on Key Construction Material*|
|Crude Granite/Marble Rubble||5%|
|Fly Ash blocks||5%|
|Natural Sand (for construction)||5%|
|Glass for construction purposes||18%|
|Prefabricated structural components for building||18%|
|Marble/Granite (other than blocks)||18%|
*The list is indicative. Rates are correct as of 27th December, 2018 subject to periodic change. You can use our handy GST Rates finder tool to check the latest GST rates for a variety of materials required in construction.
GST on Construction Services
Construction services also feature taxes that are applicable to various real estate transactions that can be considered as part of how GST on Real Estate is applicable. The following is a snapshot of GST rates applicable to select areas of construction-related services in the real estate sector*:
|GST on Key Construction Services|
|Under construction properties under Credit Linked Subsidy Scheme||8%|
|Under construction properties (excluding those under Credit Linked Subsidy Scheme)||12%|
|Composite supply of works contract for affordable housing||12%|
|Composite supply of works contract to government agencies/local govt. bodies||12%|
|Composite supply of works contract (other than government agencies/local govt. bodies/ affordable housing)||18%|
|Works Contract (other than govt. bodies)||18%|
*The above list is indicative and rates are subject to periodic change. GST rates are correct as of 27th December 2018.
GST is not applicable to the following construction-related transactions/activities:
- Sale of ready to move in flats
- Resale of property
- Sale/purchase of land
In all the above cases, the sale-purchase activity does not include the supply of goods or services as per the GST Act, hence no GST is applicable to these transactions.
Registration and Stamp Duty in Real Estate
Registration and stamp duty on real estate have continued to remain in place as state government taxes subsequent to GST. These charges vary from one state to another and may vary from one circle to another within the same state itself. In the GST era, stamp duty and registration charges will continue to be applicable in case of both already constructed and under construction properties across India, while GST will be applicable only to under construction properties being sold.
Input Tax Credit for Real Estate Developers
Subsequent to introduction of the GST regime, input tax credit (ITC) can be claimed by real estate developers in terms of various inputs (cement, bricks, sand, labor, etc.) that are required as part of the building process. The key reason for introduction of ITC has been to prevent a “tax on tax” situation wherein, GST charged at each stage will be offset by ITC received on the GST charged in the preceding stage. At the time of introduction of ITC and GST in real estate, it was expected that developers would pass on the ITC benefits received by them to new homeowners. Some of the key problem areas with respect to ITC claims made by real estate developers include:
- Each input cost in terms of materials, labor, etc. has to be separately and thoroughly analysed to provide estimates of total GST payable.
- The cost of commodities is liable to change (sometimes significantly) over the lifecycle of the construction project making it challenging to provide accurate estimates of upfront costs and file for input tax credit on that basis.
- No mechanism is currently in place to offset the increase in other (non-GST) costs while the benefit of input tax credit is only applicable to GST paid.
Conditions for Claiming Input Tax Credit in Real Estate
Subsequent to introduction of GST in real estate, as per GST Act rules input tax credit (ITC) equal to total tax paid may be claimed by real estate developers in the following cases:
- The claimant can produce a debit note/purchase invoice/tax invoice as proof of GST being deducted.
- The goods/services (or both) have already been received by the claimant.
- The ITC claimant has not used the goods/services (or both) received for personal use.
- All taxes that were due has been paid to the government by the supplier.
- A valid GST return has been filed by the ITC claimant.
Impact of GST on Real Estate
At the time of GST implementation on real estate in July 2017, the industry as a whole was witnessing a slump attributed mainly to demonetization and RERA (Real Estate Regulation and Development Act, 2016) implementation. However, early in 2018, demand and supply for real estate witnessed an increase primarily driven by strong growth in affordable and mid-income housing. However, housing prices were either stagnant or witnessed a marginal rise across the country while in larger cities such as Delhi NCR prices were reported to have witnessed a 2% decline as of Q3 2018 (as per report by Liases Foras). But such price declines were mainly a result of over supply rather than the impact GST, as in most cases, input tax credit (ITC) benefits were not passed on to the home buyer by developers. Even in cases where ITC benefits were passed on to homebuyers, the change in prices was negligible.
The resale market was also severely hit with prices reportedly plummeting by 15% to 20% in Delhi NCR as per the Liases Foras report. This, even though, GST is not applicable to resale properties. Thus one might conclude that the impact of GST cannot be accurately be gauged as of yet and only with more time can a clearer picture emerge regarding the impact of GST on real estate.
On a brighter note, as per leading industry players and analysts, 2019 promises to be a better year for the Indian real estate industry as demand for both commercial and residential real estate is expected to pick up. As per estimates provided by Anarock Property Consultants, home sales are expected to increase by 16% to 245,500 units in 2019 over 2018 levels. During the same period, the demand for commercial office space is also set to rise by 19% to 39 million sq. ft. while fresh supply during the same period is not expected to exceed 32 million sq. ft. in India’s top 7 cities.