GST Implication on Builder or Real Estate Developer

GST law has given a new and improved form to the entire Indirect taxation on real estate sector by way of reduced taxes and availability of credit on input and input services. The law has also laid down detailed provisions to prescribe mechanism for valuation of taxable value. This article discusses the implication and impact of GST on the builder/real estate industry in India.

With rapid urbanisation in the country, real estate industry and construction industry in India is moving towards rapid growth serving as a vital sector in the Indian economy. It is expected that the urban area of the country will be contributing around 70% of India's GDP in 2020. Further, the real estate sector is expected to contribute 13% to India's GDP by 2025.

The Government of India has been vigilant in framing tax laws particularly Indirect tax law on this sector with amendments from time to time keeping in mind the number of issues being faced by builders/ developers/ promoters and aiming to support real estate sector.

Prior to the introduction of GST, Value added Tax (VAT) and Service tax was applicable with builders and developers bearing excise duty, VAT, service tax, custom duty, entry taxes, etc. on input and input services procured. This impacted the pricing in real estate sector tremendously since the burden of such taxes was passed on to the buyer.

GST law has given a new and improved form to the entire Indirect taxation on real estate sector by way of reduced taxes and availability of credit on input and input services.

GST law on builder/ developer

1. Schedule III of Central Goods and Service Tax Act, 2017 provides that sale of land and building is neither considered as supply of goods or supply of service if entire consideration has been received after issuance of completion certificate by the competent authority (wherever applicable) or after its first occupation. Thus, in view of the said schedule, GST is not applicable on below transactions
   • Sale of ready to move in property
   • Resale of property
   • Sale/ Purchase of Land
2. GST Implication on Builder or Real Estate Developer
   • Sale on construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly other than transactions mentioned in point 1 above.
   • Composite supply of work contract such as contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
   • Thus in view of the above, GST is applicable on below transactions
     • Sale of under construction property
     • Additions, alterations, replacements or remodelling of any existing civil structure
     • Sale of property if consideration is received before issuance of completion certificate by the competent authority (wherever applicable) or before its first occupation
     • Composite supply of work contract
3. There are various transactions that are exempt vide mega exemption such as
   • pure labour contract service for construction under Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana.
   • pure labour contracts of construction of original works pertaining to a single residential unit not as a part of a residential complex.

What is the rate of GST

 

Nature of Transaction	GST Rate
On under construction properties (for homes purchased under credit-linked subsidy scheme)	8% with ITC
On Under Construction Properties (Other than above)	12% with ITC
Composite Supply of work contract	18% with ITC
Composite supply of works Contract to Government Authorities, for use by general public, Affordable housing	12% with ITC

 

ITC:- Input Tax Credit of goods/ services used for providing output service

Despite introduction of GST with reduced taxes and availability of credit on input and input services for real estate sector compared to provisions under erstwhile regime, builders/ developers were struggling with high unsold inventory of residential property. In order to boost the sentiment of residential real estate sector, GST rates were reduced on residential property w.e.f. April 01, 2019. However, in case of construction of commercial property, GST rate remained same as 12% and builder and developer is eligible to claim ITC.

 

Type of Residential Property	GST Rate (w.e.f. April, 01, 2019)
Affordable housing segment	1% without ITC
Non-affordable housing segment	5% without ITC

 

ITC:- Input Tax Credit of goods/ services used for providing output service

The above new rates were applicable to construction of residential apartments in a project which commences on or after 01-04-2019. In case of an on-going project, the promoter choose either to opt for new rates without ITC or opt to pay GST at the old rates and avail ITC on input/ input services subject to fulfillment of conditions. However, in the latter case, the promoter is expected to pass the benefit of the credit availed by him to the buyer.

Affordable residential apartment has been defined by law as the apartment having carpet area upto 60 square meter in metropolitan cities and 90 square meter in cities other than metropolitan cities and the gross amount charged by the builder is not more than INR 45 lakhs.

Further, reduced rate is applicable to residential real estate project with carpet area of the commercial apartments not more than 15% of the total carpet area of all the apartments in the project. Construction of commercial apartments in a Residential Real Estate Project will be subject to 5% without ITC.

The law has also laid down detailed provisions to prescribe mechanism for valuation of taxable value. The builder and developer should be compliant with the said provisions to discharge correct GST liability.

At the time of introduction of new GST rates on residential properties, number of issues were raised by builders/ developers/ promoters and consequently tax research unit issued a compilation of Frequently Asked Questions (FAQ) vide F. No. 354/32/2019-TRU dated May 07, 2019 to address those issues.

 

Registration and Stamp Duty

• Registration and stamp duty on real estate continued to be applicable on both completed properties and under-construction properties as was the case with the pre-GST regime.
• However, stamp duty and registration charges are excluded while determining taxable value for calculating GST.
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• Description: Whether the builders are liable to deduct GST? What are the tax implications on a Real Estate Developer in India?
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