GST in the Real Estate Sector

When it comes to meeting tax obligations, homebuyers along with property taxes, also have to pay the applicable GST on their property purchase. Over the last few years, several changes have been made to the GST regime directed towards the real estate sector. Potential investors and homebuyers must scrutinise the implications of GST on real estate to make an informed decision when it comes to investing in this sector.

Fundamentally, GST is paid by investors and home buyers while investing in under-construction properties. Before the implementation of GST, several taxes including VAT, stamp duty, service tax, registration charges, etc. had to be paid by home buyers.

With the introduction of GST on real estate, one has to pay taxes only on under-construction properties. Notably, one does not need to pay GST on ready for sale or completed properties that have a legitimate Completion Certificate.

What GST rate should one pay?

For the flats in new projects i.e. the ones launched after 1 April, the new lower tax rates will apply. These are categorical rates applicable on the price and the builder cannot claim rebates for the taxes paid on raw materials and services used in construction. However, in the case of properties that were still under construction as on 31 March, builders and home buyers can chose between for the earlier rates–12% for premium ones and 8% for affordable homes with the benefit of input tax credits–and the new rates  5% for premium ones and 1% for affordable homes without input tax credits. Benefit of input tax credits would mean that taxes paid previously on materials, equipment and services used in construction will not be subject to taxation again on the final product. The reason being that the builder can claim rebate on them.

What is an affordable house?

Houses priced below ₹45 lakh are eligible for the concessional 1% tax rate on affordable houses. With that being said, there is a certain carpet area requirements which needs to be met in metro and non-metro areas. Only those with up to carpet area of 60 square metre in metro cities and 90 square metre in non-metro cities, towns and villages falling under the Rs. 45 lakh cap will be eligible for the 1% rate. Parts of the national capital region covering Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad are metro areas.

How to ascertain whether a project was under construction as on 31 March?

If a construction project has commenced before 31 March but has not got completion certificate or the fist occupation of the house has not taken place before 31 March, it would be treated as an under-construction property as on this cut off date. These projects have the option to chose between old and new tax rates is available.

Knowing the tax rates on shops and offices within a residential real estate project?

For all the shops and offices within a residential real estate project, the effective new GST rate is 5% without input tax credit. This rate is applicable on both properties in projects launched after 1 April as well as to ongoing projects as on the cut-off date where the builder or buyer have opted for the new rates. Buyers can also choose the earlier rate of 12% with input tax credit in the case of projects that were under construction as on the cut-off date. What needs to be taken a note of is that these rates are are applicable on shops and offices within a residential real estate project where the carpet area which does not exceed 15% of the total carpet area of all the apartments.

Knowing tax rate applicable if part of the payment for an under-construction flat is to be paid after the cut-off date of 31 March

So long as the builder has decided to go with the earlier higher tax rate and pass on the benefit of tax rebate to the consumer, the new lower tax rate will be applicable on the remaining payment to be made after the cut-off date.

Now, there might be a query as to whether the time is right for investment in real estate. As per reports, the first quarter of 2020 did witness a jump in the demand for ready to move in and small size housing units. The reason for such demand is the fact that such projects offer great deals enhanced scope of negotiation. This makes more individuals get inclined towards this sector.

Nevertheless, it is advised to the prospective buyers that they consider a few vital things before investing in this sector. For instance, individuals must appreciate the fact that they need to invest in real estate with a horizon of making it a long-term asset. Also, they must weigh all their options with regard to  their capability to meet the financial obligations, including GST on property that accompanies such purchases.

This content is meant for information only and should not be considered as an advice or legal  opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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