GST Positive Impact Towards Real Estate Sector

If you’re on this page, you could be an existing or a potential real estate investor, an agent, an advisor, a developer, an architect, or even seeking a residential or commercial property to own. Real estate matters to most people in India. Understanding the GST implications is equally important because it can change the dynamics of your property pricing. 

Also, in 2024, the housing sales value surged by 16%, reaching Rs.5.68 lakh crore (as reported by Fortune India). The substantial growth indicates a robust performance within the sector, which, in turn, suggests a notable contribution to GST revenues. Did GST do good more than bad for India’s real estate? Have the GST reporting and input tax credit claims been simplified for enterprises operating in the real estate sector? This article decodes the impact of GST taxation on real estate in India. We have covered the following-

The pre-GST taxability of real estate transactions

Taxability of real estate transactions under GST

Applicability of the Reverse Charge Mechanism (RCM) & its impact

Treatment of input tax credit, eligibility and ineligibility

Applicability of stamp duty

Impact on buyers

GST implications on developers/builders/contractors

Impact on other stakeholders

FAQs on GST on real estate

The pre-GST taxability of Real Estate Transactions

* VAT, registration charges, and stamp duty charges vary by state. VAT was not applicable to completed or ready-to-sale properties under the erstwhile indirect tax regime. Cenvat credit on inputs used for the construction of a building or a civil structure or any part thereof was also restricted.

Taxability of Real Estate Transactions under GST

The applicable rate will be taken after cutting the 1/3rd amount towards the land cost.

Impact on Buyers

Under the earlier tax regime, buyers had to pay VAT, Service Tax, registration charges, and stamp duty on purchasing properties under construction. Since VAT, registration charges, and stamp duty were state levies, property prices varied with every state. Moreover, developers had to pay various duties like Central Sales Tax (CST), custom duty, OCTROI, etc., for which credit was unavailable.

Under GST, a single tax rate of 12% is applicable on properties under construction. At the same time, GST is not applicable on completed or ready-to-sell properties, as was the case under previous law. Hence, buyers will benefit from price reductions under GST. So far, GST has positively impacted buyers since the completed properties do not attract a GST charge. As far as the buyers who book under-construction properties, the net tax rate has been reduced over a period of time since GST was introduced.

Impact on Developers / Builders / Contractors

Under the previous tax regime, developers had to bear the Excise Duty, VAT, Customs duty, Entry taxes, etc. on raw materials/inputs and Service Tax on various input services like approval charges, architect professional fees, labour charges, legal charges, etc. ITC was unavailable for duties like CST, Customs duty, Entry Tax, etc. This would impact the pricing, and subsequently, the burden was transferred to the buyer.

Under GST, developers’ construction costs are significantly reduced as multiple taxes are subsumed and due to the availability of input tax credits on some materials. Also, a reduction in logistics costs will be an added benefit. Hence, developers may see an improvement in margins.

On the downside, developers have to do multiple calculations to arrive at ITC in order to pass it on to the buyers. Hence, in most cases, they can pass on the ITC only during the final stages. 

Under the old laws, a large portion of expenditure remained unrecorded in the books. Under GST, credit availability on inputs and cloud storage of invoicing has reduced the underrecording of expenditure.

Impact on other Stakeholders

The impact on the allied services like labour, material suppliers, service suppliers, etc. depends on the increase or decrease in the tax levied on these goods and services. This will have a consequential impact on real estate industry as a whole. GST Rates for some of the goods relating to the construction industry are given below:

Applicability of the Reverse Charge Mechanism (RCM) & its impact

The concept of RCM has been borrowed from the erstwhile Service tax law. The scope of RCM has significantly expanded in GST which may adversely impact the developers-

• If goods or services are procured or received from a person who is not registered under GST, a registered person under GST has to pay GST on all such supplies on a reverse charge basis.
• In cases where services are received from goods transporters, legal services received from an individual or firm, services received from the government or local authorities, like municipalities, etc. (subject to exceptions), developer has to pay the GST on the same.
• Also, under GST, the developer cannot adjust the tax payable under RCM against the input credit available from the GST paid on the inputs. Instead, it has to be paid by cash/through bank.

This has increased the costs and have a negative impact on the developers, especially the small developers.

Treatment of Input Tax Credit, Eligibility and Ineligibility

Under GST, credit of taxes charged on all input and /or input services which are used or intended to be used in the course of furtherance of business would be available subject to exceptions.

Conditions for Claiming ITC

A registered person will be entitled to claim input tax credit only upon fulfilment of the following conditions:

• The dealer should have the tax invoice
• The said goods/services have been received
• GSTR-3B have been filed by the recipient
• The tax charged has been paid to the government by the supplier
• The recipient must have paid towards the invoice or debit note within 180 days from the invoice date
• When goods are received in instalments, ITC can be claimed only when the last lot is received
• ITC can be claimed only for taxable supplies of goods or services, and the purchases made must be used in the furtherance of such business
• No ITC will be allowed if depreciation has been claimed on the tax component of a capital good-
• ITC on the document, such as an invoice or debit note, must be claimed within the time limit defined which is earlier of the below two dates-
  • 30th November of the year following the financial year in which the document is issued
  • Date of filing the annual returns
• CGST Rule 36(4) specifies that ITC claims made in GSTR-3B must match the details appearing in GSTR-2B
• Must not be making supplies under the composition scheme

Restriction on ITC

Input tax credit is not available on supplies received for construction of an immovable property on his own account other than plant and machinery

NOTE: The word “construction” includes reconstruction, renovation, additions or alterations or repairs to the extent of capitalisation to the said immovable property.

Example 1: If the cost incurred for changing the interiors of a service apartment is added to the cost of immovable property (in this case, the service apartment), then it forms part of the cost of the Service apartment (immovable property), and accordingly, the input tax credit is not available for the taxes paid on changing the interiors of the service apartment.

Example 2: Mantri Developers constructs a building for its branch office. In this case, ITC is not available.

Example 3: L&T constructs a hydraulic machine used for the construction of its branch office. In this case, ITC is available.

Applicability of Stamp Duty

For the limited purpose of calculating the GST, stamp duty and registration charges are excluded. Stamp duty continues to be applicable on both completed and under-construction properties, as was the case with the pre-GST regime.

For the limited purpose of calculating the GST, stamp duty and registration charges are excluded. Stamp duty continues to be applicable on both completed and under-construction properties, as was the case with the pre-GST regime.

For more information, read our other articles-

More FAQs on the Real Estate Sector under GST

GST on flat purchase

GST on house rent & commercial property

GST on home loan

GST on residential property turned into hostel