GST Rate on Real Estate – Under Construction & Completed Property

There is a lot of confusion on GST rate on real estate, be it GST rate on under construction property or completed property. Let us see what were the taxes before GST and what are the current GST rate on real estate.

Goods and Services Tax (GST) – An Introduction

Unless you have been living under a rock for the last couple of years, you would know that India recently launched its extremely forward-looking and simplified tax system called the Goods and Services Tax. The Goods and Services Tax or GST as it is normally called overwrote all indirect taxes that affected the general public such as the VAT, Excise Duty, and Service Tax in one swift motion.

While the individual State Governments levied Value Added Tax on the exchange of goods, the Central Government levied Excise Duty on the manufacture of goods and provision of services. The Service Tax was also a Central levy on services provided within the country.

The issues with these were manifold, right from the fact that the States individually had the power to decide the rate of VAT on their products, which meant the VAT rate was never uniform throughout the country, too many of these taxes, if not all of them, were not applicable in the state of Jammu and Kashmir. All the manufactured and sold goods were also obviously double-taxed.

For example, let us say Mr. A manufactures an umbrella. The cost of manufacturing an umbrella is Rs. 20 and he intends to sell it for Rs. 25. The Central government would first levy 10% i.e. Rs. 2.5, let’s assume, as Excise Duty on this umbrella, thus increasing the actual cost of the umbrella to Rs. 27.5. The respective State government, not wanting to be left out, would levy a VAT on Rs. 27.5. Let us say this is at an assumed rate of 10% again, increasing the rate to Rs. 30.25. Therefore, due to the different layers of tax in the indirect tax system, you will notice from the above that a simple product costing only Rs. 25 would be inflated manifold.

How did the Goods and Services Tax (GST) change the game?

Simple. It came up with flat rate of tax, called the GST and got rid of all the taxes mentioned above. This was levied on all the products, whether manufactured, sold or even if they were just a service provider. This made it extremely simple for the general public to adhere to the regulatory measures in place, without hiring tax consultants or chartered accountants.

It is possible that in some instances, the GST levy could be much more than all other taxes put together. The truth is, compliance has definitely become simpler. The GST had seen multiple revisions in the tax rates post the date of introduction, July 2017, to ease the burden of tax faced by the consumer.

Now Lets see how GST on real estate has impacted our lives:

GST Rate on Real Estate Transactions

What was it before GST – Initially, the government levied Works Contract Tax on the construction of buildings. This was a middle ground between the VAT and the Service Tax. The complication with the construction or sale of a building is that it is extremely difficult to define it as a manufacture, sale or service. The argument could be that it is manufacture, and thus there was an Excise Duty levy on it. The counter-argument is that all manufactures are not excise duty leviable. Only things manufactured and moveable are Excise Duty leviable as per the Excise Duty Law. So, that is one out of the window. So is VAT leviable? Are goods being sold? Definitely.

The goods being sold here is the building. This has been marketed and sold to the end consumer. Therefore, VAT was leviable. What about Service Tax? Was there a service being provided? Yes! The building or flat was subject to the effort of labour. This definitely qualifies it as a service. So does this mean both VAT and Service Tax was levied? This is where the government decided to be a little kind and introduced the Works Contract Tax. The Works Contract Tax broke out a portion of the total sale value of the building and assumed this was the materials portion, and thus there is a VAT levy on this portion alone. The remaining portion was to be Service Tax levied. Confusing? Definitely!

GST on Completed Property (Ready to Move in Flats)

What did GST do – The GST rate on real estate simplified the whole approach. No more VAT. Neither Service Tax , nor Works Contract Tax. No more assuming a material portion and what not.

Completely constructed property would not be levied a GST. As the property was already constructed, the idea was that the whole determination of material and service was so difficult − so don’t pay a GST!

Does it mean I can save money by buying a completely constructed property?

Yes, sir! You can save money if you buy a ready to move in flat.

This is the impact of GST rate on real estate.

GST Rate and Impact on Under Construction Property

What about GST rate and impact on under construction property? This is where the government makes it a lot easier for laymen like you and me to understand the law. If it is a property under construction, you will only pay 18% on two-thirds the value of the property. Wait, why two-thirds? It is assumed that the remaining one-third is the value of the land, and there is no GST on the transfer of land. Thus, effectively, you are only paying 12% on the value of the property.

The question all of us should be asking is when can you call a property completely constructed? In order to avoid GST, many builders could just build a roof over their head and call it a constructed property. They might decide to further continue constructing the property once the sale is made. This is another area where the government has been extremely clever. A property is deemed to be constructed only if the Completion Certificate has been obtained. There are lots of rules and regulations in order to get the Completion Certificate, thus it is not easy to circumvent the provisions of law in this case.

Will you get the two-thirds benefit even if you sell an under construction building without selling the land attached to it?

No. The two-thirds benefit is only if you sell the under construction building with the land attached to it. Only the transfer of attached land gets the benefit, as emphasised previously. One more point to note with respect to the above change is the fact that, under the GST, complete input tax credit is available for the 12% paid above.

1. Property with Completion Certificate issued and Sale amount is completely paid before 1^st July, 2017

In this scenario, since the sale amount is completely paid before the introduction of GST, the benefits do not apply. The buyer will have to pay the Works Contract Tax when buying the property.

2. Property with Completion Certificate issued and Sale amount is partly paid before and after 1^st July, 2017

Let us look at an example to understand this situation better. You buy a property in 2012. It is constructed and completed only in 2018. The value of the said property is Rs. 30 Lakhs, out of which the value invoiced before 1^st July, 2017 is Rs. 20 Lakhs. There is also Rs. 10 Lakhs of invoicing after 1^st July, 2017. That is, there is invoicing before and after the introduction of GST. How will you handle this purchase as far as taxes are concerned?

Before GST, a Service Tax and VAT was being levied on all properties under construction. Therefore, there will be a VAT and Service Tax on the Rs. 20 Lakhs invoiced before the advent of GST. After the introduction of GST, the amount payable will be a flat 12% multiplied by the amount invoiced, i.e. Rs. 10 Lakhs in this case.

3. Property with Completion Certificate issued and Sale value is completely paid after 1^st July, 2017

In this scenario, since the purchased property has been completed post the introduction of GST, no tax applies.

4. Impact of GST Rate on Resale properties

Since resale properties are immoveable and do not fall under the definition of Goods under GST, there is no impact. That is, there would be no GST on the resale of flats after the introduction of GST.

5. CLSS Scheme- 8% GST Rate on Real Estate

In order to make housing affordable, the government has introduced various housing schemes for the general public and also by giving housing loans at subsidised rates of interest. The government initially reduced the GST on houses bought with these loans to 12%. The CLSS Scheme effectively became 8% after the one-third deduction given to land.

Latest News – GST on under construction flats

In a recent amendment, the government has decided to completely abolish GST on houses purchased through these schemes.

GST Notification on Real Estate

Here is the GST notification on real estate. The notification talks about GST rate on real estate.

GST Calculator Real Estate

I hope you will not require a GST calculator on real estate after checking below examples.

How to calculate  GST on Under Construction property – an example!

Here are 2 examples to calculate GST on under construction property:

Situation – I buy a property for Rs. 60 Lakhs after the introduction of GST. The builder has already obtained the Completion Certificate. The value of the building is Rs. 50 Lakhs and the value of land is Rs. 10 Lakhs. What is the amount of GST payable?

Answer – If you take your calculator out to do a quick arithmetic check, you are wrong. There is no GST on the above property since it is a Completed Property as discussed previously too. Only Under Construction property is chargeable to tax.

Situation – I buy a property for Rs. 60 Lakhs after the introduction of GST. The builder has not obtained the Completion Certificate. The value of the building is Rs. 50 Lakhs and the value of land is Rs. 10 Lakhs. What is the amount of GST payable?

Answer­ – Here the amount of GST is determinable only on the cost of the building being transferred, and never on the cost of land. Thus, the value calculated is two-thirds of Rs. 60 Lakhs multiplied by 18% or 12% on Rs. 60 Lakhs. The crucial point here is that this was a single transaction for Rs. 60 Lakhs. Even though the value of land is measurable, the amount of GST is on the entire amount.

Conclusion – GST on Real Estate

It is clear from the above how the introduction of GST rate on real estate has simplified lives. The simplification of approach in calculating the GST  rate on real estate has been a huge step forward. The GST has now reduced what was once an imperious task to just a walk in the park.