The Impact of GST on Real Estate Sector Transactions in India

This article aims to inform various real estate stakeholders, including investors, agents, developers, and potential property owners, about the significant GST implications that influence property pricing in India.

Key areas covered include:

• Historical tax treatment of real estate before GST.
• Current GST rules for property transactions.
• The role and effects of the Reverse Charge Mechanism (RCM).
• Guidelines for Input Tax Credit (ITC) eligibility and restrictions.
• Continued relevance of stamp duty.
• Effects on property buyers.
• Consequences for developers, builders, and contractors.
• Repercussions for other parties involved in the sector.

Recent Updates The 56th GST Council meeting, effective from September 22, 2025, introduced several changes:

• GST on cement decreased from 28% to 18%.
• Offshore works contracts for oil and gas exploration/production now have an 18% GST rate with ITC, up from 12%.
• Works contracts for government projects involving over 75% earthwork saw an increase in GST from 12% with ITC to 18% with ITC.
• Sub-contractor works contracts for government earthwork projects, when supplied to main contractors, also changed from 12% with ITC to 18% with ITC.
• GST for sand lime bricks and stone inlay work was reduced from 12% to 5%.

Real Estate Transaction Taxability Before GST

Under the previous tax system, various duties were imposed on real estate transactions. For instance, VAT and Service Tax were applied to under-construction properties, while stamp duty and registration charges were also levied.

VAT, registration charges, and stamp duty rates varied by state. VAT was not applicable to completed or ready-to-sale properties. Furthermore, Cenvat credit for inputs used in building or civil structure construction was restricted.

• VAT, registration charges, and stamp duty charges varied 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.

GST Framework for Real Estate Transactions

The table below details the GST applicability and rates for various real estate transactions. For calculation purposes, the applicable GST rate is applied after deducting one-third of the amount towards the land cost.

Effects on Property Buyers

Prior to GST, buyers of under-construction properties faced multiple taxes, including VAT, Service Tax, registration charges, and stamp duty. These state-specific levies caused property prices to vary significantly across different regions. Developers also incurred various duties such as Central Sales Tax (CST), custom duty, and OCTROI, for which no input tax credit was available, leading to higher prices for buyers.

With GST, a unified tax rate of 12% applies to under-construction properties. In contrast, completed or ready-to-sell properties remain exempt from GST, a continuity from the previous regime. This simplification has generally benefited buyers through price reductions. The net tax rate for those purchasing under-construction properties has progressively decreased since GST was first introduced, indicating a positive overall impact on buyers.

Consequences for Developers, Builders, and Contractors

Under the old tax laws, developers bore the burden of Excise Duty, VAT, Customs duty, and Entry taxes on raw materials, along with Service Tax on various input services like approval fees, architect fees, labor charges, and legal expenses. Input Tax Credit (ITC) was unavailable for several duties, including CST, Customs duty, and Entry Tax, which increased construction costs and ultimately passed the financial load to buyers.

The introduction of GST has significantly lowered developers' construction costs by subsuming multiple taxes and allowing for Input Tax Credit on certain materials. Additionally, reduced logistics expenses offer an extra advantage, potentially improving profit margins for developers.

However, a drawback is that developers must perform complex calculations to determine ITC and pass these benefits on to buyers, often only in the final stages of a project. Before GST, a considerable portion of expenditure went unrecorded. Under the GST framework, the availability of credit on inputs and the use of cloud-based invoicing have substantially reduced the incidence of under-recording expenses.

Influence on Other Sector Participants

The impact on allied services, such as labor, material suppliers, and service providers, depends on changes in tax rates for these goods and services. This, in turn, influences the real estate industry as a whole. Below are the GST rates for some common construction materials:

Reverse Charge Mechanism (RCM) Application and Implications

The Reverse Charge Mechanism (RCM), a concept carried over from the former Service Tax law, has a significantly broader scope under GST, which can negatively affect developers.

Key impacts include:

• If goods or services are sourced from an unregistered person under GST, a registered person must pay GST on these supplies through reverse charge.
• Developers are required to pay GST when receiving services from goods transporters, legal services from individuals or firms, or services from government/local authorities (with some exceptions).
• Under GST, developers cannot offset tax payable under RCM against available input credit from GST paid on inputs. Instead, the RCM liability must be settled in cash or via bank transfer.

These factors have led to increased costs and adverse effects, particularly for smaller developers.

Input Tax Credit (ITC) Treatment: Eligibility and Restrictions

Under GST, credit for taxes paid on all inputs and input services used or intended for use in furthering a business is generally available, subject to certain exceptions.

Requirements for Claiming ITC

A registered individual or entity can claim Input Tax Credit (ITC) only by fulfilling specific conditions:

• Possession of the tax invoice is mandatory.
• The goods or services must have been received.
• The recipient must have filed GSTR-3B.
• The tax charged by the supplier must have been paid to the government.
• Payment for the invoice or debit note must be made by the recipient within 180 days from the invoice date.
• For goods received in installments, ITC can only be claimed upon receipt of the final lot.
• ITC is permissible only for taxable supplies of goods or services, and these purchases must be for business advancement.
• No ITC is allowed if depreciation has been claimed on the tax component of a capital good.
• ITC on supporting documents, such as an invoice or debit note, must be claimed within the specified timeframe, which is the earlier of either November 30 of the following financial year or the date of filing the annual returns.
• CGST Rule 36(4) mandates that ITC claims in GSTR-3B must align with details reflected in GSTR-2B.
• Supplies made under the composition scheme are ineligible for ITC.

ITC Limitations

Input Tax Credit is not available for supplies received for the construction of immovable property on one's own account, excluding plant and machinery.

NOTE: The term “construction” encompasses reconstruction, renovation, additions, alterations, or repairs to the extent that these are capitalized to the said immovable property.

For example:

• If the expense for interior changes to a service apartment is added to its immovable property cost, ITC is not available for taxes paid on these changes.
• When Mantri Developers constructs a building for its branch office, ITC cannot be claimed.
• However, if L&T builds a hydraulic machine for use in the construction of its branch office, ITC is available.

Stamp Duty Relevance

For the specific purpose of calculating GST, stamp duty and registration charges are excluded. Stamp duty remains applicable to both completed and under-construction properties, consistent with the pre-GST regulatory framework.

For additional information, consider reading articles on related topics:

• 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