Understanding the Goods and Services Tax Effects on India's Real Estate Market

The real estate sector in India is of significant interest to a wide range of individuals, from investors and agents to developers and potential property owners. A thorough comprehension of Goods and Services Tax (GST) implications is crucial, as these can fundamentally alter property pricing dynamics. This article will explore various aspects of GST's influence on real estate transactions.

Tax System for Real Estate Before GST Implementation

Prior to the introduction of GST, real estate transactions were subject to multiple taxes, which varied based on the nature of the property and its construction status.

*Value Added Tax (VAT), registration charges, and stamp duty rates differed by state. VAT was not applied to completed or ready-to-move properties under the old indirect tax framework. Furthermore, Cenvat credit on inputs used for constructing buildings or civil structures was restricted.

Real Estate Transaction Taxation Under GST

Under the Goods and Services Tax regime, the taxation of real estate transactions has been restructured.

The applicable GST rate considers a 1/3rd reduction for land cost.

Effects on Property Purchasers

In the prior tax structure, buyers of under-construction properties faced VAT, Service Tax, registration charges, and stamp duty. Since VAT, registration charges, and stamp duty were state-specific, property prices varied across India. Additionally, developers incurred various duties like Central Sales Tax (CST) and customs duty, for which no credit was available, increasing the final property cost.

With GST, a unified tax rate of 12% applies to properties under construction. Conversely, completed or ready-to-sell properties remain exempt from GST, similar to the previous regime. This change generally benefits buyers through potential price reductions. The net tax rate for buyers booking under-construction properties has progressively decreased since GST's inception, positively impacting property purchasers.

Influence on Developers, Builders, and Contractors

Previously, developers bore excise duty, VAT, customs duty, and entry taxes on raw materials, alongside Service Tax on various input services such as approval fees, architect charges, labor costs, and legal fees. Input Tax Credit (ITC) was not available for duties like CST or customs duty, impacting pricing and ultimately shifting the burden to buyers.

Under the GST framework, developers' construction expenses are substantially reduced due to the consolidation of multiple taxes and the availability of input tax credits for certain materials. Lower logistics costs also provide an additional advantage. Consequently, developers may experience improved profit margins.

However, a drawback is the complex calculations required for ITC to ensure benefits are passed on to buyers, often only feasible during the final stages of a project. Historically, a significant portion of expenditure went unrecorded. GST, with its credit availability on inputs and cloud-based invoicing, has helped to reduce the under-reporting of expenses.

Impact on Other Industry Participants

The effect on related 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 broader real estate industry. Below are some GST rates for construction-related products:

Reverse Charge Mechanism (RCM) and Its Implications

The Reverse Charge Mechanism (RCM) concept has been expanded under GST from its predecessor, the Service Tax law, which could negatively affect developers.

If a registered person under GST acquires goods or services from an unregistered supplier, they are liable to pay GST on these supplies through the reverse charge mechanism.

Developers must also pay GST on services received from goods transporters, legal professionals, and certain government or local authorities (with exceptions).

Crucially, under GST, developers cannot offset tax payable under RCM against their available input credit from GST paid on inputs. Instead, RCM liabilities must be settled in cash or via bank transfer.

These factors have led to increased costs and adverse effects, particularly for smaller developers. For more details on RCM, refer to All about Reverse Charge Mechanism (RCM) under GST.

Input Tax Credit Treatment, Eligibility, and Ineligibility

Under GST, credit for taxes levied on all inputs and input services used or intended for business operations is generally available, subject to specific exclusions.

Conditions for Claiming Input Tax Credit

Possession of a valid tax invoice.

Receipt of the specified goods or services.

Filing of GSTR-3B by the recipient.

The supplier has remitted the charged tax to the government.

Payment for the invoice or debit note by the recipient within 180 days from its issuance date.

For goods received in installments, ITC can only be claimed upon receipt of the final lot.

ITC is applicable solely to taxable supplies of goods or services, and purchases must be for business furtherance.

No ITC is allowed if depreciation has been claimed on the tax component of a capital good.

ITC on documents like invoices or debit notes must be claimed within the earlier of these two dates:

November 30th of the financial year following the document's issuance.

The date of filing the annual returns.

CGST Rule 36(4) mandates that ITC claims in GSTR-3B should align with details in GSTR-2B.

The entity must not be supplying under the composition scheme.

Input Tax Credit Restrictions

Input tax credit is not available for supplies received for constructing an immovable property for one's own use, excluding plant and machinery.

NOTE: "Construction" encompasses reconstruction, renovation, additions, alterations, or repairs to the extent they are capitalized to the immovable property.

Example 1: If the expense for interior modifications to a service apartment is added to the apartment's cost (as an immovable property), ITC is not available for taxes paid on these interior changes.

Example 2: If Mantri Developers builds an office for its branch, ITC is not available for this construction.

Example 3: If L&T constructs a hydraulic machine for its branch office construction, ITC is available for the machine.

Stamp Duty Applicability

Stamp duty and registration charges remain applicable to both completed and under-construction properties, consistent with the pre-GST era. These charges are excluded when calculating GST.