Understanding GST on Property Acquisitions: Rates, Calculation Methods, and Key Guidelines

The first half of 2024 saw significant residential unit sales across India, yet property ownership often involves navigating complex tax structures. For both developers and prospective homeowners, a clear grasp of Goods and Services Tax (GST) on flat purchases in India is essential to avoid potential penalties. This detailed guide aims to simplify the GST rates and guidelines for property transactions.

Understanding GST on Property Acquisitions in India

Following the 2017 tax reforms, GST is levied on under-construction properties, whether awaiting a completion certificate or ready for occupancy. This system offers advantages for both buyers and developers. Prior to GST, developers faced multiple taxes, including VATs, central excise, and entry tax, without the ability to claim refunds for development costs, which often translated into higher prices for buyers. GST has streamlined this process, providing transparency through specific applicable rates for all parties involved.

Pre-GST Tax Structure on Property Purchases

Before the implementation of GST, individuals purchasing a flat were subject to various separate taxes, each with distinct rules and rates. The table below illustrates the tax structure before and after GST.

GST Rates on Residential Properties and Flat Purchases

For GST purposes, residential properties are categorized into two main types:

1. Affordable housing: Defined as a house with a carpet area of up to 60 square meters in metropolitan areas or up to 90 square meters in non-metropolitan areas, valued at a minimum of ₹45 lakhs.
2. Non-affordable housing: Residential properties that do not meet the criteria for affordable housing.

GST is applicable to under-construction properties but not to ready-to-move-in flats that have received a completion certificate.

Here is a comparison of GST rates under the old and new regimes for different residential property types:

Input Tax Credit (ITC) on Property Acquisitions

Generally, taxpayers cannot claim Input Tax Credit (ITC) on GST paid for the construction of immovable property intended for their own use, whether commercial or residential, as per Section 17(5)(d) of the CGST Act. However, recent judicial pronouncements have introduced certain exceptions.

The Supreme Court of India has ruled that if a property's construction is crucial for providing rental or leasing services, it might be classified as a “plant.” This classification allows developers to claim ITC on GST paid for construction materials and services. The Court stressed that such cases should be evaluated individually using a “functionality test.”

For residential properties, ITC is typically not available for flats designated for personal use. Nevertheless, if the property is intended for rental income and meets the plant exception criteria, developers may be eligible to claim ITC.

Claiming ITC for commercial properties, such as malls or offices, is generally more justifiable if they are explicitly built to generate rental income.

GST on Maintenance Charges for Flats

Maintenance fees for flats can also be subject to GST. The applicability of GST on these charges depends on two key factors:

• The annual turnover of the housing society.
• The monthly maintenance charges per society member.

It is important to note that if the maintenance charge exceeds ₹7,500 (e.g., ₹10,000), GST will be levied on the full ₹10,000, not just the amount above the threshold.

Items typically included in the ₹7,500 threshold:

| Included in ₹7,500 threshold | Description | |---|---|| | Common area tax | Shared property taxes for maintenance | | Sinking Fund | Funds allocated for major repairs/renovations | | Security & Admin Fees | Costs for security personnel and administrative work | | Water & Facility Use | Charges for common water supply, clubhouse fees |

Items typically not included in the ₹7,500 threshold:

| Not included in ₹7,500 threshold | Description | |---|---|| | Private Property Tax & Parking Fees | Costs for personal-use areas like parking | | Non-Occupancy & Share Transfer Fees | Charges for specific circumstances like rentals or ownership transfers |

How GST is Calculated for Flats

Calculating GST on a flat purchase can be understood simply through these steps:

• Determine the Base Price: Begin with the fundamental cost of the flat before any additional charges.
• Apply GST to the Base: For under-construction residential properties, a 5% GST rate typically applies. For affordable housing, the rate is 1%.
• Include Additional Charges: Any extra costs, such as parking, maintenance, or clubhouse fees, are also subject to GST and must be included in the calculation.
• Sum Up Total GST: Add all the GST amounts from both the base price and any additional costs.
• Arrive at the Final Price: Combine the base price, all extras, and the total GST to determine the complete payment required.

Impact of GST Rates on Property Buyers

• Increased Cost for Under-Construction Flats: GST adds 5% for standard and 1% for affordable housing, making these properties more expensive compared to GST-exempt ready-to-move options.
• Higher Loan and EMI Burden: The additional GST increases the total loan amount and, consequently, the Equated Monthly Installments (EMIs), affecting buyers' monthly budgets.
• Shift Towards Ready-to-Move Properties: Many buyers may opt for ready-to-move flats to avoid GST costs.
• Developer Compliance Importance: Ensuring developers adhere to GST regulations can prevent future complications for buyers.
• Enhanced Cost Transparency: GST offers clearer insight into the total costs, assisting in financial planning.
• Value of Expert Advice: Seeking professional guidance helps navigate the complexities of GST and optimize potential savings.

Benefits of GST for Residential Real Estate

While GST introduces additional costs in some areas, its fundamental goal is to simplify taxes and enhance transparency. Here's how it benefits the residential real estate sector:

• Uniform National Tax: GST streamlines the tax system by applying a single tax across India, benefiting both developers and buyers.
• Greater Pricing Clarity: It eliminates hidden fees, clearly indicating the tax component in property prices.
• Promotion of Formal Transactions: GST discourages cash transactions, fostering greater transparency and trust within the market.

GST on Government Housing Schemes

For major government initiatives like Pradhan Mantri Awas Yojana and Rajiv Awas Yojana, the GST rate has been reduced to 1%. This measure aims to alleviate the financial burden on homebuyers. By offering low GST on these affordable projects, the government reinforces its commitment to making homeownership more accessible to the public.