GST on Real Estate Sector in 2023 (Updated)

Did you know that the real estate sector is undergoing a seismic shift in 2023, which could reshape the way we buy, sell, and invest in property? Imagine this: billions of dollars are in play, and the decisions made now will echo through generations. But here's the burning question that's on everyone's mind: What's the deal with GST on real estate sector this year?

In the labyrinthine world of real estate, taxes have always been a hot topic. They can make or break a deal, significantly impacting property prices and investment returns. In 2023, the GST has again taken centre stage, promising to disrupt the real estate landscape in more ways than one. But why? What's changed? And what does it mean for buyers, sellers, and investors?

If you're a property enthusiast, investor, or just a curious soul looking for insights into the ever-evolving real estate market, you're in the right place. In this article, we delve deep into the GST on real estate sector in 2023, unravelling the complexities, answering your burning questions, and equipping you with the knowledge and resources you need to navigate this dynamic landscape.

Latest News: GST on Real Estate Sector

According to the Economic Times, the GST on Real estate will remain unchanged in 2023.

According to sources, the government has kept the GST rate on real estate the same in the Union Budget 2023-24. The current GST rates on real estate are 1% for affordable housing and 5% for non-affordable housing.

In a recent article in The Hindu, real estate developers have urged the government to reduce the GST on real estate, arguing that the high GST rates are making it difficult for homebuyers to purchase properties. Reducing GST rates on real estate could make properties more affordable for homebuyers and boost demand in the sector. This could positively impact on the overall economy, as real estate is a major contributor to the GDP.

The GST Council will likely discuss the issue of GST on real estate in its next meeting in October, as per a recent article on Business Standard. The Council may consider reducing the GST rate on real estate in order to boost demand.

The government is facing a dilemma with GST on real estate. On the one hand, it wants to boost demand in the sector and make properties more affordable for homebuyers. On the other hand, it needs to generate revenue to fund its programs and initiatives.

Reducing the GST rate on real estate would reduce the government's revenue. However, it is possible that the government could make up for this by increasing the GST rates on other goods and services.

It is too early to say whether or not the GST Council will reduce the GST rate on real estate. However, the fact that the Council is likely to discuss the issue in its next meeting is a positive sign. If the Council decides to reduce the GST on real estate, it could be a major boost for the sector and the economy.

What is GST on Real Estate?

The Goods and Services Tax (GST) is a single indirect tax system that has replaced multiple indirect taxes such as Value Added Tax (VAT), Service Tax, Central Excise Duty (CED), etc. in India. GST is applicable on the sale of goods and services, including real estate.

GST on Real Estate in 2023

Affordable Housing: GST at 1% is applicable on affordable housing projects. Affordable housing is taxed at a lower rate of 1% GST but without input tax credit (ITC) benefits. Affordable housing is defined as a residential unit with a carpet area of up to 90 square meters in metropolitan areas and up to 60 square meters in non-metropolitan areas, with a value of up to ₹45 lakhs.

Non-affordable Housing: GST at 5% is applicable on non-affordable housing projects.

Completed or Ready-to-Sell Properties: No GST is applicable on ready-to-sell properties, provided that the builder or developer has obtained the Completion Certificate (CC) for the property.

Under-Construction Properties: GST is applicable on under-construction properties at 1% (without input tax credit) for affordable housing projects and 5% for non-affordable housing projects. The GST is calculated on the total value of the property, including the construction cost and the land value.

GST on Other Real Estate Transactions

No GST applicable on the sale of land as it is not considered a good or service under GST.

GST is applicable on the sale of commercial properties at 18% and 12% for under-construction commercial properties.

GST is applicable on the rental income from commercial properties at a rate of 18%.

GST is applicable on maintenance charges paid by residents of housing societies at a rate of 18% if the annual turnover of the housing society is more than ₹20 lakhs.

Stamp duty and registration charges are levied by the state governments and are not subject to GST.

If you purchase a property from a government agency, you may not be required to pay GST at all.

GST on Construction Services

The GST rate on real estate construction services in India as of September 2023 is 18%. However, there are a few exceptions to this rule:

Affordable housing: The GST rate on affordable housing is 1%.

Works contracts for the central and state governments, local authorities, etc.: The GST rate on works contracts for the central and state governments, local authorities, etc., for historical monuments, canals, dams, pipelines, plants for water supply, educational institutions, hospitals, etc., and sub-contractors thereof is also 1%.

Composite supply of works contracts and goods where the value of goods is less than 25% of the total contract value: The GST rate on composite supply of works contracts and goods where the value of goods is less than 25% of the total contract value is 12%.

It is important to note that the GST rate on real estate construction services applies to contract’s entire value, including the cost of materials and labour. However, the contractor can claim an input tax credit (ITC) on the GST paid on the materials and services used in the construction project. This reduces the overall GST burden on the contractor.

Who Pays GST on Real Estate?

The buyer of the property pays the GST on real estate. The developer is responsible for collecting the GST from the buyer and paying it to the government.

Exemptions from GST on Real Estate

The following are exempted from GST on real estate in India:

Sale of land
Sale of ready-to-move-in residential properties
Rental of residential properties
Affordable housing projects falling under the Pradhan Mantri Awas Yojana (PMAY)

What is an Input Tax Credit?

Input Tax Credit (ITC) is a mechanism under GST that allows businesses to offset the GST paid on their purchases against the GST payable on their sales. This helps to bring down the overall tax burden on businesses and make them more competitive.

Real estate ITCs are available for goods and services used to construct immovable properties that qualify for GST, such as:

Building materials
Construction services
Professional fees (e.g., architect, engineer)
Marketing and advertising expenses
Transportation costs

To claim ITC, the following conditions must be met:

The taxpayer must be a registered GST taxpayer.
The goods or services must have been purchased from a registered GST supplier.
The goods or services must be used for business purposes.
For the purchase, the taxpayer must have a valid tax invoice or debit note from the registered supplier.
The ITC must be claimed within one year of the date of invoice.

However, there are some restrictions on the availability of ITC in the real estate sector. For example:

ITC cannot be claimed on the GST paid on land.
ITC cannot be claimed on the GST paid on residential properties that do not fall under the affordable housing segment.
ITC cannot be claimed on the GST paid on residential properties that are sold before the completion certificate is issued.

To claim ITC, the taxpayer must file their GST return (GSTR-3B) and declare the ITC claimed in the return. The taxpayer must also have the necessary supporting documents, such as tax invoices, to support their ITC claim.

Impact of GST on Real Estate

The introduction of the Goods and Services Tax in India in July 2017 has had a noteworthy impact on the real estate sector. After replacing multiple indirect taxes this single tax has simplified the tax structure and made it more transparent.

Impact on Property Buyers

One of the most noteworthy impacts of GST on real estate sector in India has been on property buyers. Under the previous tax regime, buyers had to pay VAT, service tax, registration charges, and stamp duty on the purchase of under-construction properties. This could add to a significant amount of money, especially for high-value properties.

Under GST, tax rates of 1% & 5% (affordable and non-affordable) are applicable on under-construction properties, with a standard 33% abatement being provided towards the value of the land. This means that the effective GST rates for the sale of under-construction properties are 0.67% & 3.35%. This is lower than the combined rate of taxes that were payable under the previous regime.

Another positive impact of GST on real estate for property buyers is that they can now claim input tax credit (ITC) on the GST paid on construction inputs, such as cement, bricks, and steel. This can further reduce the cost of buying a property.

Impact on Property Developers

GST has also had a significant impact on property developers. Under the previous tax regime, developers had to pay multiple taxes on various inputs, such as cement, steel, and construction services. This could add up to a significant cost, which was often passed on to the buyers in the form of higher property prices.

Under GST, developers can claim ITC on the GST paid on construction inputs. This can help them to reduce their overall costs and make their properties more competitive.

Despite the availability of ITC, the overall construction cost has increased by 2-3% under the GST regime. This is because the GST rate on some key inputs, such as cement and steel, is higher than the taxes that were payable under the previous regime.

GST has also led to increased competition in the real estate sector. This is because developers can now sell their properties to buyers from across the country without worrying about paying interstate taxes.

Overall, the impact of GST on real estate property developers has been challenging. Nevertheless, developers are adjusting to the fresh GST provisions on real estate and devising strategies to manage the rising expenses.

Other Impacts of GST on Real Estate

Increased transparency: GST has made the real estate sector more transparent by eliminating the cascading effect of taxes. This has made it easier for buyers and sellers to compare prices and make informed decisions.

Reduced corruption: GST has also helped to reduce corruption in the real estate sector by making it more difficult for developers to evade taxes.

Boosted investment: GST has made the real estate sector more attractive to investors by reducing the overall tax burden. This has resulted in an increase in investment in the sector, which has helped boost its growth.

Overall, the impact of GST on real estate sector has been positive. It has simplified the tax structure, made it more transparent, and reduced the overall tax burden. This has benefited both property buyers and developers. GST has also helped to boost investment in the sector, which has led to its growth.

Reverse Charge Mechanism under GST on Real Estate Sector

The reverse charge mechanism (RCM) under GST entails that the party receiving goods or services bears the liability for GST payment, not the supplier. This ensures that GST is collected from all transactions, even if the supplier is not registered for GST.

In the real estate sector, the RCM applies to the following transactions:

Purchase of goods or services from unregistered suppliers: If a registered real estate developer purchases goods or services from an unregistered supplier, the developer is liable to pay GST on the transaction under RCM.

A shortfall in procurement from registered suppliers: If a registered real estate developer procures less than 80% of its goods and services from registered suppliers, the developer is liable to pay GST on the shortfall under RCM.

Supply of Transfer of Development Rights (TDR) or Floor Space Index (FSI): The supply of TDR or FSI by a registered real estate developer to another registered real estate developer is subject to GST under RCM.

The rate of GST payable under RCM on real estate transactions is 18%.

It is important to note that the RCM does not apply to the sale of completed real estate units. GST is payable by the supplier on the sale of completed real estate units at the rate of 5% (without input tax credit) or 1% (with input tax credit).

Government Measures for GST on Real Estate

In recent years, the Indian government has taken several measures to streamline the GST on real estate sector. Some of the key measures include:

Reduced GST rates on under-construction properties: In 2019, the GST Council reduced the GST rate on real estate under-construction residential properties from 12% to 5%. The GST rate on affordable housing projects was also reduced from 8% to 1%.

Abatement for land value: Within taxable real estate transactions, the GST legislation grants a standard 33% abatement from the total contract/agreement value, specifically allocated to land value. This is meant to account for the fact that land is not subject to GST.

Input tax credit (ITC) benefits: Developers and builders are entitled to ITC on the GST paid on inputs and input services used in the construction of properties. This helps to reduce the overall cost of construction and, in turn, the price of properties for buyers.

In addition to these measures, the government has also taken steps to simplify the compliance process of GST on real estate for real estate developers and buyers; the government has introduced a simplified GST return form for real estate businesses.

In addition, the government has also introduced several other measures to support the real estate sector, such as the Real Estate (Regulation and Development) Act (RERA) and the Pradhan Mantri Awas Yojana (PMAY). These measures have helped improve the sector's overall health and make it more attractive to investors.

Tips to Save your GST on Real Estate Transactions

Buy a ready-to-move-in property: GST on real estate is not applicable to the sale of ready-to-move-in properties, i.e., properties that are ready for occupation and have been issued a completion certificate.

Buy a property under the affordable housing scheme: GST on real estate is levied at a lower rate of 8% on the sale of residential units under the affordable housing scheme. To be eligible for this scheme, properties in metropolitan cities must have a carpet area of no more than 60 square meters, while properties in non-metropolitan cities must have a carpet area of no more than 90 square meters.

Avail of input tax credit (ITC): If you are a registered GST taxpayer, you can avail of ITC on the GST paid on the purchase of goods and services used to construct a property. This can help you to reduce your overall GST liability.

Negotiate with the builder: Many builders are willing to negotiate on the GST component of the property price, especially in a slow market. You can negotiate a lower GST rate or even ask the builder to bear the entire GST liability.

Choose a reputable builder: When buying an under-construction property, choosing a reputable builder with a good track record is essential. This will help ensure the property is completed on time and to the agreed-upon specifications.

Get the agreement in writing: Make sure that all the terms and conditions of the sale, including the GST on real estate, are clearly mentioned in the written agreement between you and the builder. This will help to avoid any disputes later on.

Be aware of the latest GST rules and regulations: The GST rules and regulations are constantly changing, so staying up-to-date with the latest developments is crucial.

Conclusion

The impact of GST on real estate sector in India is both complex and multifaceted. This comprehensive value-added tax has significantly changed how properties are bought and sold, influencing both property buyers and developers. While the GST has streamlined the taxation system, introduced transparency, and reduced corruption in the sector, it has also posed challenges, especially in terms of managing the tax burden and increased construction costs.

The real estate sector's future with respect to GST remains uncertain, with debates surrounding potential rate reductions. While a reduction could boost demand and affordability for homebuyers, it would also reduce government revenue, necessitating adjustments in other sectors. The GST Council's upcoming discussions on this matter indicate a potentially positive change on the horizon.

Overall, the impact of GST on real estate sector in 2023 reflects a dynamic and evolving landscape. As discussions continue, the sector's stakeholders must adapt and find innovative ways to thrive in the ever-changing tax environment of the Indian real estate market.

FAQs

What is the latest GST rate on real estate?

The latest GST rate on real estate for under-construction properties is 1% for affordable housing and 5% for non-affordable housing, and there is no GST for ready-to-move-in properties.

Is GST payable on purchase of residential property?

Yes, GST is payable on the purchase of residential property, but only on under-construction properties. The GST rate on real estate is 5% for affordable housing and 12% for non-affordable housing.

How GST is calculated on under construction property?

To calculate the GST on an under construction property, multiply the GST rate by the total value of the property. For example, if you are buying an under construction property for Rs. 50 lakhs, the GST payable will be Rs. 2.5 lakhs (5% of 50 lakhs).

When to pay GST for under construction property?

You need to pay GST on under-construction property as and when you make the payments to the builder.