GST Implications on Real Estate Sector: Overview & Analysis

Executive summary

Being the most globally recognised sector in today’s time, it is segmented by four sub sectors- housing, retail, commercial and hospitality. Increasing corporate environment, adoption of co-working culture and more opening of MNC’s day by day in India results with boom in this sector as demand for commercial buildings and housing societies increasing day by day amid covid. The best example to see growth in this sector can be seen in Gurgaon.

In India, the real estate sector is the second-highest employment generator, after the agriculture sector and According to Savills India, real estate demand for data centers is expected to increase by 15-18 million sq. ft. by 2025. Demand for residential properties has surged due to increased urbanization and rising household income. India is among the top 10 price-appreciating housing markets internationally. According to IBEF (India Brand Equity Foundation), FDI in this sector (including construction development & activities) stood at USD 55.18 billion from April 2000-September 2022.

The present article tells you about GST implications on Real estate sector.

Part A- To understand the implication of GST on real estate sector, firstly we need to understand types of activities undergoing under this sector-

1. Sale/purchase of immovable properties like commercial spaces, residential flats etc.

2. Renting of immovable properties

3. A paying guest business, also known as PG Business

> Sale/purchase of immovable properties-

As per Para 5 of Schedule III of CGST Act, 2017 Sale of land & building (where the entire consideration has been received after issuance of completion certificate or after its first occupation, whichever is earlier) is neither supply of goods nor supply of services, so does not attract GST, but GST is levied in case of sale of under construction property for which occupancy certificate has not been issued “that means if the property has been sold after it gets completed then it is exempted from GST and if the property has been sold in the under construction phase it attracts GST”,

The rates of GST are-

Note: The above rates are after one-third deduction for value of land

As per GST law, the activity of construction of complex, buildings, civil structures or part thereof is covered within the meaning and scope of works contracts services as defined in Sec 2(119) of CGST Act, 2017 and it is a supply of services.

As per GST law, the sale of land does not attract GST as the sale does not involve the transfer of any goods or services, As per CBIC circular no. 177/09/2022-TRU dated 3rd August 2022, Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines etc, It is clarified that sale of such developed land is also a sale of land and is covered by Para 5 of schedule III of the CGST Act, 2017 and accordingly does not attract GST.

> Renting of Immovable Properties

As per GST Law, Renting of immovable property is treated as a supply of service. So if a person earns rental income of more than Rs. 20,00,000 in a financial year then he is compulsorily liable to get its registered under GST and Such rental income attracts GST at the rate of 18%.

Renting of immovable property has been divided in two parts-

1. Renting of Commercial Property

2. Renting of Residential Property

• Renting of Commercial Property

Service by way of renting of commercial property is leviable to GST under forward charge mechanism so it not relevant that recipient of service is registered or not only relevant is service provider is registered person.

Renting of commercial property have never been exempted under GST Law since inception of GST. Hence, if the service provider of renting of commercial property is register person then it would charge GST in Tax Invoice.

Input tax credit would be available on renting of property whether it is commercial or residential property where it has been used for in course or furtherance of business of registered person.

• Renting of Residential Property

On the other hands Renting of residential property was exempted by Notification No. 12/2017- central tax (rate) dated 28th june 2017 where the property is used for residence, otherwise taxable under GST.

However above exemption has been withdrawn w.e.f 18th July 2022 through vide Notification No. 04/2022 –central tax (Rate) dated 13th july 2022. The exemption has been withdrawn only in cases where the residential property has been rented to registered person either for business or residential use, it means if the residential property has been rented to registered person(the tenant) then the tenant (recipient of service) would be liable to pay GST on rent under Reverse charge mechanism otherwise exempted.

Brokerage Business termed as Real estate Agent

This business is the main pillar of real estate sector. Brokerage business is treated as supply of service under GST regime, they are also known as Real estate agent. As per GST law, if a person receives brokerage of more than Rs. 20 Lakhs should be liable to get it registered under GST law and attracts GST at the rate of 18%.

Part B– Important Discussions to know

Affordable Housing Under GST: Explained

In the context of the Goods and Services Tax (GST), affordable housing is defined by the government as residential units with a value of up to Rs 45 lakh. However, there are specific size criteria that must also be met to qualify as affordable housing. In metropolitan cities such as Delhi-National Capital Region, Bengaluru, Chennai, Hyderabad, Mumbai-Mumbai Metropolitan Region, and Kolkata, a housing unit is deemed affordable if it costs up to Rs 45 lakhs and boasts a carpet area of up to 60 sqmt. For cities outside this metropolitan classification, affordable housing applies to units priced up to Rs 45 lakh, featuring a carpet area of up to 90 sqmt.

GST on Maintenance Charges for Housing Societies: Insights

Concerning the Goods and Services Tax (GST) implications on maintenance charges for housing societies, individuals who own flats are subject to an 18% GST if their monthly maintenance payment to the housing society exceeds Rs 7,500. The same 18% GST is applicable to housing societies or residents’ welfare associations (RWAs) that collect Rs 7,500 per flat per month. An important exception exists for RWAs with an annual turnover below Rs 20 lakhs, as they are exempt from GST. The application of GST hinges on both conditions being met: maintenance charges exceeding Rs 7,500 per month per member and an RWA’s annual turnover surpassing Rs 20 lakhs.

A significant clarification involves the scenario where maintenance charges exceed Rs 7,500 per month per member. In such cases, the entire amount is subject to the 18% GST. For instance, if the monthly charges are Rs 9,000 per member, the GST applies to the full Rs 9,000, not just the exceeding amount of Rs 1,500 (Rs 9,000 – Rs 7,500). Furthermore, individuals who own multiple flats within the same housing society are subject to separate GST taxation for each unit.

On the flip side, RWAs are eligible to claim Input Tax Credit (ITC) for the tax paid on capital goods (such as generators, water pumps, lawn furniture), goods (including taps, pipes, sanitary fittings), and input services like repair and maintenance.

GST on One-Time Maintenance Deposit by Builders: Key Insights

In a recent ruling by the Gujarat bench of the Authority for Advance Rulings (AAR), it has been established that GST is applicable to the one-time maintenance deposit collected by builders from home buyers. According to this ruling, this deposit falls under the category of service supply and is considered non-refundable. However, the AAR stipulates that GST will be deducted from the deposit when the funds are eventually used for future maintenance activities.

Traditionally, real estate developers collect a one-time maintenance deposit from home buyers prior to the formation of residents’ welfare associations or cooperative housing societies, which subsequently assume responsibility for maintenance. After this transition, the RWA or CHS assumes full control over maintenance activities and establishes their own maintenance charges. This ruling mandates that developers deposit the entire collected amount without any GST deduction.

It’s important to note that before the GST regime was implemented in 2017, builders were not liable to pay service tax on such maintenance deposits. The AAR’s ruling empowers RWAs and CHSs to collect GST from society members at the time when funds are required for maintenance. This essentially defers the payment of GST for home buyers.

GST on Developable Land: Exemptions and Criteria

When it comes to GST (Goods and Services Tax) on developable land, an important exemption exists. According to a circular released on August 3, 2022, by the Central Board of Indirect Taxes and Customs (CBIC), no GST is applicable to investments in developable plots. This applies even if some basic infrastructure has been established. The Karnataka Authority for Advance Ruling (AAR) has also recently issued a similar ruling in this regard.

Understanding Developable Land

Developable land refers to plots where the owner has acquired all the necessary permissions from local and municipal authorities for future development of the land. Moreover, the owner must have carried out essential infrastructure development to facilitate future construction. If any or all of the following activities have been undertaken on the land, it would be considered developable:

1. Demarcation of the plot
2. Ground leveling
3. Construction of boundary walls
4. Road construction
5. Establishment of overhead tanks
6. Installation of water pipelines
7. Installation of underground sewerage lines
8. Implementation of water harvesting facilities
9. Installation of sewage treatment plants
10. Creation of landscaped gardens
11. Establishment of drainage systems

Previously, some state authorities held differing viewpoints on this matter. For instance, in July 2022, the Madhya Pradesh Appellate Authority of Advance Ruling (AAAR) stated that land sold after undergoing development activities would attract an 18% GST. A similar stance was taken by the Gujarat Authority of Advance Ruling in 2021.

Before the implementation of GST, the sale of immovable properties was not subject to value-added tax. Consequently, only direct taxes like stamp duty and registration charges were applicable during such transactions.

GST on home loan

While GST is not applicable on the repayment of home loans from the borrower’s perspective, financial institutions provide various ‘services’ as part of home loans. These services are subject to GST. Therefore, if you take out a housing loan, the bank would levy GST on the processing fee, technical valuation fee, and legal fee.

The last topic to discuss is that what is GST on flat Registration-

Regarding GST on flat registration charges, there is currently no GST applied to these charges. However, it raises the question of whether GST could potentially subsume stamp duty and registration charges in the future. This is an ongoing topic of discussion and consideration.