GST on Real Estate Activities: Land & Building, Construction & Long-Term Leases

GST has introduced many new reforms, tax structures and confusions. But the most troublesome and disputed aspect of the GST is its applicability on Real Estate Sector. In this article, we will try to grasp the applicability and procedure of GST on various aspects of Real Estate sector. For sake of brevity, reference to CGST Act will also serve as reference to parallel SGST Act.

SUPPLY UNDER GST

The first thing to find is that whether a particular activity is considered supply under GST or not. Section 7 of the CGST Act defines supply as any exchange, barter, transfer, etc., made for consideration in the course of business (irrespective of volume/continuity), plus Schedule I activities without consideration.

Further, Schedule II to the CGST Act categorizes activities between supply of goods or services. Schedule III categorizes activities which will be neither supply of goods nor of services.

As per para 5 of Schedule III, sale of land is not a supply under GST and as such GST is not applicable on sale of land.

SALE OF BUILDING WHEN TAXABLE ?

Para 5(b) of Schedule II states that construction and sale of any complex, building, civil structure and part of thereof is deemed to be supply of service. This will be taxable except when entire consideration is received after

1. issuance of completion certificate from a competent authority, where it is required; or

2. first occupation of the building;

whichever is earlier

In such exceptions, sale of such building will be treated neither as supply of service nor supply of goods and will be out of the scope of GST under per para 5 of Schedule III.

Competent authority means any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate, from Registered Architect; Chartered Engineer or Licensed Surveyor.

TAXABILITY ON SALE

Notification No. 11/2017-CT(Rate) dt. 28/06/17, the principal notification for rate of supply on services, provides that for sale of constructed building or structure, taxable value on which GST will be charged will be calculated in the following manner, to exclude the deemed value of land:

Taxable Value = (Total Consideration for land & construction of building x 2) ÷ 3

But practically, instead of deriving value of taxable supply, two-thirds of the prescribed rate is used.

The principal notification has been amended various times, and with effect from 01/04/2019, there are two different options to pay GST, which are discussed below.

FOR SPECIFIED APARMENTS [ENTRY NO. 3 (i),(ia),(ib),(ic),(id)]

This option covers construction of Residential Apartments in Residential Real Estate Projects or Real Estate Projects; and Commercial Apartments in Residential Real Estate Projects only. The tax rates under this option are as follows:

*Affordable Residential Apartments are those apartments which fulfill both the following conditions:

a) Does not exceed 60 sq. m. in metropolitan areas or 90 sq. m. in non-metropolitan areas. Metropolitan areas include Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, and Mumbai/MMR

b) The amount charged for such apartment does not exceed 45 Lakhs.

Conditions for availing:-

1. ITC on inputs is not allowed.

2. Mandatory requirement of payment of output tax by debiting electronic cash ledger only.

3. At least 80% of the inputs and services shall be received from registered suppliers only, except development rights, long-term leases, FSI, electricity and fuel.

4. If the % value of inputs and services prescribed in point 3 falls short of 80%, then RCM on differential value shall be paid at rate of 18% or at prevalent rates in case of cement.

5. In case of purchase of cement from unregistered supplier, RCM at the prevalent rates will be paid irrespective of the total % value from registered suppliers.

FOR OTHER CONSTRUCTIONS [ENTRY NO. 3 (if)]

This option covers construction of Buildings, Complex, Civil Structures and Commercial Apartments other than those covered in Residential Real Estate Project. The tax rate is as follows:

GST Rate – 18% on value of constructed structure i.e excluding value of land

The availability and eligibility of ITC is governed by general provisions of GST law.

TAXIBILITY FOR LAND OWNERS SELLING BUILT APARTMENTS

Landowner-promoters, who provide the development rights or FSI (Floor Space Index) for development of apartments by developer-promoter, shall be eligible for setting off ITC of tax charged by developer-promoter against tax on sale of apartments, on fulfilling following conditions:

1. The further supply of such apartments by landowner-promoters must be before issuance of completion certificate or first occupation

2. The tax payable by landowner-promoter is not less than what was charged by developer-promoter.

TAXIBILITY OF SINGLE RESIDENTIAL UNITS

As discussed above, Sale of land and sale of building after issuance of completion certificate or its first occupation, is not a supply as per para 5(b) of Schedule II read with para 5 of Schedule III.

Also, contracts involving pure labour services for original works pertaining to single residential units are exempt from GST as per entry no. 11 of notification no. 12/2017-CT(Rate) dt. 28/06/17.

LONG-TERM LEASES AND DEVELOPMENT RIGHTS

Generally, the amount paid for Transfer of Development Rights (TDR), Floor Space Index (FSI) and long term leases (30 years or more) is chargeable on RCM basis @ 18% under GST. But there are few exceptions to this.

The amount received for TDR, FSI or long term leases are exempt under entry no. 41A & 41B of notification 12/2017-CT(Rate) dt. 28/06/17. This exemption is available only for supply of service for building of residential apartments. In projects where both residential and commercial apartments are present, the exemption is calculated as follows

= (GST Payable on Amount Received × Total Carpet Area of Residential Apartments) ÷ Total Carpet Area of Residential and Commercial Apartments

The above exemption is not available when consideration for apartment is received after issuance of completion certificate or first occupation, whichever is earlier.

Also, in case completion certificate is received for apartments and there are un-booked residential apartments as on such date, the promoter who is receiver of above mentioned TDR, FSI or lease shall be liable to pay GST on RCM basis on such amount of TDR, FSI or lease which is attributable to un-booked residential apartments. The amount shall be calculated in the following way:

= (*Value of TDR, FSI or Lease attributable to residential apartments × Carpet Area of Residential Apartments unbooked as on the date of Certificate / First Occupation) ÷ Total Carpet Area of Residential Apartments in the Project

*The Tax rate for RCM payment in case of un-booked apartments shall be 1% for affordable residential apartments and 5% for other than affordable residential apartments.

Further, notification no. 11/2017 CT(Rate) dt. 28/06/17 also provides that for lease and sub-lease of land or share of land for construction and composite supply of services under entry no. 3(i) to 3(if), the tax rate on such will be NIL, provided that the value of lease or sub-lease does not exceed one-third of total value of the composite supply at next level.

LONG TERM LEASE FROM GOVERNMENT

Entry no. 41 of notification 12/2017 Central Tax (Rate) dt. 28/06/17 gives exemption for long term leases for allotment of industrial plots to industrial units or developers. Such exemption is available when the allotment is made by State Government Industrial Corporations or any other entity having 20% ownership by Central Government or State Government. It is also mandatory to use such industrial plots only for purpose for which they were allotted.

PRECEDENT CASE LAWS

ACTUAL VALUE OF LAND TO BE EXCLUDED WHERE AVAILABLE –

Munjal Manishbhai Bhatt V. Union of India [R/Special Civil Application 1350 of 2021, GUJARAT HIGH COURT]

In this case, the hon’ble high court held that the 1/3^rd valuation of land prescribed in para 2 of notification no. 11/2017 CT(Rate) is ultra-vires the provisions of GST law. The court ruled that in cases where value of land is ascertainable, actual value of land shall be deducted from total consideration. The impugned valuation rule can only be applied where value of land is not ascertainable like in case of flats where undivided share of land is involved.

TRANSFER OF LEASEHOLD RIGHTS IS TRANSFER OF IMMOVABLE PROPERTY-

Gujarat Chamber of Commerce & Industries V. Union of India [R/Special Civil Application 11345 of 2023, GUJARAT HIGH COURT]

Aerocom Cushions Pvt. Ltd. V. Assistant Commissioner (Anti-Evasion) CGST [W.P. 2145 of 2025]

The Gujarat High Court ruled that transfer of leasehold rights pertaining to lease of 99 years is absolute transfer of immovable property. The ratio decidendi was that immovable property is not defined in CGST Act, and reliance was placed on General Clauses Act, where immovable property includes ‘benefits to arise out of land’. The leasehold rights of 99 years were ruled to be substantial benefits to arise out of land and as such they are immovable property. Hence, they are exempt under Schedule III of CGST Act.

These views of Hon’ble Gujarat High Court were also upheld by Hon’ble Bombay High Court recently.

SALE OF LAND & BUILDING NOT TAXABLE IF NO SERVICE AGREEMENT EXISTS-

Rohan Corporation India Pvt. Ltd. V. Union of India [W.P. 12700 of 2023]

In this case, the Hon’ble Karnataka High Court ruled that there must exist agreement for executed construction work, to operate para 5 of Schedule II for charging GST. The principle in GST law is to tax the construction services and not immovable property itself. Sale of partially or fully constructed building on ‘as is where is basis’, constructed without any agreement for such work and no identification of final purchaser at the time of construction, will be squarely covered by exemption of para 5 of Schedule III.

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I hope this article has helped you understand operation of GST on various transactions in Real Estate sector.

CA Aftab Ranjan Sehgal Contact: arsehgalca@gmail.com