GST on Real Estate – GST only on under-construction property and not on ready-to-move-in properties
“Electricity, real estate, stamp duty and petroleum products should become part of GST. This would be GST Council endeavour,” Bihar Finance Minister, Sushil Modi said at the annual meet of FICCI. He, however, said it would be difficult to specify any timeline for this to happen. Inclusion of these can happen without amending the Constitution, he added.
Earlier, Finance Minister, Arun Jaitley indicated, that real estate is often seen as one of the worst sectors in so far as tax evasion is concerned and to address this issue, the government might soon move to bring it within the ambit of GST. “The one sector in India where maximum amount of tax evasion and cash generation takes place and which is still outside the GST is real estate. Some of the states have been pressing for it. I believe that there is a strong case to bring real estate into the GST,” Jaitley said.
The stamp duty, which is outside the GST, has complicated the tax structure for real estate. A lot of states had opposed the inclusion of the stamp duty in the GST, as it was a source of revenue for them. “Some states want; some do not. There are two views. Therefore, by discussion, we would try to reach one view,” he said. 12% GST is levied on construction of a complex, building, or civil structure intended for sale, wholly or partly. However, land and other immovable property have been exempted from the GST. If real estate is brought under the GST, the final tax would be almost negligible, Jaitley added.
Touted as the second largest employer in the country (after agriculture) the real estate sector counts for 5% of India’s GDP, projecting a potential growth of 30% over the next decade. Supported by a thriving corporate environment, an increasing demand for office and commercial space, a burgeoning middle-class keen on purchasing property in urban and semi-urban areas as well as rising short-term and long-term NRI investments pouring in, the market in this sector was expected to touch US$ 180 billion by 2020.
Despite such hopes for the future, this sector has been plagued by countless challenges that seem to have slowed down its projected growth in recent years. The main reasons are inventory pile-ups, job loss in most service companies, less than impressive rental yields, the insidious impact of recession that has not quite worn off, delay in procuring bank loans, as well delay in possession of property itself. Inflated tax rates mounted on assistive bank loans, multiple taxes borne by both the developer as well as the buyer, tax burden reflected at the time of actual purchase, and ancillary transparency and corruption issues in this sector are also what dissuades most people from investing in property.
The introduction of GST from 1.7.2017 though, is being perceived as a beacon of hope for many prospective home buyers who may finally get to realize their dream of owning property in the post-GST era. Specially for those who book flats well before their time of completion, it would help to know how this new regime is set to influence their purchasing decisions, and if they would be pocketing the gains or shelling out some more of their hard-earned money.
The CBEC on 14.12.17 has clarified that the sale of ready-to-move-in or completed property would not attract levy of GST. Hence, GST will be levied only on under-construction property.
GST only on under-construction property and not on ready-to-move-in properties: The CBEC has also clarified the applicable rate of GST on under-construction as well as ready-to-move-in property.
1. In case of purchase of under-construction residential or commercial property, from a builder, involving transfer of interest in land or individual share of land to the buyer, the effective rate of GST for such purchase would be 12%, with full ITC.
2. GST would be levied @18% on 2/3rd of the amount of the property, whereas 1/3rd of the amount was deemed to be value of land or undivided share of land supplied to the buyer.
3. The consideration amount which did not constitute transfer in land or undivided share of land as part of the consideration, for instance, construction services provided by a sub-contractor to a builder, would attract levy of GST @ 18%, with full ITC.
4. Property on which completion certificate has been issued – The clarification states that no GST would be levied on ready-to-move-in or completed property, as per the Paragraph 5(b) of the Third Schedule to the CGST Act, 2017.
5. For Under-construction property – The clarification envisages two circumstances:
Where the entire amount of consideration for the property was paid to the builder of such property before 1.7.2017, no GST would be leviable. This would be even though the construction was completed after 1.7.2017. However, such transaction would attract Service Tax @ 4.5%, considering that as per the Service Tax (Point of Taxation Rules), 2011 where the invoice was raised or payment was made prior to the appointed date under GST, the point of taxation would arise before the appointed day.
Where part amount of the consideration for the property was paid to the builder of such property, before 1.7.2017, Service Tax @ 4.5% would be leviable on the invoices raised or on consideration paid before 1.7.2017. However, any payment made by the property buyer to the builder on or after 1.7.2017 against invoices issued on or after 1.7.2017 would attract GST @ 12%.
What will attract GST is, the construction of a complex, building, civil structure or part thereof, intended for sale to a buyer, either wholly or in part, except where the entire consideration was received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.