Here is everything home buyers need to know about the Goods and Services Tax regime and how it will impact them financially Among the many taxes that buyers have to pay on property purchase is the Goods and Services Tax or GST on flats and apartments. In this guide, we examine the implications of the GST for real estate in general and home buyers in particular. We will also discuss GST on flat purchase in 2022 and GST rate on land purchase in 2022.

GST on real estate

Home buyers in India have to pay a Goods and Services Tax (GST) on the purchase of under-construction properties like flats and apartments at the rate of 1% for affordable housing and 5% for non-affordable housing. In real estate, the GST is also applicable on purchase of developable plots.

Taxes before GST implementation

Before the GST came into force in 2017, a variety of state and central taxes were imposed on buildings, through the course of the construction of a housing project. While these taxes increased the cost of project development for developers, no credit against this tax was available to the builders against the output liability. Some of the taxes that real estate developers had to pay before the GST came into force included:

Value Added Tax (VAT)

Central Excise

Entry Tax

LBT

Octroi

Service Tax, etc.

The cost incurred on these taxes by builders was, then, transferred to the property buyer.

Moreover, the complexity involving rate applicability of the numerous taxes also made it possible for developers to manipulate numbers to charge more from buyers. For a common buyer, it used to be an uphill task to find out the VAT, Central Excise, Entry Tax, LBT, Octroi and Service Tax rate applicable on property construction.

After GST implementation

Launched in India on July 1, 2017, the GST was touted to be the biggest tax reform in India after Independence. The GST subsumed multiple indirect taxes, to offer a uniform regime to the taxpayers. Since its launch, various changes have been made with regard to the bracket under which real estate is taxed under the GST regime.

Types of central and state taxes that GST subsumed

Listed below are the types of central and state taxes that the GST subsumed when it became operational in July 2017:

Central taxes

1. Excise Duty
2. Customs Duty
3. Special Additional Duty of Customs
4. Service Tax
5. Central Sales Tax
6. Central surcharge and cess on supply of goods and services

State taxes

1. State Value Added Tax
2. Entertainment Tax
3. Luxury Tax
4. State Excise Duty
5. State surcharge and cess on supply of goods and services
6. Taxes on advertisement
7. Purchase tax
8. Taxes on lotteries, gambling and betting

GST on real estate in 2022

With the intent to simulate demand amid a prolonged slowdown, the government has reduced the GST rate on property transactions significantly since its launch. This could potentially lower the buyers’ pay-out by 4%-6% on the overall purchase, believe experts.

GST rate on flat purchase 2022

Property type GST > rate till March 2019 > GST rate from April 2019

A) Affordable housing > 8% with ITC > 1% without ITC

B) Non-affordable housing > 12% with ITC > 5% without ITC

Note that while the new tax rate without input tax credit (ITC) will apply on all new projects, builders were given a one-time option to pick between the old and the new rates by May 20, 2019, for their ongoing projects. This offer was valid only for projects which were incomplete as on March 31, 2019. The government’s decision came, after the developer community raised concerns on the tax liability in the absence of ITC.

GST calculation on affordable property

Here’s a look at how to calculate GST on flats’ purchase in the affordable housing segment, before and after the change in rate in April 1, 2019:

Affordable housing > GST on affordable housing before April 1, 2019 > GST on affordable housing after April 1, 2019

A ) Property cost per sq ft > Rs 3,500 > Rs 3,500

B ) GST rate on flat purchase > 8% > 1%

C ) GST > Rs 280 > Rs 35

D) ITC benefit for material cost of Rs 1,500 at 18% > Rs 270 > Not applicable

E) Total > Rs 3,510 > Rs 3,553

Impact of GST on luxury property

Under the new GST rates, buyers of luxury properties will save more than they would have earlier. Here’s a look at how to calculate GST on flat purchase in the luxury segment:

Luxury housing > Before April 1, 2019 > After April 1, 2019

Property cost per sq ftRs > 7,000Rs >7,000

GST rate on flat purchase > 12% > 5%

GST > Rs 840 > Rs 350

ITC benefit for material cost of Rs 13,000 at an average of 15% > Rs 126 > Not applicable

Total > Rs 7,714 > Rs 7,350

GST on government housing schemes

The government has clarified that government-led mega housing projects meant for the common man, will attract only 1% GST under the new regime. These housing schemes include as the Jawaharlal Nehru National Urban Renewal Mission, the Rajiv Awas Yojana, the Pradhan Mantri Awas Yojana and housing schemes of state governments.

GST on construction services

While real estate in India does not directly fall under the purview of the GST regime, various activities and services in the sector are taxable under the new regime. Following are the rates at which associated activities in the construction sector are taxed, under the GST regime in India:

A ) Under-construction home bought under the PMAY Credit-Linked Subsidy Scheme (CLSS) > 8%

B) Under-construction home bought without the subsidy > 12%

C ) Works contract for affordable housing > 12%

GST rate on construction and building materials

The Goods and Services Tax (GST) covers real estate in India through works contracts and building and constitution works, as all components used in the development work attract GST. To put it simply, covered under the new regime is the Indian construction industry, which continues to attract high rates of taxes through a blend of levies imposed on the purchase of various building construction materials.

Read out our article on GST rate for cement, construction and other building materials, for a comprehensive list of rates.

GST on maintenance charges for housing societies

Flat owners are liable to pay 18% GST on residential property, if they pay at least Rs 7,500 as maintenance charge to their housing society. Housing societies or residents’ welfare associations (RWAs) that collect Rs 7,500 per month per flat, also have to pay 18% tax on the entire amount. Housing societies which have an annual turnover of less than Rs 20 lakhs are, however, exempted from paying the GST. For the GST to be applicable, both the conditions should apply – i.e., each member should pay more than Rs 7,500 per month as maintenance charge and the annual turnover of the RWA should be higher than Rs 20 lakhs.

The government has also clarified that the entire amount is taxable, in case the charges exceed Rs 7,500 per month per member. For example, if the maintenance charges are Rs 9,000 per month per member, the 18% GST on flats will be payable on the entire amount of Rs 9,000 and not on Rs 1,500 (Rs 9,000-Rs 7,500). Also, owners with multiple flats in the same housing society will be taxed for each unit separately.

On the other hand, RWAs are entitled to claim ITC on tax paid by them on capital goods (generators, water pumps, lawn furniture, etc.), goods (taps, pipes, other sanitary/hardware fittings, etc.) and input services such as repair and maintenance services.

GST on rent

Landlords do not have to pay GST on real estate rental income, as long their premises are let out for residential purposes. However, the GST regime treats renting out of residential property for business purposes as supply of services, thus, including rental income under its purview. An 18% GST on residential flats is charged on such rental income under the new regime, if the rent amount per year exceeds Rs 20 lakhs. In this case, landlords also have to register themselves, to pay the GST on their rental income. On letting-out of commercial properties, a GST at 18% is levied.

GST on home loan

While there is no applicability of the GST on home loan repayment as far as the borrower is concerned, financial institutions offer several ‘services’ as part of home loans. Based on the fact that these are services, the applicability of GST comes into picture. Consequently, if you are taking a housing loan, the bank would charge GST on the processing fee, technical valuation fee and legal fee.

GST as a tool to revive sales

Caught in the middle of an over five-year demand slowdown and high levels of inventory, cash-starved builders in India had extremely low scope for price reduction in the post-Coronavirus lockdown period. However, to make home purchases more lucrative for buyers, a majority of them offered a complete waiver on the GST during the festive season, to boost sales in 2021. Most developers, who were approached by this writer to offer their quotes on festive sales, said they had offered complete waivers on GST and stamp duty, to attract buyers during the much-talked about festive season that was instrumental in helping the economy recover to some extent, after the lockdown.