Purchasing a property involves a lot of paperwork and payments such as registration fees, TDS, stamp duty, GST, etc. It is essential for the homebuyer to know these charges and to stay up to date with them especially about GST.
Before the GST entered into operation, through the construction of a housing estate, a number of state and central taxes were levied on houses. Although the cost of project construction for developers increased with these taxes, no compensation against this tax was offered to builders against the production liability. Value Added Tax (VAT), Central Excise, Entry Tax, LBT, Octroi, Service Tax, etc. were some of the taxes that real estate developers had to pay before the GST entered into force. The expense paid by builders for these taxes was then passed to the buyer of the house.
In addition, as consumers had very little clarity about the different taxes and the prices applicable, developers were often able to manipulate statistics to hold the offer to their best advantage. For a consumer, it would’ve been an extreme challenge, to find out the VAT, Central Excise, Entry Tax, LBT, Octroi, and Service Tax rate applicable to real estate property development.
On July 1, 2017, the GST regime was introduced in India. I India’s biggest tax reform after Independence, the GST incorporated several indirect taxes in order to give the taxpayer a uniform system. The GST for real estate was initially kept higher, but the rate was decreased by the government in 2019. This was achieved in an attempt to make the property more affordable for the common man and to raise their ambitious ‘Housing for All’ aim by 2022.
GST rate on property
The government has reduced the GST rate on property transactions substantially with the goal of stimulating demand in the midst of a prolonged slowdown. This could theoretically decrease the pay-out of the buyers by 4 percent -6 percent on the overall purchase, experts say. While the new tax rate without an input tax credit ( ITC) would apply to all new projects, builders have been granted a one-time option for their existing projects to choose between the old and new rates by May 20, 2019. This bid was only valid for projects that were unfinished as of 31 March 2019. The government’s decision came when, in the absence of ITC, the developer group expressed doubts about tax liability.
Property type GST rate till March 2019 GST rate from April 2019
Affordable housing 8% with ITC 1% without ITC
Non-affordable housing 12% with ITC 5% without ITC
Under GST, what is the input tax credit (ITC)?
The ITC system, which makes it distinct from the previous tax system in India, is a special feature of the GST rule. From the beginning of a residential property, until its completion, a real estate developer pays tax several times on the purchase of goods and services. The builder will earn an input tax credit under the GST regime when he pays his production tax.
As a tax on his final product, a developer has to pay Rs 30,000. As an input fee, the developer already has paid Rs 23,000, while buying materials such as steel, cement, paint, etc. In this case, after changing the input tax allowance, he will just have to pay just Rs 7,000 as an output tax.
As per GST, what is affordable housing?
Housing units worth up to Rs 45 lakhs identify as affordable housing under the government-determined description. The unit must, however, adhere to certain specifications as well. If it costs up to Rs 45 lakhs and measures up to 60 sq meters (carpet area), a housing unit in a metropolitan city qualifies to be an affordable home. As metropolitan cities, the Delhi-National Capital Region, Bengaluru, Chennai, Hyderabad, the Mumbai-Mumbai Metropolitan Region, and Kolkata are classified. A housing unit in any other city, excluding those mentioned above in India, qualifies as an affordable home if it costs up to Rs 45 lakhs and has a carpet area of up to 90 sq meters.
GST on home loan activities
As far as the borrower is concerned, although the GST is not applicable to home loan repayment, financial institutions provide many ‘services’ as part of home loans. The applicability of GST falls into the picture on the basis that these are facilities. Consequently, the bank will charge GST for the transaction fee, technical valuation fee, and legal fee if you are taking a home loan.
The impact of GST on affordable real estate
The presence of different taxes prior to the GST could not have overly affected property prices. Nevertheless, the tax calculation for the home buyer was a tedious operation. As a result, not many buyers will venture to find out the different taxes that added up to the property’s final price. While there are still many teething problems, the effect of GST on the property is that it provides homebuyers with more clarification about their tax obligation than the previous scheme. With the GST effect on the real estate sector leading to greater accountability, investors will have more confidence in India’s property transaction taxation. In addition, even if the prices are lowered slightly, properties will become more affordable. Here’s a look at how to measure GST on flats’ acquisition in the affordable housing segment:
Affordable housing GST before April 1, 2019 GST after April 1, 2019
Property cost per sq ft Rs 3,500 Rs 3,500
GST rate on a flat purchase 8% 1%
GST Rs 280 Rs 35
ITC benefit for the material
cost of Rs 1,500 at 18% Rs 270 Not applicable
Total Rs 3,510 Rs 3,553
Combined with these cost advantages, the GST effect on the real estate sector is expected to steadily increase buyer feelings.
Remember here that taxes like excise duty, value-added tax, customs duty, inputs and service tax depend on approval charges and architectural professional fees, labor charges, legal fees, and entry taxes depend on raw materials. These were among the costs that builders in India had to bear on housing project growth.
Although the government has already cut GST rates for real estate and there may be no room for further lowering of rates for the sector, industry experts believe that lowering rates for other goods and services may cause real estate investments at a time when home sales have dropped due to the post-Coronavirus pandemic economic crisis.
Industry bodies, such as ASSOCHAM and NAREDCO, have already proposed that for a fixed tenure, the government should reduce the GST for different goods and services by up to 50%.
For any more information related to real estate, you can read other articles of SBP Group.