GST Impact on Under-Construction Property – Is GST applicable?

GST on under-construction property - Is GST applicable?
GST on under-construction property - Is GST applicable?

One of the most raging questions on everyone’s mind after GST is the GST impact on real estate industry and will it be applicable on those flats or apartments booked, before the implementation of GST. One of the most sought-after and clarity required scenario is on GST impact on an under-construction property.

We are well-aware of how GST – The goods and services tax, has replaced the earlier twin taxes of Service Tax and Value Added Tax(VAT). These taxes are levied from the buyers of an under-construction property, in addition to other taxes paid by the builders on materials and services in the construction activities.

While the law has been announced, it has also brought in a lot of confusion on taxation under GST impact on the under-construction property and for those who have booked apartments in such properties. Here’s an impact of GST on Indian real estate and insights on the rate of GST on an under-construction property.

So when does the GST become applicable? The GST impact on already booked flats.

The GST impact applicable when the property – complex, building, flat or apartment is sold to the prospective buyer, before its completion and the consideration for the same, be it in full or part is received by the builder before its completion.

So, if you have paid even one percent or a nominal payment and are intending to pay the balance after possession, you will have to pay GST on the full amount.
Alternatively, if the entire sale consideration is paid on a ready-to-move-in building, that is a completed building, then no GST is applicable. Hence GST on completed flats is not applicable.

When the entire sum is paid before the implementation of GST, but construction is completed after the introduction of GST.

If the invoice is raised pre-GST, then service tax will be charged on the full value of the agreement. So even if the construction is completed after implementation of GST, you will not have any further tax liability under the GST law. The GST is a substitute for the earlier taxation schemes of service tax and VAT.

What happens when part of the money is paid before the introduction of the GST?

Money which has been partly paid to the builder before the GST will essentially involve two taxes – Service Tax and VAT as applicable in your state. On this, the builders were not allowed any input credit on the materials and services used in the construction activities. Hence, the entire tax was recovered or put on the customers.

Flats which are under-construction and booked prior GST – July 1st, 2017, the payment would have been added along with service tax and VAT. In case, the payments were not made before July 1st, 2017, the builder would have already raised the invoice for complete or impending balance amount, on which the service tax and VAT components would have already been added. Since, as per the taxation rules 2011, service tax had to be levied at the earlier of one of the two – at the moment of raising the invoice or at the moment of payment.

GST impact on under-construction property - Is GST applicable?
GST impact on an under-construction property – Is GST applicable?

The rate of GST on an under-construction property is 18%. One-third of the entire value is presumed to be the value towards the cost of the land, in cases where the interest in the land is also supposed to be transferred. The GST rate in such cases is 12%, on the entire value of the agreement.

The 12% rate on an under-construction property may seem high, the effective cost applicable to the customer is supposed to be lower, due to the tax being replaced by other taxes such as service tax, VAT, entry tax etc.

Also, under the earlier tax regime, the overall taxes were higher due to the effect of these taxes and the higher rate of excise on materials and simultaneous levy of services and no input tax credits were available for the builder.

Under the GST liability of 12%, GST on under-construction properties, the net impact will be lower, offering builders/developers the ability to claim the benefit of input tax credits. Where the ownership of land is not involved, the rate of GST applicable is 18% along with full Input tax credit, in the cases where the builder outsources some of the construction activities, say to a sub-contractor.

Hence per GST rules, for the unpaid consideration, for which the builder has not raised an invoice, the builder will recover GST at 12% on the balance amount due.

The builder will be in a position to claim input credit, on the materials and services used, and must pass on the benefits of the same to the respective flat-buyers.

Hence, the builders should not ask property buyers to pay the full 12%, without considering the benefits under the GST. If a builder does so, the builder/developer can be charged under anti-profiteering provisions. The GST calculation must be done with utmost proficiency, to prevent any discrepancies.

No GST impact on completed properties

Transfer or sale of completed property, does not establish as rendering services to a buyer and thus does not attract GST. So, if you buy a completed property, it will help you save money in form of tax.

No GST impact in case of resale property

Once a completion certificate is issued by a government authority, or if the property has undergone occupation, it means it is a case of resale. Hence, the tax should not be charged if the property is being bought after the issuance of completion certificate.

The GST impact on an under-construction property will be charged when you buy a house, at a certain stage. The kind of property you are looking for will also hold regard. Make sure to always go deeper in the insights, and research thoroughly, to understand the legal and taxation norms. You can be assured of complete transparency and updation of all legal & GST implications on real estate when you buy a property with HousingMan.