GST Application on Land And Home Purchases: A Comprehensive Guide

Since its implementation on July 1st, 2017, the Goods and Services Tax (GST) has been mired in a web of uncertainties and inquiries. In this article, we aim to provide clarity on GST and its application in the real estate industry.

GST is a value-added tax that is applicable at every stage of the supply chain. With the introduction of GST, all indirect taxes such as Central Excise and others are eliminated, bringing transparency to the tax filing system.

Prior to GST, land transactions were subject to Value Added Tax (VAT) and Service taxes. However, GST now serves as the single tax levied on all under-construction properties, while fully developed properties are exempt from it. This is because land is an immovable asset and, therefore, GST cannot be applied. However, GST is applicable whenever there is an infrastructure that needs to be built on the land, with construction companies providing services and building materials being used. Any property that has received its completion certificate is exempt from GST application.

The concept of GST is built around the ‘One Nation, One Tax’ philosophy, with compliance, focusing on eliminating the old tax structure, facilitating compliance, and creating a consistent tax rate structure. The implementation of GST has boosted the sentiment of property buyers in the residential real estate sector. It benefits all stakeholders in the residential real estate sector by simplifying the tax structure and ensuring accountability at every stage.

There are various situations where GST is applicable, as discussed below:

1. Government Housing Programmes: Under the new GST system, the GST rate on government-led mega housing projects aimed at the average person will be capped at 1%. All popular Central Government schemes and housing schemes of individual states fall under this category.
2. Construction and Construction Supplies: Although real estate in India is not directly subject to GST, many of its activities and services are. Contracts for construction and constitutional work, as well as all materials used in the construction process, are subject to India’s Goods and Services Tax.
3. Housing Association Upkeep Expenses: Flat owners are liable to pay 18% GST on residential property if they pay at least Rs 7,500 as maintenance charges to their housing society. Housing societies that have an annual turnover of less than Rs 20 lakh are, however, exempt from paying GST. Owners with other flats in the same society will be taxed separately for them all.
4. Rent: If registered for GST, the tenant must include the tax within their monthly rent. If the annual rental amount of a residential flat is more than Rs 20 lakh, the landlord must pay GST. This is common in metro cities, for example, because of high property prices in Mumbai.
5. Loans for Houses: The repayment of a home loan is not subject to GST. However, financial institutions include a variety of “services” as part of the home loan process. As a consequence of this, the bank will charge GST on the processing fee, the fee for a technical valuation, and the legal fee if you are getting a housing loan from them.
6. Process of Flat Registration: No GST is levied on the fees that must be paid to register a property.

The purchase or sale of real estate in India still requires the payment of stamp duty and registration fees. Registration fees are either one percent of the property’s value or a flat rate, while stamp duties vary from state to state and can be anywhere from five to ten percent.

Leasing activities are considered a service, and renting or leasing land is taxable under GST. However, GST does not apply to land leases in certain scenarios, such as when there is a tax on commercial leases of vacant land or when renting or leasing undeveloped land, with or without buildings.

Some key highlights of the article are:

5. The GST rate on government-led mega housing projects aimed at the average person is capped at 1%.
6. Contracts for construction and constitutional work, as well as all materials used in the construction process, are subject to India’s Goods and Services Tax.
7. Flat owners are liable to pay 18% GST on residential property if they pay at least Rs 7,500 as maintenance charges to their housing society. Housing societies with an annual turnover of less than Rs 20 lakh are exempt from paying the GST. Also, owners with other flats in the same society will be taxed separately for each of them.
8. If registered for GST, tenants must include the tax within their monthly rent. If the annual rental amount of a residential flat is more than Rs 20 lakh, the GST must be paid by the landlord.
9. The Goods and Services Tax (GST) does not apply to the repayment of a home loan. However, financial institutions include a variety of “services” as part of the home loan process, and as a consequence, the bank will charge GST on the processing fee, the fee for a technical valuation, and the legal fee if you are getting a housing loan from them.
10. There is no Goods and Services Tax (GST) levied on the fees that must be paid in order to register a property.
11. Leasing activities are considered a service, and in light of this fact, renting or leasing land is taxable under GST. However, sometimes GST does not apply to land leases. The following are the scenarios in which they are exempted:
12. Amount due up front in the event of a long-term lease of land from the Central or State Government or from any other entity in which the Central or State Government owns 20% or more of the shares.
13. Agriculture equipment rental.
14. Rental or lease of undeveloped land, with or without buildings.
15. There is a tax on the commercial lease of vacant land as well.

The Final Word:

In conclusion, the implementation of GST has brought about a simplified and transparent tax structure that benefits all stakeholders in the residential real estate sector. Only flats that are still in the construction phase are subject to GST, and ready-to-move-in apartments are exempt from the tax. Buyers must also benefit from the price reduction the builder enjoys due to input tax credit. However, it is important to understand and implement GST correctly, and in such a circumstance, it is best to consult a lawyer before you go ahead with any renting, sale, or construction activities on your land.