Impact of GST on Property Purchase

As we all know GST was introduced in the country on July 1, 2017, in place of various goods and services taxes, and GST on real estate came into force from April 1, 2019.  The pertinent question on your mind would be how does GST on real estate work. In this article, we will shed light on various aspects of GST to help you have a fair understanding of how GST on purchase of property works, with a special focus on GST for real estate, GST on home loan, GST on sale deed registration, GST on stamp duty, GST on under construction property, GST on residential property, GST on land purchase, GST on flat purchase, GST on sale of property, GST on flats after completion certificate.

Taxation Criteria for Real Estate 

Taxation differs with respect to these categories.

1. Properties under construction and after construction. 
2. Affordable housing properties and non-affordable housing properties. 

• Residential properties with a carpet area of up to 90 sqm in non-metropolitan cities, and up to 60 sqm in metropolitan cities, and value upto Rs. 45 lakhs is defined as affordable housing. Outside of these values, is the non-affordable (or luxury) segment.
• Delhi-NCR, Bengaluru, Chennai, Hyderabad, Mumbai-Mumbai Metropolitan Region and Kolkata are categorised as metropolitan cities. 

Real Estate Taxation Prior to GST 

Before we go into GST for real estate, it is requisite to understand how taxation on property purchase worked prior  to GST. In the earlier taxation scheme,  people had to pay registration charges, stamp duty, VAT, service tax when purchasing a property that is still under construction.  For property purchased after construction, only registration charges and stamp duty were applicable.

GST on Purchase of Property

After the implementation of GST, what are the changes in the tax structure? VAT, service tax and several other taxes have been subsumed by GST, when it comes to GST on purchase of property, or GST on sale of property.  Let us understand this with respect to various aspects.

1. GST on Residential Property

It is important to know what GST on flat purchase (or villa purchase) is.   GST for real estate came into effect on April 1, 2019.  This is how GST on residential property is applicable, be it GST on flat purchase or independent houses:

ITC refers to Input Tax Credit, which is the taxes paid on purchase of materials and labour.

2. GST on Flats After Completion Certificate

There is no GST on properties that are ready to move in, i.e., after construction, just as there was no service tax, VAT in the scenario prior to GST.  GST applies to only sale of properties under construction. A property is categorized as ‘ready-to-move’ upon the receipt of completion certificate. GST is essentially a tax on goods and services. GST on flats after completion certificate is not applicable, if the entire payment is made after the completion certificate is issued. 

3. GST Rate on Under Construction Property

GST rate on under construction property is  5% on non-affordable housing, and 1% on affordable housing, where the payment is made when the construction is going on, i.e., completion certificate is not yet issued.

4. GST on Home Loan

Another question bothering real estate buyers would be how GST on home loan is applicable.  Will they need to pay GST on home loan repayment? Are home loans costlier after GST?

The simple answer to this is there is no GST on home loan repayment. That is to say, there is no GST on costs of interest payment and stamp duty, as these do not come under GST. However, banks may levy GST on the services rendered by them - such as processing fee, legal fees, etc.  Earlier banks used to charge about 15%, and it will go up by 3% to 18%.  This is a one-time GST liability to the borrower, to be paid to the lender at the time of application. It does not impact the monthly EMI payment.

5. GST on Sale Deed Registration

GST does not subsume registration charges, and they would continue to apply, which is usually 1% of property value or a fixed fee.  However, you do not need to pay additional GST on sale deed registration.

6. GST on Stamp Duty

Likewise, GST also does not subsume stamp duty.  Stamp duty would have to be paid at the prevailing rate which is generally 5 to 7% of the market value of the property. Again, there is no additional GST on stamp duty.

7. GST on Property Under Construction on 31 March, 2019

What is the GST rate on property under construction at the time when GST was implemented?  If a property is under construction as on 31 March, 2019,  the sellers and buyers have the option to choose for the earlier rates or the present GST rates.  

That is, they can choose 12% taxation for luxury housing, with ITC benefits, or 5% GST without ITC. And 8% taxation for affordable housing with ITC deductions, or 1% without ITC.

8. GST on Land Purchase

It is important to note that GST on land purchase is not applicable, as land sale or purchase does not involve any goods or services.  In fact, GST provides 33% abatement towards value of land in the total contract value of the building. That is to say, GST will be calculated on only 77% of the total value of the sale, after deducting 33% towards cost of the land.

9. GST on Rental Income

There is no GST on rental income, if the premises is rented for residential purposes. However, if a residential property is rented out for commercial purposes, then there is 18% GST on rental income, if the rent collected exceeds Rs. 20 lakhs per annum.  This is a benefit in the new GST on rental income. Prior to GST, the  limit for service tax exemption was Rs. 10 lakhs per annum.

On the whole, the benefits of GST for real estate includes simplification of the tax computation, to make it easy for the buyer to understand, apart from the revised tax structures that result in overall savings.