Update on February 24, 2019: To boost demand in the real estate sector, the GST Council, on February 24, 2019, slashed tax rates for under-construction flats to 5 per cent and affordable homes to 1 per cent, effective April 1, 2019. Currently, the Goods and Services Tax (GST) is levied at 12 per cent with input tax credit (ITC) on payments made for under-construction property or ready-to-move-in flats, where the completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate is eight per cent.
Update on December 8, 2018: The Finance Ministry, on December 8, 2018, said the GST will not be levied on buyers of real estate properties, for which the completion certificate is issued at the time of sale. However, the Goods and Services Tax (GST) will be applicable on sale of under-construction property or ready-to-move-in flats, where the completion certificate is not issued at the time of sale, it said.
The Goods and Services Tax (GST) has replaced the earlier twin taxes of service tax and VAT (Value Added Tax) levied from the buyers of an under-construction property, in addition to various taxes paid by the builders on the materials and services used in construction activities. However, this has created some amount of confusion, for persons who had booked under-construction flats. The situation has been further complicated, by calls made by the builders, asking buyers to pay up the full money, to avoid the increased rate of tax. In order to clear the doubts, the Central Board of Excise and Customs, has issued various circulars and clarifications, from time to time.
When does the GST become applicable?
The GST is applicable, when the complex, building or flat, is sold before its completion and the consideration, whether in full or in part, is received before its completion. So, even if you book a flat, where the builder asks you to pay just one per cent or a very nominal payment and the balance after possession, you will still have to pay the GST on the full amount. Conversely, if the entire sale consideration is paid after the building is completed, there is no GST liability. The present law under the GST is the same as what existed prior to the introduction of GST, under the service tax regime.
What happens when part of the money is paid before the introduction of the GST?
In case part of the money is paid to the builder before the introduction of GST, you would have paid service tax at 4.50 per cent and VAT as applicable in your state, on such payments. However, the rate of 4.50 per cent service tax was under the composition scheme, under which the builders/ developers were not entitled to take any input credit on the materials and services used in the construction. So, the entire service tax and VAT was loaded or recovered from the customers. Hence, for under-construction flats booked prior to July 1, 2017, where the payments were made prior to the GST coming into force, the builder would have already recovered the service tax and VAT, applicable on such payments made. Even if the payment was not made prior to July 1, 2017, but the builder had already raised the invoice or demand, for either the full consideration or part of the balance amount, you would have paid the component of service tax and VAT on it, because as per the point of taxation rules 2011 applicable in case of service tax, the service tax is to be levied at the earlier of the two – the moment of payment or raising of invoice.
The rate of GST on an under-construction property was18 per cent. However, one-thirds of the value of the consideration was presumed to be the value toward cost of the land, in cases where the interest in the land is also supposed to be transferred. So, effectively, the GST rate, in such cases, was 12 per cent, on the entire agreement value. Although the rate of 12 per cent on an under-construction property was high, the effective cost to the consumer was supposed to be lower, due to various reasons. One of the reasons, is that this replaced various other taxes, including VAT, service tax, entry tax, etc. Secondly, the effect of all these taxes and higher rate of excise on materials and simultaneous levy of services, along with the fact that in the earlier regime of the composition scheme under service tax and VAT, no input credits were available to the builder, meant higher taxes. As the builders/ developers were able to claim the benefit of input tax credits against the GST liability of 12 per cent, the net impact was probably lower, under the GST regime. However, from April 1, 2019, under the new GST regime with reduced GST rates – 1% for affordable housing and 5% for other units, the input tax credits will no longer be available to developers.
In cases where the ownership of land is not involved, the rate of GST applicable is 18 per cent, like in the cases where the builder outsources some of the construction activity to some other contractor.
So, for the balance consideration, which remained unpaid and for which the builder has not raised an invoice, the builder will recover the GST at the rate of 12 per cent on the balance amount due. According to the GST’s rules, the builder will be in a position to claim input credit on the materials and services used and should pass on the benefit of input credits to the flat buyers.
Hence, the builders should not ask the flat buyers to pay the full 12 per cent, without taking into account the benefits under the GST. However, if a builder does so, the authorities can initiate punitive actions against such builder, under the anti-profiteering provisions of the GST laws.
What happens if the entire consideration has been paid before the implementation of GST but the construction is completed after the introduction of GST?
In case the entire consideration has been paid before the introduction of GST, or if the invoice has been raised and it has been paid, you would have already paid service tax on the full value of the agreement. So, even if the construction is completed after the date of introduction of GST (i.e., June 30, 2017), you do not have any further tax liability under the GST law, as the GST substitutes the earlier service tax and VAT.
(The author is a taxation and home finance expert, with 35 years’ experience)