BACKGROUND OF THE INDUSTRY

The Construction industry is a vital contributor to the Indian Economy.

REAL ESTATE SECTOR

• Part of the construction sector – globally

Third-largest recognised sector.
industry amongst 13 • Comprises of 4 sub-sectors: housing, retail,
hospitality & commercial.
major sectors Second-highest
employment
generator • Growth of real estate sector:

Due to surge in residential properties because of

urbanisation and rising household income.
BACKGROUND OF THE INDUSTRY
NRI investments in the Indian real estate sector come pouring in especially in cities such as Bengaluru, Ahmedabad, Pune
and Chennai.

• Estimated Growth of real estate sector:

The construction industry in India is expected to grow

by 12% in the year 2023
It is expected to reach $1.4 Trillion by 2025.

The real estate sector in India is expected to increase

to Rs. 65,000 Crores by 2040.
It will contribute 10% of the country’s GDP by 2025
As of today, it stands at 7% contribution.
BACKGROUND OF THE INDUSTRY
GOVERNMENT INITIATIVES

In the Union Budget 2023-24, a commitment of Rs. 79,000 crore (US$ 9.64 billion) for PM Awas
Yojana has been announced, which represents a 66% increase compared to the last year.

The Smart City Project is a prime opportunity for real estate companies due to increased demand
of commercial and residential spaces

100% Foreign direct investment in the construction industry in India under automatic route is
permitted in completed projects for operations and management of townships, malls/shopping
complexes, and business constructions.
PRE-GST REGIME • Entry Tax: Levied by some states on entry of
building materials into the states.

INDIRECT TAXES THAT WERE APPLICABLE • Octroi: Tax levied by some municipal corporations
TO THE CONSTRUCTION/REAL ESTATE on entry of building materials into the municipal
SECTOR corporation area.

• Stamp Duty: State-level tax levied on transfer of

• VAT: Value Added Tax is a State-level tax levied on property. In real estate it is applicable to sale, lease,
sale of building materials. or transfer of ownership of property.

• Central Excise Duty: Levied by central government • Registration Fee: State-level fee levied on
on manufacture of goods. Applicable to production registration of property transactions. In real estate,
of construction goods such as pre-fabricated it is applicable on sale deeds, lease deeds and other
concrete blocks, pipes, and other building materials. property-related documents.

• Service Tax: Levied by Central Government on • Property Tax: Local tax levied by municipal
provision of services. corporations or local authorities on ownership of
property.
PRE-GST REGIME
EFFECTS OF THE PREVIOUS INDIRECT TAX REGIME

Indirect Taxes help generate revenue for the Government, which in turn is used for development projects. However,
there are many negative effects of it such as:

Double Taxation: Indirect taxes are levied at multiple No uniform taxation regime: VAT, Service Charges and
stages of supply chain, resulting in double taxation and Registration charges are some of the indirect taxes which
higher costs for businesses. vary from state to state.

Complex Tax System: Multiple layers of indirect taxes Unfair Tax Burden: Indirect tax often results in unfair
create a complex tax system, leading to confusion and burden on the construction industry as certain materials
compliance difficulties for businesses. and services are taxed more than others.

Inefficient Credit System: It leads to business being Lack of clarity on tax liability: The complex tax structure
unable to claim input tax credit, resulting higher costs for and multiple tax laws lead to confusion regarding tax
them. liability, resulting in disputes.
PRE-GST REGIME CASE STUDY ANALYSIS
Before GST, Service Tax levied on under-construction
properties at a rate of 4.5% in addition to other taxes
such as VAT and Stamp Duty. This resulted in complex
tax structure and increased cost of under-construction
Nature of Duty Rate of Tax When was tax properties.
required to be
paid According to Knight Frank India Report, tax burden on
under-construction properties in Mumbai was at 35%
VAT 1-4% On the sale of
high in 2016. Buyers of under-construction properties
Service Tax 4.5% under
had to pay a total of 14 different taxes, including service
construction
Stamp Duty 0.5-1% tax, VAT, stamp duty and others.
properties
Charges
Registration 5-7% Inefficient input tax credit on construction materials
Charges resulted in high costs for developers. Thus, high tax
burden resulted in increase in property prices. As a
result, construction and real estate industry faced an
unfair tax burden which impacted the affordability of
properties and led to slowdown in the sector.
 Input Tax Credit:
PRESENT GST When you buy a product/service from a registered dealer you
pay taxes on the purchase. On selling, you collect the tax. You

ERA
adjust the taxes paid at the time of purchase with the amount of
output tax and balance liability of tax has to be paid to the
government. This mechanism is called utilization of input tax
credit.

GST on real estate is applicable when there is services as So, in simple terms GST will be applicable on the
defined under Entry 5(b) of Schedule-II of CGST Act 2017 as of sale of under-construction properties that have yet
which, GST on real estate will be applicable only on satisfying to receive OCs. It won’t be applicable on ready-to-
three under-mentioned conditions: move homes or on the sale of land unless
developed. In case of developed land, 1/3rd will be
counted as land value and GST on construction will
Consideration is be applicable on remaining 2/3rd.
This building received from
There is However, in case of sale of under-construction
must be buyer before
construction issuance of properties, the following rates will come into
intended for
of building completion picture.
sale to buyer certificate
Sr. No Nature of Project Nature of Residential Commercial/Residential GST Rate (old) GST Rate
Construction Portion (New)
ITC ITC

Note:
Residential Portion 12% 1%
1. RREP Affordable Yes No REP- Real Estate Project
Commercial Portion 12% 5%
RREP- Real Estate Project
where the carpet area of
the commercial apartment
Residential Portion 12% 5% < 15% of the total carpet
2. RREP Non-Affordable Yes No area of all the apartments in
Commercial Portion 12% 5% REP

Affordable price- A
residential apartment in a
Residential Portion 12% 1% No project having carpet area
3. REP Affordable Yes not exceeding 60 square
Commercial Portion 12% 12% Yes meter in metropolitan cities
or 90 square meter in cities
or towns other than
metropolitan cities and for
Residential Portion 12% 5% No
which the gross amount
4. REP Non-Affordable Yes charged is not more than
Commercial Portion 12% 12% Yes forty five lakhs rupees

100%
5. N/A N/A 12% 12% Yes Yes
Commercial
Note:
1. Builders need to purchase 80% of inputs and input services from the registered persons
2. Developers of the ongoing residential projects have been given an onetime option to choose between the old tax
rates with ITC and the new rates without ITC for under-construction residential projects to resolve any issues related to
the input tax credit.

Apart from these there are two more aspects of GST applicability in real- estate sector, one being the GST on various
construction material and other in the services aspect like the service of construction itself.

Moreover, just having an

GST on key Construction Materials
Building Bricks
Marble/ Granite Blocks
Glass for Construction
Slag Cement
GST on Key Transaction Services
understanding of the tax rates
5%
Under construction properties under and its applicability is not enough,
8%
Credit Linked Subsidy Scheme we need to understand that
12% whether this has brought any
Composite supply of works contract significant changes and have any
12%
18% for affordable housing impact on the buyers and builders.
Works Contract (other than govt.
This will be discussed upon in the
28%
bodies)
18% further slides
 IMPACT OF GST
ON DEVELOPERS/CONTRACTORS/BUILDERS
• In the previous regime, the builder paid multiple taxes such as Item/Component GST Rate
Excise Duty, Value Added Tax , Customs Duty for the various Iron & Steel 18%
raw materials purchased. and service tax on various services
like labor charges, legal fees, professional fees, etc. Also, here, Sanitary fittings 28%
the input credit of goods can’t be used with the output liability Electrical cables 18/28%
of services. Sand 5%
• This added to the pricing of the services, which was borne by Building Bricks 5%
the buyers, indirectly.
Fly ash bricks 12%
• In the GST regime, the construction costs have been
reduced as the multiple taxes are subsumed. Services 18%
• For the taxes incurred by the builders, Input Tax Credit
can be availed on both, services and material.
Effect of Reverse Charge Mechanism
Benefits of GST Regime for builders: The real estate sector uses many supplies
1. Elimination of cascading effect from the unorganised sector and therefore
2. Easy compliance under GST mechanism builders will have to
3. Uniform tax structure bear the tax.
However, as the input tax credit is available
on products utilized for construction, the
overall tax incidence is neutralized
IMPACT OF
GST Definition- Section 2(5) of the CGST Act, 2017

Means – A broker/ commission agent – carrying out

ON REAL ESTATE business of supply or receives the goods or services
AGENTS on the behalf of others.

Helps Buyers to choose property & builders to get buyers.

Section 24 of CGST Act, 2017 -Compulsory Registration

Illustration:

Rohan Builder Hires Raju (Agent)

• Supply of services on behalf of others.

• GST on commission- 18 %
• ITC available to agents
 IMPACT OF GST
ON RE-DEVELOPMENT OF PROPERTY

• Transfer of redevelopment rights by the landowners or builders

• Sale of land is neither the goods nor the services, hence no GST levied on the landowners.

• The builder shall be liable to pay GST under RCM for the registration of redevelopment and
permission from the local authority.

• Selling of flat before receiving Completion certificate: Supply of Service as per Section 7
read with para 5(b) of Schedule II.

• Selling of flat after completion certificate: No GST shall be charged.

IMPACT OF GST
ON BUYERS
In the previous regime, buyers bore multiple
taxes such as Value Added Tax, Service Tax,
Registration Charges and Stamp Duty.
The GST Regime is simple and transparent
form of Indirect Taxation which is applied to
the purchasing price.
Tax Rate for under-construction property: 12%
• Larsen & Turbo v. State of Karnataka
In this case the Supreme Court opined that
Immovable Property shall be excluded from
the GST regime.
Therefore, no GST is charged on completed
and ready-to-move in property
• Benefits of the GST Regime:
When Input Tax Credit is received by the
developer or contractor, it passes to buyer.
Implies long term benefit
IMPACT OF GST
ON CO-PROMOTERS LAND OWNERS AND JOINT DEVELOPMENT AGREEMENTS

Meaning
In this situation, the land is acquired by some other person and development rights are further extended to the
builders.
Case No. 1: Sale of Land Case No. 2: Development of Land

Section 7, Schedule III of CGST Act, 2017 This essentially forms a partnership between
prohibits the application of GST on sale of land, the land owner and developer.
as it neither qualifies as supply of goods nor
services. Notification No.11/2017-CT vide Notification
No.3/2019-Central Tax (Rate) dated 29/03/2019
Therefore, applying GST will be illegal allows for GST to be applied.
IMPACT OF GST
Item/Component Applicable Tax Rate
ON OTHER STAKEHOLDERS Customer Advances 12/18%
Floor Raise Charges 18%
The 3 primary costs incurred in the real estate Corner Flats 18%
sector are as follows: Facing Charges 18%
Amenities Charges 18%
Maintenance Charges 18%
Cancellation Charges 18%
Land cost Material cost Labour costs

Overall impact of GST:

GST is beneficial to the real estate sector

 CONCLUSION
BENEFITS CRITICISMS

• GST has reduced the burden on buyers, builders and

• Any restriction on ITC would result in a massive
developers. However, it has minimized the scope of
Cascading Effect of taxes and lowering of profits for
other income for the builders.
the industry. This move has resulted against the
basic principle of GST which was to establish an
• Rationalization of tax rates would not only boost
unbroken chain of tax credits.
the sales for the Real estate sector but also allow
the benefits to reach the ultimate consumers.
• Reversal of Input tax credit on a proportionate basis
would entail significant computational issues for
• The benefit of proposed GST of 5% restricting the
builders as each project would be in various stages
input tax credit would be beneficial to only those
of construction and have different sale patterns.
projects which has a high rate per square feet on
Protecting existing input tax credits and mandating
account of increased land price and has negative
the new rates only in respect of new Projects would
impact or no impact where the flat price is less on
benefit both builders and consumers.
account of reduced land price.
WAY FORWARD
There might be a situation where complete VAT has already been paid; however, only a part of
Service Tax is yet to be paid. Therefore, there might be a question of the proportion of GST that
needs to be paid in such a scenario. To deal with such cases, section 42(11) of the CGST Act/SGST
Act will be helpful.

The challenges the industry has been facing will be diluted by the
enactment of this new GST on real estate. It will help the industry
come out of the turmoil it has been seeing for quite a long time.

The new GST enactment would

certainly be beneficial to the
buyers, and bring transparency,
ease and accountability in the
taxation process.