Emerging as a preeminent global sector in the contemporary landscape, real estate is divided into four distinct sub-sectors: housing, retail, commercial, and hospitality. The dynamic surge in corporate environments, the embrace of co-working culture, and the escalating influx of multinational corporations (MNCs) into India have precipitated a notable boom within this sector. This growth is unmistakably evident in burgeoning demands for commercial edifices and residential communities, which have intensified even amidst the backdrop of the COVID-19 pandemic. This trend is exemplified by the remarkable expansion witnessed in Gurgaon.
- Notably, within India, the real estate domain stands as the second most significant generator of employment, trailing only behind the agricultural sector.
- A projection by Savills India suggests a 15-18 million sq. ft. augmentation in the demand for data center facilities by 2025.
- The escalation in urbanization and a concurrent uptick in household incomes have kindled a heightened demand for residential properties.
- India’s position in the upper echelons of the list of top 10 globally appreciating housing markets attests to this fervent growth.
- Impressively, the period from April 2000 to September 2022 has witnessed Foreign Direct Investment (FDI) inflows totaling USD 55.18 billion in this sector, encompassing both construction development and related activities.
- The focal point of this discourse pertains to the implications of the Goods and Services Tax (GST) on the real estate sector, with specific attention paid to the various activities encompassed within this domain. These activities encompass:
- Sale/purchase of immovable properties, including commercial spaces and residential flats.
- Renting of immovable properties.
- Operating a paying guest (PG) business.
The GST implications on these activities are elaborated upon in two parts:
Part A: GST on Sale/Purchase of Immovable Properties
In accordance with Para 5 of Schedule III of the CGST Act, 2017, the sale of land and buildings (where the entire consideration has been received post-issuance of completion certificate or after the initial occupation, whichever comes first) does not qualify as supply of goods or services and therefore does not attract GST. However, when it comes to the sale of under-construction properties for which an occupancy certificate is yet to be issued, GST does apply. This signifies that properties sold after completion are exempt from GST, while properties sold during the construction phase are subject to it. The GST rates are as follows:
- Residential Property (under the affordable housing scheme): 1% without Input Tax Credit (ITC) on total consideration.
- Residential Property (not under the affordable housing scheme): 5% without ITC on total consideration.
- Commercial Properties (offices, shops, godowns, etc.): 12% with ITC on total consideration.
Further, as per GST law, the activity of constructing complexes, buildings, civil structures, or their components is classified under works contract services, encompassing the supply of services. Conversely, the sale of land does not attract GST, a stance reiterated by the CBIC circular dated August 3, 2022. Developed land is also classified as land under Schedule III of the CGST Act, 2017, affirming that it remains exempt from GST.
GST on Renting of Immovable Properties
Under GST law, renting of immovable properties is treated as a supply of service. Individuals earning rental income exceeding INR 20,00,000 annually are mandated to register under GST and are liable to pay GST at a rate of 18%. This division encompasses renting both commercial and residential properties. For commercial property rentals, GST is levied under the forward charge mechanism, irrespective of whether the recipient of the service is registered. The input tax credit is accessible for both commercial and residential property rentals, provided they are utilized for the registered person’s business activities.
Part B: In-Depth Explorations
- Affordable Housing Under GST: In the realm of GST, the government defines affordable housing as residential units valued up to INR 45 lakh, with stipulated size criteria for metropolitan and non-metropolitan areas.
- GST on Maintenance Charges for Housing Societies: Maintenance charges exceeding INR 7,500 per month incur an 18% GST, applicable to flat owners and housing societies. However, RWAs with turnovers below INR 20 lakhs are exempt. If both criteria are fulfilled, the entire maintenance charge exceeding INR 7,500 per month per member is subject to GST.
- GST on One-Time Maintenance Deposit by Builders: A recent ruling establishes that GST applies to non-refundable one-time maintenance deposits collected by builders from home buyers. However, GST is deducted when these funds are eventually utilized for maintenance.
- GST on Developable Land: GST does not apply to investments in developable plots, even with basic infrastructure. This exemption is reinforced by a circular issued by the CBIC.
- GST on Home Loans: Home loans involve certain services subject to GST, including processing fees, technical valuation fees, and legal fees.
In conclusion, the multifaceted realm of real estate intertwines with the complexities of GST, shaping the landscape for both developers and consumers. The provisions and implications of GST underscore the need for a comprehensive understanding of the regulatory framework within which this pivotal sector operates.