How are real estate transactions affected by GST?

Real estate transactions in India have undergone significant transformation with the introduction of the Goods and Services Tax (GST). GST has replaced multiple indirect taxes such as VAT, service tax, and excise duty, creating a unified taxation structure. Its application to real estate is governed by provisions in the CGST Act, 2017 and clarified through constitutional principles.

Constitutional Framework for GST on Real Estate

1. Article 246A

• Grants concurrent powers to the Parliament and State Legislatures to levy GST on goods and services, including real estate transactions.

2. Article 265

• Ensures that no tax is levied or collected except by the authority of law, validating GST imposition on specific real estate activities.

3. Article 366(12A)

• Defines GST as a tax on supply, ensuring clarity on its application to under-construction properties and other taxable real estate activities.

4. Article 286

• Restricts states from levying GST on inter-state supplies of goods and services, streamlining taxation for real estate developers operating across states.

Provisions Under GST for Real Estate

1. Taxability of Real Estate Transactions

• Under-Construction Property:
  • GST is applicable on the sale of under-construction properties (supply of goods and services).
  • No GST is levied on the sale of completed properties or ready-to-move-in flats, as they are considered immovable property under Schedule III of the CGST Act.
• Land Transactions:
  • Sale of land is exempt from GST under Schedule III.

2. Input Tax Credit (ITC)

• Builders and developers can claim ITC on goods and services used for construction.
• However, ITC is disallowed if the project involves an outward supply exempt from GST (e.g., completed properties).

3. GST Rates on Real Estate

• Residential Properties:
  • 1% GST for affordable housing (without ITC).
  • 5% GST for non-affordable housing (without ITC).
• Commercial Properties:
  • 12% GST with ITC for commercial real estate.

4. Works Contract (Section 2(119))

• GST applies to construction services under works contracts, categorized as a supply of services, at 18% with ITC eligibility.

5. Reverse Charge Mechanism (RCM)

• GST is payable under RCM for certain supplies such as raw materials purchased from unregistered suppliers.

6. Joint Development Agreements (JDAs)

• Tax liability arises on the transfer of development rights or construction services under JDAs. The time of supply is determined by Notification No. 4/2018-Central Tax (Rate).

Impact of GST on Real Estate

1. Transparency and Uniformity

• GST replaced multiple taxes, reducing ambiguities in tax liability for real estate transactions.

2. Reduced Tax Cascading

• Input Tax Credit (ITC) prevents tax cascading, but restrictions on ITC for residential projects have increased costs.

3. Boost to Affordable Housing

• Lower GST rates for affordable housing have made it more accessible, aligning with government initiatives.

4. Simplified Tax Structure

• GST has streamlined compliance for developers and buyers by creating a unified framework.

5. Challenges in Compliance

• Complexities in ITC claims, compliance with RCM, and ambiguity in JDAs still pose challenges.

Landmark Cases on GST and Real Estate

1. M/s. Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019)

• Issue: Eligibility of ITC for construction of buildings intended for leasing.
• Judgment: Orissa High Court allowed ITC on construction materials, stating it aligns with GST’s intent to prevent cascading taxes.

2. Unity Infraprojects Ltd. v. Commissioner of GST (2020)

• Issue: Classification of construction services under works contracts.
• Judgment: Tribunal upheld the classification of services as taxable under works contracts at 18% GST.

3. DLF Cyber City Developers Ltd. v. Union of India (2021)

• Issue: Applicability of GST on transfer of development rights in JDAs.
• Judgment: Delhi High Court clarified that GST is applicable on the transfer of development rights, treating them as taxable supplies.

4. Lodha Developers Ltd. v. Commissioner of CGST (2022)

• Issue: Applicability of GST on unsold inventory.
• Judgment: Tribunal ruled that GST does not apply to unsold flats held by developers, as they are not considered a supply.

5. Bangalore Club v. Commissioner of GST (2021)

• Issue: GST on clubhouse services provided to residents.
• Judgment: Karnataka High Court held that clubhouse services are taxable as distinct supplies under GST.

Exemptions and Exclusions Under GST

1. Completed Properties:
   • Sale of ready-to-move-in flats and buildings is exempt from GST.
2. Pure Land Transactions:
   • Sale of land is not considered a supply under GST, as per Schedule III.
3. Charitable Housing Projects:
   • Certain housing projects under government schemes are GST-exempt.

Conclusion

GST has revolutionized real estate taxation by unifying taxes, improving transparency, and reducing cascading effects. The CGST Act, 2017 and associated rules govern its application, particularly for under-construction properties and services in the sector. Landmark cases like Safari Retreats Pvt. Ltd. and DLF Cyber City Developers highlight the judiciary’s role in addressing ambiguities. While challenges remain, GST has simplified taxation in real estate, benefiting both developers and buyers.