When it comes to meeting tax obligations, homebuyers along with property taxes, also have to pay the applicable GST on their property purchase. Over the last few years, several changes have been made to the GST regime directed towards the real estate sector.
Potential investors and homebuyers must scrutinize the implications of GST on real estate to make an informed decision when it comes to investing in this sector.
What is GST on Property in India
GST on property in India refers to the Goods and Services Tax (GST) applied to real estate transactions. Which was introduced by the Indian government in 2017 to harmonies global Taxation frameworks. Before GST on flat purchase, multiple taxes like value-added tax (VAT) services Tax. and central excise were levied on property purchase, making the process complex and less transparent.
Impact of GST on Rent: GST on House Rent and Commercial Property Rent
Are you wondering if you must charge and collect Goods and Services Tax (GST) on the rent received by you? the treatment of GST differs between residential and commercial renting. On the other hand, if you run a business, then rent payment is one of those prominent expenses and you may want to know your eligibility for claiming Input Tax Credit (ITC) on GST paid on the rental expense. Let's understand all these in detail.
GST Taxation on Real Estate:
Particulars
Ready to Move Properties
Under construction properties (house bought under credit linked subsidy scheme)
Under construction properties (excluding the other)
Resale properties
Land purchase and sale
Works contract
Composite Supply of works
Composit supply of works to Govt Authority
Composit supply of use for the general public
Composit supply of works contract for affordable housing
Tax on Rental Inco me in the pre-GST era
During the per-GST era, the landlord had to obtain a service tax registration if their
total taxable services (including the rental income from all properties) exceed Rs 10 lakh per year. As long as the rental income (from all the properties that have been rented out) does not exceed Rs. 10 lakh per year, the landlord would not be attracted to service tax
Under the previous tax regime, commercial properties alone, that were let out would attract service tax. This applies even if a residential property is used for commercial purposes. Service tax was levied at 15% of the rent, for commercial properties. Moreover, the rental income from residential properties did not attract service tax.
GST on New Flats
The GST on new flats is set at 5% directly influencing the ultimate purchase cost. Developers are eligible to receive the input tax credit (ITC) advantage for the supplies and Labour used in constructing the apartment. However, developers don't need to pass this ITC benefit on to the byer. Therefore, the final cost of a new apartment may vary depending on whether or not the developer chooses to transfer the ITC benefit to the buyer. This can affect the overall expense and should be considered when budgeting for a new flat.
GST Calculation on Real Estate
By factoring in the cost of property and the applicable GST rate and other charges, one can easily estimate the GST on property. To break it down, GST liability is computed by adding the State GST and Central GST.
For instance,
Total GST = SGCT + CGST
Notably, this GST regime extends an abatement of 33% of the contract amount as land value.
Example of GST Calculation
This simple example emphasizes how GST is computed on under-construction property.
Suppose an under-construction property is worth Rs. 1000 and is sold to a buyer. The GST on the property in question is computed after factoring in the standard abatement on under-construction property.
So, after deducing the 33% Rs. will be considered as the land value. Subsequently. GST on the property will be computed on the remaining Rs. 770 by implementing the applicable.
Does renting out a property attract GST
According to the GST Act, renting out an immovable property would be treated as a supply of services. GST, however, will be applicable only to certain types of rent such as:
(a) Ehen a property is given out on lease, rent, easement, or licensed to occupy
(b) When any property is leased out (or let out including a commercial industrial, or residential property for business (either or wholly) this type of renting is considered a supply of services and would thus attract tax. When you rent out a residential property for residential purposes, it is exempt from GST. Any other type of lease of renting out of the immovable property for doing business would attract GST at 18%, as it would be treated as a supply of service.
GST Exemptions on Real Estate
Under schedule III of GST Act, 2017, ready-to-move-in properties do not come under the category of goods or services. It is more like an activity of purchase or sale of a property. This is why GST is not applied to ready-to-move Propeties with a legitimate Completion Certificate.
Similarly, individuals will not be required to pay GST on resale properties and purchase and sale of land.
Other than the said exemption, real estate developers are entire to claim the Input Tax Credit on construction material under the GST system. Notably, to claim such benefits, developers need to meet a few specific conditions. for example, to proceed with the claim developers need to
(a) submit invoices/receipts of construction material
(b) The developer must receive goods and services
(c) Claims on personal use of goods and services will not be entertained
(d) All pending dues must be cleared
(e) GST must be filed accurately
Who is required to register when the property is rented out to business?
A taxpayer earning more than the exempted threshold will have to register under GST and pay taxes So, if you have given your property to a business, then it is taxable. If you are earning income from business including rent and any other exempted income of more than Rs. 20 lakh per annum. You will have to register yourself under GST.
The threshold limit for applicability of GST for those providing only services is Rs. 20 lakhs, more than the Service Tax limit of Rs. 10 lakhs. this makes many landlords - who were covered under the Services Tax regime be at ease now up to another Ts. 10 lakhs earned.
(Please note that the threshold limit of Rs. 20 lakh excludes special category states, where the limit remains at Rs. 10 lakhs.)
Let us look at an example - Mohan resides in Delhi and has a property in Bangalore that is rented out to Goel Furniture Co. for use as a show room for the Bangalore Property. he is getting a rental income of Rs 50000 monthly or Rs. 6,00,000 per annum alone. under GST, the place of supply shall be the location of the immovable property.
Therefore, even though the person resides in Delhi, the place of supply will always be where the property is situated, which is Bangalore in this example. Here, the total income is below Rs. 20 lakh a year, thus Mohan is excluded from GST applicability
It needs to be noted that, though this property is used for residential purposes, it cannot be said that the rent that is received is that from the residential property as this property is given to a company for their use. How they use the said property is not the deciding factor.
No GST on residential property rented in personal capacity for use as a residence
In the 48th GST Council meeting, the Council clarified that no. GST is payable where a residential dwelling is rented to a registered person if the same is rented it in their personal capacity and for use as their own residence
This means that where a registered person is proprietor of a proprietorship firm, and they have rented out a residential property in their personal/own capacity (and not that of the proprietorship) and the property is for use as their own residence then no GST will be applicable
