GST Impact- Under construction vs. ready to move property

GST Impact- Under construction vs. ready to move property
Property Status GST Rate
Under-construction property 12% (effective rate)
Under-construction property with full consideration paid to developer prior to GST regime Nil
Under Construction Property with partial consideration paid to developer before 1st July 2017 4.5% service tax on consideration paid before this date; subsequent invoices to attract 12% GST
Ready to Move in Property with Completion Certificate
Ready to Move in Property without Completion Certificate 12%
Resale Property Nil

GST on real estate is something that has been generating a lot of buzz amongst prospective homebuyers in recent times and why not! Buyers are already wary of the overall implications of the Goods and Services Tax (GST) on the cost of property that they wish to purchase. However, the impact of GST on housing property can be subdivided into two key aspects.

These are the GST impact on under construction property and GST on ready to move flats. Before delving deeper into these aspects, it must be noted that GST subsumes all other taxes that were earlier required to be paid by the buyer and the developer also gets input credit for the same.

GST rate for real estate

The effective rate of GST under purchase of a home which is under-construction or any commercial property from the real estate developer, which involves interest transfer in land or individual housing units to buyers, is 12%. There is total input tax credit available.

Yet, the full GST rate of 18% will be applicable in case of any consideration which does not involve transfer/undivided share of land like construction services offered by sub-contractors to the developer.

GST impact on under-construction property

As per the GST rule, construction of any building, complex, civil structure or any part which includes buildings/complexes which will be sold to buyers is considered as a supply of service. As a result, the Goods and Services Tax (GST) will be applicable for the same.

In this context, there are some aspects to keep in mind-

  • 5% service tax has to be paid by buyers (applicable on invoices raised/consideration paid prior to 1st July, 2017). Yet, payment made by the buyer to builders on or after this date against invoices issued on or after this date will attract GST at 12%.
  • There is no GST payable on under construction property in case the entire consideration has been paid to the developer prior to the rollout of GST. Buyers need not pay GST even if construction has been finished post 1st July, 2017. The transaction will draw 4.5% in service tax.

Thus, GST on all other under construction properties, it is effectively 12%. If you were thinking of how to calculate GST on under construction flats, you should keep in mind that purchasing any property under construction is taken as a service offered to you by the real estate developer. As a result, you’re required to pay GST on this service of construction of a building/part of a building/complex that you avail from the real estate developer.

Yet, the tax should not be charged in case the property has been purchased post the completion certificate being issued by any government authority or post occupation which indicates a resale transaction.

While the entire GST rate is 18% on under construction properties, it is not charged on the entire property value but only on 2/3rds of the same. 1/3rd of the value is taken as the land cost. The effective rate is thus 12% with full ITC (input tax credit) payable as GST on buying any under-construction residential/commercial property from a developer which involves transfer of interest in individual share of land/land to the property buyer.

GST on ready to move property

There are quite a few aspects that are worth nothing whenever it comes to GST on completed flats.

  • No GST (Goods and Services Tax) is to be paid by the buyer on property which is completed or ready to move in.
  • This applies only in case of properties which have already got their completion certificate issued by the requisite Government authority.
  • Property buyers can straight away save 12% GST on ready to move property although these properties are usually priced higher as compared to properties under construction and instant funds may also be required to buy the same.
  • GST thus does not apply on ready to move property in case the sale has taken place post the issuing of completion certificate on the property.

However, this means that ready to move properties without completion certificates will be attracting GST. This should have a major impact on buyers and real estate developers alike.

Here are some of the key points in this regard:

  • According to reports, 14% of overall unsold in the country comprises of ready-to-move-in property.
  • Projects which are ready but do not have completion certificates will have GST applicable on their purchase. The buying cost will go up for buyers similarly as in case of under construction properties.
  • Overall options will come down for buyers as well since not every ready-to-move-in property has its completion certificate.
  • Developers were previously cashing in on buyer preference for ready-to-move-in property and will now have to absorb GST charges for projects which have not obtained completion certificates yet. They will do this to attract more buyers since if the cost is passed onto buyers then the impact will be the same as buying under construction property.
  • There will however be no GST on resale property and secondary sales transactions should increase since there will be no GST on these properties which are deemed completed. Buyers could actually consider this option instead of forking out 12% as GST on new units.
  • Ready to move projects which have completion certificates will definitely garner huge demand since they will not have any GST applicable on the transaction. This will be a trend that most real estate developers will want to tap into over the next couple of years.

Homebuyers may consider opting for projects with completion certificates or they may explore options in the resale market since such units will be exempted from GST. The added GST imposed on ready to move in properties which do not have completion certificates is something that many developers will have to absorb either fully or partially.

Summing Up the Overall Impact of GST

As can be seen, GST does not apply on both under construction and ready to move property in case of certain conditions. The reverse is also true, where it applies on both categories in case of certain specific aspects.

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