From July 1, homebuyers will have to pay Goods and Services Tax (GST) on EMIs paid for purchase of under-construction apartments and on all additional costs collected by the developer such as internal and external development charges, preferential location charges and club membership fees.
GST will not be charged on completed apartments or on rental income received by a landlord from a tenant for a residential unit. In case of commercial properties on rent, a service charge of 15 percent is currently levied as service tax. This will be replaced by GST.
Parliament on Thursday passed four legislations to pave the way for roll-out of the GST from the target date of July 1.
While the government is yet to clarify whether a lower rate of 12 percent will be applied on real estate in the under-construction stage or a higher rate of 18 percent, the cost of the apartment will accordingly reduce or increase by a miniscule 1 percent once GST comes into effect provided the reduced tax scheme (abatement) continues, explains MS Mani, Partner, Deloitte Haskins Sells LLP.
The government is also to clarify whether developers and homebuyers can continue to receive benefits under the abatement scheme (reduced tax rate under a special scheme). Under the current service tax regime, for those buying an under-construction flat, an abatement of 75 percent is allowed, subject to the flat being less than 2,000 sq ft and sold for less than Rs 1 crore, taking the effective tax rate from 15 percent to 4 percent. Similarly, if the cost of the flat is above Rs 1 crore and the size of the unit is more than 2,000 sq ft, the abatement is reduced to 70 percent and the effective tax rate to be borne by the buyer is 5 percent. States also charge VAT over and above service tax. If the abatement rules are not included under the GST regime, the applicable tax rate will increase the cost of the residential unit.
“Currently, EMIs for ready-to-move-in apartments do not attract indirect tax. But installments paid to the builder for an under-construction property attracts a service tax of 15 percent on which abatement is provided. The premise here is that a builder is providing a service to a homebuyer by constructing an apartment. The abatement is allowed to take care of the value of the land involved in the construction of apartments," says Mani.
“Only under-construction properties will be impacted as service tax is charged at the pre-booking stage. Key states such as Haryana, Delhi and Maharashtra also charge VAT which is around 1 percent of the contract value for under-construction projects. Under the current regime, all under construction projects are liable to service tax and VAT. If a buyer has held a property for five years, registered it and it has a completion certificate, these taxes are not levied as these are constructed properties. The same will be true once GST comes into effect,” says Harpreet Singh, Partner, Indirect Tax, KPMG in India.
“Currently, around 5 percent service tax is charged from homebuyers on the entire sale value of apartment after providing for abatement. This is levied on all components such as BSP (basic selling price), PLC (preferential location charge), parking, club membership etc. Under a court ruling, a developer who sells an under-construction property and receives consideration from a buyer, it is termed as a works contract and not a transfer of property,” says Rohit Raj Modi, Vice President, North, Credai (Confederation of Real Estate Developers Association of India), an apex body of private developers.
Builders generally opt for either a compounding scheme under which they pay VAT to the authorities at the rate of 1 percent, depending on the state, but do not charge the same from customers or go in for an assessment scheme under which they produce records of purchases made during the construction process to the assessing authorities that charge them VAT on a notional profit of 10 percent.
What will be excluded under GST? Sale of land and buildings will be out of the purview of GST. They will continue to attract stamp duty levied by states. Electricity has also been kept out of the GST ambit.
What happens to affordable housing? According to reports, the Ministry of Housing and Urban Poverty Alleviation (MHUPA) has suggested to the Finance Ministry that the current exemption of service tax on affordable housing should continue even under the GST regime. A decision on this is expected before July.
“Given the government’s goal of Housing for All by 2022, this exemption is likely to continue under the new tax regime. MHUPA has also requested the states and union territories to consider waiver or rationalisation of stamp duty on affordable housing projects,” says Ramesh Nair, CEO & Country Head, JLL India.