Want to invest in real estate? Beware of these GST myths!

Due to the complex nature of GST, many myths started doing the rounds. Here are some of these

For representational purposes (File Photo | EPS)

Real estate has been a favored investment choice for many Indians. The investments to a large extent are in the residential properties segment.

During the pre-GST era of taxation, multiple taxes applied to this sector namely VAT, stamp duty charges, registration charges, and service tax each of which had different rates and also varied from one state to another. With the implementation of GST, it was believed that investing in the real-estate sector will prove an easier decision due to the simplicity the 'One Nation, One Market, One Tax' principle ushered in.

Further, it was anticipated that the developers would pass on the input tax credit benefits received by them to buyers leading to a drop in prices.  However, with the introduction of GST, various problems with respect to the Input Tax Credit claims cropped up.  Further, due to the complex nature of GST, many myths started doing the rounds. Here are some of these:

Myth: GST has an equal impact on all residential properties

The impact of GST on a property is dependent on various factors like the classification of the project into affordable and non-affordable housing, the phase of construction, type of project (Residential Real Estate Project or Real Estate Project) as well as location.  

To illustrate, the GST law ignores one of the important factors in real-estate sector which governs its price i.e. location. It assumes a similar land cost in all the projects at 1/3^rd of total value irrespective of its location. Thus, if a person buys a house in Delhi and another person buys a house in a village in Uttar Pradesh, all will have to pay applicable GST considering 1/3^rd as value of land. This is a travesty. Further, due the reduced tax rate in affordable housing, there will be larger impact on this segment as compared to luxury housing.

Myth: GST law in real estate is clear

 There persist certain grey areas which need a thorough evaluation :

• Taxability of land value where the same exceeds one-third of the total sale price and the developer has contracted separate agreements for the supply of land and the construction portion;
• Ineligibility of refund to developers under the inverted duty structure considering inputs are procured at a higher rate of tax, whereas the output is charged at a lower tax rate.
• Adopting different tax computation methods for different projects/phases of the same project.
• Contradictory provisions for ITC availment i.e. one of the key conditions for reduced rate of GST is non-avialment of ITC. However, in case of area sharing model, GST law specified that landowner can avail the ITC on the construction services provided by the developer. But, it didn’t specify about the utilization. Thus, the recent clarification by way of notification was issued with respect to the same.
• Tracking of purchases from registered and non-registerd persons and to report the discrepancies in form on GST portal. However, there is no clarity on the form which needs to be filled.

The above points show GST laws in the real-estate sector aren't clear and there are still many grey areas that need to be looked at and clarified.

Myth: No GST is applicable on the sale of plots

GST law excludes sale of plots from GST levies. Further, sale of the building is also exempt where the entire consideration is received after issuance of completion certificate or after its first occupation.

However, if there is a plot on which small constructions like two rooms or a single room are built, then it will fall under the purview of GST and GST will be leviable if the said plot is transferred before construction.

And, as per GST law, 1/3^rd value of plots will be excluded and GST will be leviable on the 2/3^rd value which is actually tantamount to GST on land value since the value of construction will be very less. Further, as stated earlier, in places where the land cost is higher than the construction cost, this valuation of 1/3^rd doesn’t hold good and GST is being paid on land value leading to dual taxation which defeats the very purpose of introduction of GST.

Myth: Developers do not want to pass on the benefit to buyers

There is a perception that developers do not want to pass the benefit to end users. This does not bear scrutiny. They do want to pass on the benefit as this would not only attract more buyers but also build trust for their brand. However, the lack of mechanism to compute the benefits is a big impediment.

The industry is grappling with the need to determine the actual benefit from GST so that they can pass it on to the consumers. Unlike other sectors like FMCG, in the case of real estate, the product is unique. It is difficult for a developer to apportion the benefits of input tax credit across various projects due to changing market conditions impacting the estimated prices frequently.

The major challenge is passing on input tax credit to under-construction projects, where part of the project has been completed before GST. Although, there have been various rulings from National Anti-Profiteering Authority specifying the methodology to compute these benefits, they do not address all the issues. 

Myth: The affordable housing project is always affordable.

Following are the key qualifying criteria for a residential property to be classified as a project under the affordable housing segment in India:

•         The total carpet area of the residential property cannot exceed 60 square meters in metropolitan areas.
•         The total carpet area of residential property cannot exceed 90 square meters in non-metropolitan cities and towns.
•         The total value of a property cannot exceed Rs 45 lakh in either metropolitan or non-metropolitan areas.

Therefore, affordable housing projects are not always affordable. They come with a lot of terms and conditions to fall under the definition and requirements of affordable housing and the definition of affordability varies from person to person.

Myth: No GST is applicable on electricity and water charges for maintenance of property

Flat owners are liable to pay 18% GST on a residential property if they pay at least Rs 7,500 as maintenance charge to their housing society. Housing societies or residents’ welfare associations (RWAs) that collect Rs 7,500 per month per flat, also have to pay 18% tax on the entire amount. Housing societies that have an annual turnover up to the specified limit under GST are, however, exempted from paying the GST.  Thus, for the GST to be applicable, both the conditions should apply – i.e., each member should pay more than Rs 7,500 per month as maintenance charge and the annual turnover of the RWA should be higher than the specified limit.

It has been clarified by the government that the entire amount will be taxable if the maintenance charges exceed Rs 7,500 per month per member. For example, if the maintenance charges are Rs 9,000 per month per member, then 18% GST will be payable on the entire amount of Rs 9000 and not on Rs 1500 (Rs 9,000-Rs 7,500). Also, owners with multiple flats in the same housing society will be taxed for each unit separately.

GST will be applicable on the electricity and water charges paid for the maintenance of a property @18% (9% CGST + 9% SGST).

To summarise then, there is a need to rationalise the compliance related procedures and further simplification and clarifications are needed to reach to the ultimate objective of the introduction of GST as a good and a simple tax. 

The author is partner, GST, at chartered accountancy firm AMRG & Associates