GST simplified for home buyers

GST is a phrase that has been heard by Indians over the last decade or so. It is our

nation’s much-needed tax reform, which was implemented in July 2017. GST means

Goods and Services Tax, as most of us know. Any goods or services rendered are also

subject to this tax regime.

The fundamental reason for GST was to bring all kinds of indirect taxes under one

banner and make the taxation system more uniform. But one might ask, how is it

important for a home buyer?

In this blog, we will cover the salient points of GST that impact a home buyer.

GST and Real Estate

The most important question that comes to our mind is, what kind of real estate does

the government levy on GST? Only under-construction houses fall under the category

of GST. Ready-to-move-in homes that have a completion certificate won’t attract GST.

It doesn’t mean that they are free from any tax liability during the calculation of the

selling price of the housing unit, the builder factors in the tax component paid by him.

Pre – GST

Before GST got implemented in India, a builder had to pay multiple taxes during the

construction of the project. This included Service Tax, Central Excise, and Value Added

Tax (CST) etc. Since the builder could not get any credit against these taxes, it would

reflect in the selling price of the houses/flats up for sale under the said projects. As the

calculation of the various taxes would be extremely challenging for a homebuyer, they

lacked good clarity.

GST-Post

GST rolled out in our nation on 1st July 2017. It abolished the cascading impact of

taxes on taxes being applied. In addition, it was more straightforward and faster

because it was one tax with a digitally-driven system. Thus the home buyer was now

able to get an idea about tax liability with better clarity.

2019 GST Rate reduction on Home Buying

For making housing more accessible to the common man, in 2019, the government

had declared their goal of “Housing for all by 2022″. To boost that, they announced a

major reduction in the GST rates for the real estate industry based on home

categories. As of 1 April 2019, the revised rates have come into effect.

Home-unit Categories for GST application

Homes fall into 2 categories, based on which the government levies GST, affordable

and non-affordable/luxury homes. An affordable housing unit should cost less than 45

Lakhs (Delhi-NCR, Mumbai-MMR, Bengaluru, Chennai, Kolkata, and Hyderabad) and

measure up to 65 sq.mt in metros and up to 90 sq.mt in non-metros. Anything above

this proposition is considered to be a luxury home.

Current GST Rates

1% for affordable housing – without Input Tax Credit (ITC)

5% for non-affordable housing – without Input Tax Credit (ITC)

The GST rates in 2019 were reduced from 8% to 1% for affordable housing units. For

non-affordable/luxury housing units, the rates came down from 12% to 5%. The

reduced rate would apply to all the projects that begun their construction after 31st

March 2019. This rate reduction effectively eliminated input tax credit.

On 31 March 2019, the government gave the projects under construction the option of

choosing between the new rates or the old rates with the possibility of claiming the ITC

balance.

Input Tax Credit in GST

One of the most significant aspects of Goods & Services Tax was the ITC, which helped

to prevent taxation. Every time they bought raw materials such as cement, steel, sand,

etc. or services such as architectural consulting for the project, developers would pay

tax during the construction of a project. GST will allow the developer, at the time of the

output tax payment, to claim the input tax credit.

GST on Home Loan

GST does not apply to the interest payment or principal amount repayment.

Government levies GST on service charges of the bank like the processing fee and pre-

payment fee etc.

Banks and financial institutions offer financial aid only in the form of a home loan,

while the home buyer has to pay the down payment.

GST brings transparency in the functioning of the real estate sector & useful for new

home buyers.