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GST on Real Estate: Land leasing, Renting, EMIs for Under-construction Houses to be Taxed

After receiving a nod from President Pranab Mukherjee on the four key legislations namely ‘The Central GST Act, 2017’, ‘The Integrated GST Act, 2017’, ‘The GST (Compensation to States) Act, 2017’, and ‘The Union Territory GST Act, 2017’, the Goods and Services Tax (GST) is all set to be implemented on July 01, 2017. Touted as the biggest taxation reform since Independence, GST will subsume central excise, service tax, Value Added Tax (VAT) and other local levies to create a uniform market.

The real estate sector has also been brought under the ambit of GST. Leasing of land, renting of buildings and EMIs for under construction houses will attract GST, post implementation. However, the sale of land and buildings will not be liable to GST and will continue to attract stamp duty as per the current tax regime.

Leasing or Renting of Land / Building

According to Clause 2 / Section 7 of the Schedule II of the CGST Bill, 2017 the following activities will be treated as a supply of services and will fall under the purview of GST:

  1. Lease, tenancy, easement, licence to occupy land
  2. Lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly

Under Construction Properties

Another aspect that the real estate developers need to consider is the inclusion of under construction properties under GST by the virtue of being treated as a supply of service. According to Clause 5 / Section 7 of the Schedule II of the CGST Bill, 2017, ‘construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier’ will be treated as a supply of service.

Since GST is levied on supply of goods or services, the sale of land and building(s) [except under construction properties] are exempt from GST since these activities are treated neither as a supply of goods nor a supply of services according to Clause 5 / Section 7 of the Schedule III of the CGST Bill, 2017.

In the current tax regime, income received from properties rented out for residential purpose is exempt from service tax. The good news is that in the recently circulated list of exempted services under Goods and Services Tax [GST], rental income from properties used for residential purposes continues to be exempted from the GST laws.

Abatement in Service Tax

A home buyer on purchasing an under construction property pays for land cost, materials used and the construction service provided by the real estate developer. Since service tax can be applied only on the services provided and not on the goods, it needs to be calculated only on the construction cost. Since it can get difficult to separate the costs, the government provides an abatement scheme, wherein the service tax is paid only on a portion of the total amount. The final GST rates and abatement, if any will decide the final impact of GST on real estate in India.