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GST and Its Provisions for Real Estate and Construction

A Guide for Businessmen and Chartered Accountants


The Goods and Services Tax (GST) Act, 2017, brought significant changes to various industries, including real estate and construction. Understanding GST's applicability and provisions is crucial for businesses and professionals in these sectors to ensure compliance and avoid legal issues. This article aims to provide a clear and concise overview of GST's impact on real estate and construction.

GST Applicability on Real Estate and Construction

  1. Construction Services: GST is applicable on construction services provided by builders, developers, and contractors. The tax rate varies depending on the type of project and service provided.
  2. Sale of Under-Construction Properties: When a property is sold before the completion certificate is issued, it is considered a supply of service and attracts GST. The effective GST rate on under-construction properties is 5% without the benefit of input tax credit (ITC).
  3. Sale of Completed Properties: If the property is sold after the completion certificate is issued, it is treated as the sale of immovable property and does not attract GST.

low angle photography of cranes on top of building

Key GST Provisions for Real Estate and Construction

  1. GST Rates
    • Affordable Housing: Projects under the affordable housing category attract a GST rate of 1% without ITC.
    • Other Residential Properties: Other residential properties have a GST rate of 5% without ITC.
    • Commercial Properties: The GST rate for commercial properties is 12% with ITC.
  2. Input Tax Credit (ITC)
    • Eligibility: Builders can claim ITC on inputs, input services, and capital goods used in the construction of properties meant for sale before completion. However, ITC is not available for projects under the 1% and 5% GST rates.
    • Reversal of ITC: If a builder claims ITC and later the project is sold after completion, the ITC claimed needs to be reversed.
  3. Joint Development Agreements (JDAs)
    • Landowner and Developer: In JDAs, the landowner transfers development rights to the developer, who, in return, provides constructed units or revenue share. GST is applicable on the transfer of development rights and the supply of construction services.
    • GST Liability: The liability to pay GST on the development rights is on the developer, while the landowner's liability arises on the construction services received.
  4. Reverse Charge Mechanism (RCM)
    • Goods and Services: Under RCM, the recipient of certain goods and services is liable to pay GST instead of the supplier. For construction, this includes services like legal fees, consultancy fees, and certain goods like cement.
    • Compliance: Businesses must ensure compliance with RCM provisions to avoid penalties.
  5. Compliance and Documentation
    • Invoices: Proper invoicing is crucial for claiming ITC and ensuring compliance. Invoices should include all mandatory details as per GST rules.
    • Returns: Builders and developers must file regular GST returns, including GSTR-1 (outward supplies), GSTR-3B (monthly summary return), and GSTR-9 (annual return).
    • E-Way Bills: For the transportation of goods worth over ₹50,000, an e-way bill must be generated. This applies to the movement of construction materials.
  6. Transitional Provisions
    • Ongoing Projects: For projects that were under construction at the time of GST implementation, transitional provisions allow the carryover of credits from the previous tax regime to GST.

Practical Implications and Compliance Tips

  1. Project Planning: Builders should consider GST implications during the project planning stage to optimize tax benefits and pricing strategies.
  2. Accounting Systems: Proper accounting systems should be in place to track ITC, RCM, and other GST-related transactions.
  3. Professional Advice: Regular consultation with Chartered Accountants and GST experts can help navigate complex provisions and ensure compliance.

Conclusion

GST has significantly impacted the real estate and construction sectors, bringing in both challenges and opportunities. Understanding the applicability and provisions of GST is essential for businesses and professionals to ensure compliance and optimize tax efficiency. By staying informed and seeking professional advice, builders and developers can navigate the complexities of GST and focus on their core business activities.