No GST on property with completion certificate

Post the implementation of the Goods and Services Tax (GST) over a year ago, homebuyers booking their 'dream home' had to pay taxes under the new law. Even those who had purchased homes in soon to be completed under-construction projects were unsure about the GST calculation. As a result, buyers ended up paying GST on any property they purchased directly from builders. Benefits of the lowered tax slab weren't immediately passed on to homebuyers. Unfortunately the situation continues to be the same more than a later.

"Even where the project eventually got completed and possession of the apartment was handed over, benefits passed on to buyers have been only up to 2%, as substantial construction had already happened before GST implementation resulting in lower GST benefits for the homebuyer," said a tax analyst.

"In the years to come, projects that were just launched pre-GST would have more tax benefits in store to be passed on to homebuyers, as not much of construction (including purchase of materials) have happened pre-GST. As projects have still been subject to two different taxation systems, the benefit being handed out to buyers is minimal. However, in the years to come the benefits could go up to 4% to 5%," said a tax analyst.

Changes in GST on property purchase

Initially, the GST Council had put all transactions pertaining to home purchase under the 12% bracket. Eventually, in order to boost affordable housing segment, the government reduced the tax to 8%, but for homes outside the affordable housing ambit the tax continues to 12%.

During the initial days of GST implementation, the government had clarified that homebuyers are not supposed to pay any GST on completed projects. However, issues related to GST benefits not being passed on to purchasers keep on arising, even now. Due to these issues several homebuyers moved the National Anti-profiteering Authority (NAA) to demand their rightful dues.

The first ever order by NAA against a real estate company came against Gurugram-based Pyramid Infratech, where over 100 homebuyers moved the authority to get money paid for GST.

The NAA, in its first ever order against a real estate company observed: "The Respondent (Pyramid Infratech) cannot appropriate this benefit as this is a concession given by the government from its own tax revenue to reduce prices being charged by builders from the vulnerable section of society which cannot afford high value apartments."

Advantage homebuyers

Last week, the Ministry of Finance reiterated that there is no GST applicable on the sale or purchase of constructed property that is ready to move-in. The Ministry's note states that no GST has to be paid for "...flats where sale takes place after issue of completion certificate by the competent authority. However, GST is applicable on sale of under construction property or ready to move-in flats where completion certificate has not been issued at the time of sale."

The government recently clarified the effective rate of tax under pre- and post-GST regime on sale of under construction property, or ready to move-in flats, where Completion Certificate has not been issued at the time of sale. The government clarified that the effective tax rate under GST has not increased, as the input tax credit has now been made available. The input tax was restricted under pre-GST regime, wherein the tax incidence was 15-18%, vis-a-vis the present GST at the rate of 12%. According to Suresh Nandlal Rohira, Partner, Grant Thornton India LLP this explains the myth that property prices have gone up post implementation of GST.

The perception that prices went up after GST came about because buyers did not have to directly pay the Central Excise and VAT though these were indirectly charged. Pre-GST, there was Central Excise on most of the construction materials at 12.5%, apart from 12.5-14.5% Value Added Tax and there was not input tax credit available. This meant that the effective pre-GST tax incidence of 15%-18%.

"This is already well known within the industry that a buyer does not have to pay GST for any project having a Completion Certificate. In fact, many developers in their advertisements mention that 'no GST' has to be paid if a buyer books an apartment with them. There are certain realtors who prefer selling the project after they get Occupation Certificate (which is issued soon after the Completion Certificate), as it helps in marketing the project, apart from reducing construction risks," said Pankaj Kapoor, Managing Director, Liases Foras Real Estate Rating & Research.

"There was some confusion pertaining to Completion Certificate and Occupation Certificate. Law says that on receiving Completion Certificate, GST shouldn't be demanded from purchasers. In this case, the homebuyer should ask for a copy of Completion Certificate at the time of booking an apartment. The latest directive issued by the Ministry of Finance reiterates what was already there," said Abhishek Jain, Tax Partner, EY India.

"However, most builders would be concerned about the intimation by the government to pass on benefits of lower tax burden to property buyers by way of reduced prices/installments, where effective tax rate has been down. We have already witnessed in case of Pyramid Infra wherein the National Anti-profiteering has held the case against the builder. Real estate players needs to be mindful of these developments and act accordingly so as to not attract anti-profiteering provisions,'' he said.