How to Calculate GST on Under Construction Property with Examples

The Goods and Services Tax (GST), launched on July 1, 2017, is a comprehensive taxation system.  It largely had a positive effect on prospective real estate buyers as it subsumed a host of indirect taxes and reduced the cascading effect. It brought transparency to the taxation process. Under the aegis of the ‘Housing for All by 2022’ scheme, the real estate industry is growing rapidly. Therefore, if you are looking for affordable housing, it is vital to know how to calculate GST on under-construction property.

But before we dive into that, let us understand the significant changes brought about by GST in the real estate industry.

Impact on real estate

The real estate sector accounts for 6-8% of the Indian GDP. After the 33rd GST Amendment in April 2019, the GST rate on property transactions was reduced significantly. For affordable housing (within Rs. 45 lakhs), the GST rate on under-construction property went down from 8% to 1%. For other properties, it reduced from 12% to 5%. This significant drop was facilitated by the removal of Input Tax Credits (ITC).

These changes have ensured the fair pricing of a property. They also protect the buyer’s interests by ensuring transparency and removing the Stamp Duty, which burdened buyers under the erstwhile tax regime. Affordable housing and rental market have also gained popularity over the past few years, and competitive home loan interest rates by lenders have definitely played a part in this.

However, the Reverse Charge Mechanism under GST has affected developers negatively. Under this, if a person registered under GST acquires raw materials from a person not registered under GST, then the former will have to bear the cost of GST for the transaction. Moreover, many people don’t know how to calculate GST and find the process cumbersome.

Additional Read: Looking to finance a Property? Here is How GST Will Impact Real Estate

How to calculate GST on an under-construction property?

Example:  Suppose that an under-construction property worth Rs 1000 is sold to a buyer by a builder. Then to calculate the GST on building, Rs 300 will be counted out as the land value and the GST on construction would apply only on the remaining Rs 700.

Now that we have discussed the positive and negative impacts of GST, we can move on to the process of calculation of GST on under-construction property. Note that property without a Completion Certificate (CC) is deemed as under construction.

For a property that is under construction, the government has offered relief for property buyers.

• A tax of 18% is levied on under-construction flats, out of which you are subjected to pay only two-thirds, that is, only 12% tax.
• A deduction of 6% (one-third of the total tax) is made because it is assumed that this is the value of the land being transferred. No tax is levied on the transfer of land. Therefore, the final effective tax paid by the buyer is 12%.
• After the 33rd Amendment made by the GST Council, the tax rate was slashed from 12% to 5%. However, this is only valid for a property without Input Tax Credit.

Additional Read: How to Save Lakhs After Financing Your Property After GST Implementation?

In conclusion

With the above information, you can quickly and easily become acquainted with the process of calculating GST on construction of residential houses. We at Tata Capital can make your worries disappear using our GST Calculator and our home loan offers. What are you waiting for? Visit our website to learn more.