Imagine you're in a financial crisis and you need a big amount of money immediately. You have invested in commercial property and you want to sell it. However, when you approach your Chartered Accountant, he explains that there is something called GST on commercial property that will be applicable on its sale. Now, you don’t understand what its implications are.
Selling and buying commercial properties is a complicated process when you don’t know the A-B-C-D of GST, the Goods and Services Tax. Navigating the ins and outs of Goods and Services Tax (GST) can be a daunting task for any property buyer or seller.
But don't be alarmed, we are providing you with a comprehensive article to clear all your doubts about GST on the sale of commercial property and its implications.
1. What is GST on property?
Many countries including India, have indirect taxing on the supply of goods and services. This is what we call the GST, the Goods and Services Tax. The GST on property refers to the tax that is applicable on the sale of immovable property, such as land or buildings, whether residential or commercial.
GST on the sale of commercial property in India is not applicable for all types of properties though. For example, the sale of under-construction or newly constructed commercial properties attracts a tax rate of 18% on the value of the property. However, the sale of fully constructed commercial properties or resale of commercial properties is exempt from GST.
It is important to note that GST is not applicable on the sale of residential properties or on the sale of land without any construction.
2. Impact Of GST On the Real Estate Sector
In India, GST was first introduced on July 1st, 2017. The main reason to implement this is to simplify the tax structure and to bring uniformity for all types of industries including the real estate industry.
Prior to GST, the real estate sector was subject to a variety of taxes, such as service tax, VAT, and stamp duty, which led to confusion and complexity. With the introduction of GST, multiple taxes were streamlined into a single tax, making the tax regime more transparent and simpler.
Some of the key impacts are as follows:
Overall compliance is increased as GST eliminates the various indirect taxes and has more transparency, and reduced tax evasion.
The tax burden is reduced because of the single tax, so the properties are more affordable to the buyers.
Affordable housing is boosted. As the GST on the sale of the property has a lower tax rate for affordable housing properties, the increase in supply and accessibility are also increased for the society of economically weaker sectors.
GST on the sale of residential property has decreased with many benefits while the GST on the sale of commercial property has increased with the new implementation.
The impact of affordable housing is at the rate of 1%, this one has a direct benefit for the buyers.
For luxury properties, the tax rate is revised to 5%, and this has an increase in tax amount for those who have bigger pockets as savings.
Moreover, the implementation of GST led to an increase in the cost of construction due to the increase in tax rates for under-construction properties, which in turn led to an increase in property prices. As per a report by Knight Frank India, property prices in Mumbai, NCR, and Bengaluru have increased by 3% - 9% in the year 2022 which in a way can be attributed to GST.
3. Is GST Applicable On The Sale Of Commercial Property?
GST on the sale of commercial property is applicable only if the property hasn't recieved a completion certificate. That is, the property is still under construction.
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Useful read: Beginner’s Guide to Commercial Property Investment
4. What Is The GST On the Sale Of Immovable Commercial Property?
Any immovable commercial property which is on sale or sold will have a GST rate for the transaction. The sale of under-construction or newly constructed commercial properties attracts a tax rate of 18% on the value of the property. This tax is applicable to the developer or builder of the commercial property, who is required to pay the tax to the government.
However, the sale of fully constructed commercial properties or resale of commercial properties is exempt from GST. This means that if you buy a fully constructed commercial property or a resale commercial property, you do not have to pay GST on the transaction.
5. What are the GST Rules On Commercial Property Sales?
GST on commercial property purchase, have you heard this before? It's mandatory to know this if you want to delve deep into real estate. There are certain rules in GST you need to be clear if you are going to buy or sell a commercial property.
GST is applicable for all immovable properties including commercial and residential.
Builders of commercial properties are required to register for GST and file regular GST returns with the government.
The GST is usually charged on the rent of the property at an 18% rate. In addition, the rent-paying individual has to deduct the income tax at 10% if the rent is more than 2.4 lakh/year.
The GST for the sale of under-construction or newly constructed commercial properties is 12% as per the revised 2022 update.
Fully constructed commercial properties or resale commercial properties are exempt from GST
Developers or builders of commercial properties are eligible to claim an input tax credit (ITC) on the GST paid on goods and services used for the construction of the property.
6. Is GST Applicable on Construction Of Commercial Property?
Yes, Goods and Services Tax is applicable on the construction of commercial property. The GST law mandates that any construction service, including those related to commercial properties, is subject to GST. The applicable GST rate for construction services is currently 18%, which includes both Central GST (CGST) and State GST (SGST).
7. Rate Of GST On Commercial Property In India
Buying or selling a commercial property has a GST applicable depending on the property's nature and location.
The rate of GST before and after 2019 has a significant difference as it was revised and decreased with certain benefits for a middle-class man who could plan for buying or selling commercial properties.
| Type of Commercial Property | Commercial property GST rate |
|---|---|
| GST On Commercial Properties In Residential Real Estate Projects | 5% |
| GST on other commercial properties | 12% |
Useful read: All You Need to Know About Capital Gains and Taxes on Sale of Property in India
8. Is GST on Property Refundable?
No! If the GST is paid for property purchase or construction, it is not refundable. It is always considered a liability and doesn't qualify for a refund most of the time.
GST on sale of commercial property in India also has some exceptions for GST refunds such as: If the property is sold to a non-Indian who is an outside buyer, here the GST amount may be eligible for a refund.
Builders and developers can claim the Input Tax Credit (ITC) for the raw materials and services used for construction. If there is an excess ITC accumulated then it may be eligible for a refund.
When a commercial property is sold as part of a going concern, where the business is being sold along with the property, the sale may be exempt from GST.
Some commercial properties may be eligible for GST-free or zero-rated supplies, such as medical facilities or charitable organizations. In such cases, GST paid on the purchase or construction of the property may be eligible for a refund.
Final Words
It is important to remember that GST is an ever-evolving system, and staying up-to-date on any changes or updates is crucial for business success. At the end of the day, understanding GST on commercial property is just one small aspect of the huge world of finance. By staying informed and proactive, you can continue to thrive, earn and grow while staying in compliance with all relevant laws and regulations. With this understanding, future entrepreneurs like you can confidently navigate through the complexities of property transactions, leases, and valuations, empowering them to unlock the full potential of your investments.
Whether you want to buy commercial property or sell your property, we at PropReturns can give you the best deal in the market!
