The real estate sector has always been regarded as one of the most complex and heavily regulated industries in India. The introduction of the Goods and Services Tax in July 2017 marked a turning point for this industry, which had previously been subject to multiple indirect taxes levied by both central and state governments. Real estate developers, contractors, and buyers had long struggled with overlapping levies, inconsistent state practices, and litigation arising out of the taxation of construction contracts. GST attempted to consolidate this maze of laws into a uniform framework. However, the journey has not been simple.
This traces the historical taxation framework for real estate, the manner in which GST was introduced, its statutory provisions, and the legal concepts that determine its applicability to construction projects.
Taxation of Real Estate Before GST
Before July 2017, the taxation of real estate was a patchwork of central and state levies. Service tax was levied by the central government on certain construction-related services, while states imposed value added tax and works contract tax on similar activities.
Developers entering into agreements with buyers for sale of flats before completion were liable to collect service tax on a portion of the consideration received. At the same time, states required developers to pay value added tax on the materials deemed to have been transferred in the course of construction. This dual levy often led to double taxation. For instance, the same transaction of a buyer making a payment to a developer could trigger both service tax and VAT.
In addition, stamp duty and registration fees were levied by states on agreements to sell immovable property. These were not subsumed under GST and continue to be payable even today. Buyers therefore had to bear a heavy tax burden, which contributed to higher property prices.
Another problem under the earlier regime was lack of clarity regarding the valuation of construction services. Different states prescribed different formulas to compute the taxable value for works contracts. This not only created compliance difficulties for developers operating in multiple states but also led to litigation.
Introduction of GST in July 2017
The Goods and Services Tax was introduced on 1 July 2017 with the objective of creating a single indirect tax system across the country. For the real estate sector, GST replaced service tax, works contract tax, and value added tax. Instead of paying different levies to different authorities, developers now had to comply with a single law.
At the time of introduction, the applicable rate of GST on construction services was 12 percent with input tax credit. For affordable housing projects, the concessional rate was 8 percent with credit. Developers were permitted to claim credit for taxes paid on inputs such as cement, steel, and services received from contractors.
However, the transition was not smooth. Many developers found that while they were paying GST at 12 percent, they were unable to pass on the benefit of input tax credit to customers in an easily verifiable manner. Buyers complained that the promised reduction in prices was not visible. Litigation also arose on whether land value should be deducted from the taxable amount, and if so, how the deduction should be calculated.
Statutory Provisions under the CGST Act
The statutory basis for levying GST on construction of property is found in paragraph 5(b) of Schedule II of the Central Goods and Services Tax Act. It deems the following activity as supply of services:
Construction of a complex, building, civil structure or a part thereof, including those intended for sale to a buyer, except where the entire consideration is received after the issue of completion certificate or after first occupation, whichever is earlier.
This provision makes it clear that when a builder sells flats before the issue of completion or occupancy certificate, GST is payable because such a transaction is treated as supply of construction service. On the other hand, if the entire payment from the buyer is received after the building is completed and the competent authority issues a certificate, no GST is applicable.
Meaning of Construction and Residential Complex
The law provides a broad definition of the term construction. It includes not only new construction of complexes and buildings but also additions, alterations, replacements, and remodeling of existing structures. This ensures that even redevelopment projects and repair contracts are brought within the ambit of GST.
A residential complex has been defined as a building or group of buildings having more than one residential unit. A single residential unit, in contrast, means a self-contained dwelling designed for one family. The definition plays an important role because taxation depends on whether a project falls under the category of residential real estate project or not.
Completion Certificate and Occupancy Certificate
The statutory provision refers to the issue of a completion certificate by a competent authority as the determining point for levy of GST. The competent authority could be a government body, a local authority, or any authority authorised by the government. In cases where no such requirement exists under law, the certificate may be issued by an architect, a chartered engineer, or a licensed surveyor.
In practice, many municipal laws provide for the grant of occupancy certificates, which allows possession and occupation of the premises. Courts have recognised that an occupancy certificate is equivalent to a completion certificate for GST purposes. For example, in certain rulings, it was clarified that once an occupancy certificate is issued by the municipal corporation, the developer cannot be asked to pay GST on subsequent sales.
This has significant practical implications. If a flat is sold after issuance of an occupancy certificate, the transaction is treated as sale of immovable property, which does not attract GST. Only stamp duty and registration charges would apply.
Concept of First Occupation
Another important concept under GST law is first occupation. The provision states that GST is not applicable if the consideration is received after completion certificate or first occupation, whichever is earlier. The term first occupation was initially unclear and caused confusion.
The Central Board of Indirect Taxes and Customs issued a circular clarifying that first occupation refers to the first legally recognised occupation of the building under applicable laws. This means informal possession given by the developer to the buyer before obtaining statutory approvals will not be considered valid.
In many cases, buyers start using their flats even before the official certificate is issued. However, for GST purposes, such occupation is disregarded. Only once the competent authority recognises the occupation does the exemption from GST become available.
Ongoing Projects and Partial Completion
The real estate industry often deals with large projects spanning multiple years and involving several phases or towers. It is common for developers to receive partial completion or occupancy certificates for individual buildings within a larger township.
GST law treats each building or phase for which a separate certificate is issued as an independent project. Accordingly, a developer may be liable to pay GST on one building under construction while another building in the same township is considered completed and outside the scope of GST.
This principle was particularly relevant at the time of transition in April 2019, when the GST Council revised rates. Projects where partial completion was obtained before 31 March 2019 were treated as ongoing projects, allowing promoters to choose between the old and new tax schemes.
Implications for Buyers and Developers
For buyers, the key takeaway is that GST is applicable only on under-construction property. If a property is purchased after the issue of completion or occupancy certificate, no GST is payable. However, stamp duty and registration charges continue to apply, which means the cost is not tax-free.
For developers, the statutory provisions require meticulous compliance. They must track the status of certification, the timing of payments received, and the nature of construction. Any mistake in classifying a project or misinterpretation of completion status could result in demand notices and penalties.
Supply of Construction Services by Developers
It is essential to recognise that GST is levied not on the sale of immovable property but on the provision of construction service. When a developer agrees to construct and deliver a flat to a buyer in return for payment received in installments, it is treated as a works contract. GST law deems such contracts as supply of services.
This principle has been upheld in advance rulings and judicial pronouncements. Even when a buyer resells an under-construction apartment, GST is not payable by the buyer because the buyer is not providing construction services. The levy is confined to the developer who is engaged in construction activity.
The Broader Policy Objective
The introduction of GST in the real estate sector was aimed at reducing the cascading effect of multiple taxes and bringing transparency in pricing. It was also expected to curb black money transactions, as GST requires strict invoice matching and input tax credit mechanisms.
However, the initial years of GST witnessed confusion, especially in interpretation of statutory provisions. Questions arose on valuation, timing of supply, and applicability in redevelopment and joint development agreements. These were addressed gradually through circulars, notifications, and judicial rulings.
Shift from Old Rates to New Rates
When GST was introduced in July 2017, the standard rate on construction of residential apartments was 12 percent with input tax credit. For affordable housing, the concessional rate was 8 percent with credit. Developers were entitled to set off the GST paid on materials such as cement and steel and on input services like architect fees against their output tax liability.
Despite the benefit of credit, homebuyers felt that property prices were not reducing. Developers faced difficulty in passing on the credit transparently, which created disputes and customer dissatisfaction. To address these concerns, the GST Council decided in February 2019 to overhaul the system.
With effect from 1 April 2019, new projects were subject to significantly lower rates, but without the facility of input tax credit. Affordable housing projects were taxed at 1 percent, while other residential apartments attracted 5 percent. Commercial apartments forming part of a residential real estate project were also taxed at 5 percent.
Treatment of Ongoing Projects
For projects that were already under construction on 31 March 2019, developers were given the choice to either continue under the old rates with input tax credit or shift to the new scheme with reduced rates but no credit.
This option recognised that many developers had already planned their pricing and procurement strategies under the old system. Forcing them to adopt the new scheme could have led to serious business disruption. By giving an option, the Council allowed each promoter to evaluate which regime was more beneficial depending on the stage of completion and the amount of input credit accumulated.
If the promoter opted for the new scheme, payments received after 1 April 2019 were taxed at 1 percent or 5 percent, even if the booking was made earlier. On the other hand, if the promoter remained under the old scheme, the applicable rate continued to be 8 percent or 12 percent with credit until completion.
Procurement from Registered Suppliers
One of the most important compliance requirements under the new regime is that at least 80 percent of inputs and input services for a project must be procured from registered suppliers. This provision was introduced to widen the tax base and ensure that transactions in the sector are captured within the GST network.
If a promoter fails to meet the 80 percent threshold, the shortfall is deemed to have been procured from unregistered suppliers, and the promoter must pay GST at 18 percent on the shortfall under reverse charge. An exception applies for cement, which is subject to 28 percent under reverse charge if purchased from unregistered dealers.
The rule ensures that developers avoid sourcing from unregistered entities and contributes to formalisation of the supply chain. It also imposes an additional compliance burden, as promoters need to maintain meticulous records to demonstrate compliance with the 80 percent requirement.
Project-Wise Compliance
Each real estate project is treated as a distinct unit for GST purposes. Promoters cannot club multiple projects for the purpose of compliance with procurement rules or for exercising the option between old and new schemes. Even within a large township, different phases or buildings may be considered separate projects if separate approvals are issued.
This project-wise treatment means that developers have to maintain separate books of accounts, invoices, and records for each project. While this increases compliance cost, it also creates transparency and ensures that input credits and liabilities are not intermingled across projects.
Advance Payments and Time of Supply
GST law provides that tax on services is payable at the earliest of the date of raising invoice or the date of receiving payment. Since construction is treated as supply of service, advances received from buyers also attract GST.
For instance, if a buyer pays a token advance for booking a flat before completion, GST is payable by the developer immediately on receipt of that amount, even though the flat will be handed over much later. This principle has been reaffirmed in advance rulings and circulars.
This rule sometimes creates cash flow issues for developers, as they must discharge tax liability even before incurring the full construction cost. However, it ensures that revenue authorities get their dues upfront and that buyers are issued proper tax invoices for payments made.
Taxation of Contractors and Sub-Contractors
Developers frequently engage contractors and sub-contractors for execution of civil works, finishing, electrical, plumbing, and related services. These contractors are treated as independent suppliers under GST.
The rate of GST for contractor services depends on the nature of the project. For services provided to residential or commercial projects, the applicable rate is generally 18 percent. However, when the services are provided to affordable housing projects that have been given infrastructure status, the rate is reduced to 12 percent.
An advance ruling in the case of Starworth Infrastructure clarified that contractor services for affordable housing projects are eligible for the concessional rate of 12 percent. This distinction makes it important for developers and contractors to verify whether the project qualifies as affordable housing under the notified definitions.
Redevelopment and Joint Development Agreements
Redevelopment projects are common in cities where societies of existing apartment owners engage developers to reconstruct buildings in exchange for development rights. In such cases, the society transfers development rights or additional floor space index to the developer, who in return constructs new flats for society members and also sells additional units to outsiders.
GST law treats transfer of development rights as consideration. The builder is required to pay GST both on the flats given to society members as well as on those sold to new buyers. For the society members, the value of consideration is the development rights surrendered, while for outside buyers it is the monetary consideration paid.
Special rules have been notified to determine the timing and value of tax liability in such redevelopment cases. Promoters must carefully evaluate these provisions to avoid disputes.
Slum Rehabilitation Schemes
In certain states, governments implement slum rehabilitation schemes where developers are granted additional development rights in exchange for constructing free housing units for slum dwellers. The developer recovers costs and profits by selling additional units to buyers in the open market.
GST applies to both legs of the transaction. The free apartments given to slum dwellers are treated as consideration for the transfer of development rights, while the units sold to other buyers are taxable at 1 percent or 5 percent depending on whether they qualify as affordable housing.
The government has issued notifications granting concessional treatment to certain notified rehabilitation schemes. Developers need to verify eligibility before availing such concessions.
Cancellations and Rebookings
A practical issue arises when buyers cancel their bookings after having paid installments on which GST has been collected. The law allows promoters to issue a credit note to the buyer and adjust the tax liability, provided the credit note is issued within the prescribed time.
If the buyer later rebooks the flat, the earlier tax is reversed and the new booking is taxed at the rate applicable on the date of rebooking. This provision ensures fairness to both parties but requires timely compliance with invoicing and credit note procedures.
Affordable Residential Apartment – Definition
The benefit of 1 percent rate applies only to affordable residential apartments as defined in the notifications. The definition is based on both size and value criteria.
In metro cities, the carpet area of the unit must not exceed 60 square meters. In non-metro areas, the limit is 90 square meters. Further, the value of the apartment must not exceed forty-five lakh rupees. Both conditions must be satisfied for the unit to be considered affordable.
This definition ensures that the concessional rate is targeted at genuine affordable housing projects and not misused for larger or luxury apartments. Promoters must ensure compliance with these conditions, as incorrect classification can result in substantial tax demands.
Compliance Challenges for Promoters
The 2019 framework, while simplifying rates, has introduced several compliance challenges for promoters. They must track procurement from registered suppliers, maintain separate accounts for each project, and ensure correct classification of apartments as affordable or otherwise.
In addition, they must manage advance payments, issue timely invoices, handle cancellations, and comply with reverse charge obligations on unregistered procurements. Non-compliance can attract penalties and interest, and may also affect reputation with buyers.
Promoters must therefore invest in proper accounting systems, seek professional advice, and stay updated with frequent notifications and clarifications issued by the authorities.
Compliance with Procurement Norms
The requirement that at least 80 percent of input and input services for each project must be procured from registered suppliers has been one of the most challenging obligations for promoters. In practice, small-scale subcontractors, local vendors, and material suppliers often remain outside the GST registration system.
Promoters are required to calculate the shortfall for each financial year and pay GST on the deficit under reverse charge. Cement purchased from unregistered sources carries a higher liability of 28 percent. This has forced developers to restructure procurement policies and often pay a premium for sourcing from registered suppliers.
The compliance is further complicated when projects span multiple financial years, requiring year-wise evaluation of the 80 percent threshold. Developers must maintain detailed records to support their calculations, which increases administrative costs but ensures alignment with the objective of formalising the sector.
Challenges in Record Keeping
Since each project is treated as a separate unit for GST purposes, developers must maintain distinct books of accounts, invoices, and returns for each project. In large organisations handling multiple projects simultaneously, this results in the need for project-specific accounting teams and software.
The segregation of credits and liabilities is particularly difficult in cases where common input services, such as marketing or administrative costs, are incurred for multiple projects. Allocation rules are not always clear, leading to interpretational disputes. Developers often rely on professional judgment to apportion such costs, but this may later be challenged during audits.
Advance Payments and Buyer Expectations
The treatment of advances under GST continues to create disputes between buyers and developers. Since GST is payable on receipt of advance, developers are obliged to collect tax from buyers upfront. However, buyers often resist paying tax on amounts not yet linked to actual construction milestones.
This conflict is particularly acute in markets where regulatory authorities have capped the percentage of advance that can be collected before completion of certain stages of work. Developers are caught between contractual obligations, buyer expectations, and statutory tax liability.
Advance rulings and circulars have clarified that GST must indeed be paid on advances, but developers have lobbied for relief to align tax incidence with progress of construction. As of now, however, the principle remains unchanged.
Judicial Interpretations and Rulings
Several judicial decisions and advance rulings have shaped the interpretation of GST in the real estate sector. These rulings, while binding only on the applicants, have provided useful guidance to the industry at large.
In the case of Bindu Ventures before the Authority for Advance Ruling in Karnataka (2018), it was held that an occupancy certificate issued by the municipal authority is equivalent to a completion certificate for the purpose of determining GST liability. This has settled a common dispute in cities where occupancy certificates are issued instead of completion certificates.
In Starworth Infrastructure (2021), it was clarified that contractor services provided for affordable housing projects with infrastructure status are taxable at 12 percent rather than 18 percent. This has helped contractors and developers in structuring their contracts more accurately.
In UP Avas Evam Vikas Parishad (2021), the appellate authority reaffirmed that GST is payable on advances collected for under-construction flats, regardless of whether possession has been handed over. This case reinforced the time of supply rules and their application in real estate.
Such rulings demonstrate the dynamic nature of GST interpretation and the need for developers to stay updated with emerging jurisprudence.
Treatment of Partially Completed Projects
Projects that were partially completed as of 1 April 2019 continue to pose practical difficulties. Payments received before this date are taxed at old rates, while payments received after are taxed at the new rates. Developers had to calculate the percentage completion of projects to allocate payments appropriately.
This calculation often involved disputes, as different methods of estimating completion percentages could yield different results. Authorities insisted on a certified basis of calculation, often requiring validation from architects or chartered engineers. The lack of uniformity in approach has caused litigation in some cases.
Impact on Redevelopment Projects
Redevelopment projects and joint development agreements have been a particular focus of GST litigation. The transfer of development rights by societies to developers is considered a taxable supply, even though no money changes hands. The consideration is in the form of reconstructed flats or additional space.
Notifications have been issued to defer the point of taxation in such cases to the time of handing over possession of the flats, but disputes continue regarding valuation. The valuation of development rights is often subjective, and developers argue that the free flats given to society members should not be equated to sales.
Despite clarifications, redevelopment remains one of the most complex areas under GST, requiring careful structuring of agreements and proactive engagement with authorities.
Taxation in Slum Rehabilitation and Government Schemes
Slum rehabilitation projects and other government-backed schemes have their own set of rules under GST. Developers receive development rights from the government and in exchange build free units for slum dwellers. The tax treatment requires GST to be paid both on free units and on sale units, subject to concessional rates for affordable housing.
While concessions have been provided, developers often face difficulties in cash flow, as liability arises even when there is no direct monetary consideration. Moreover, delays in approvals from authorities add to compliance burden, as developers must reconcile tax liability with project timelines.
Issues in Cancellation and Refunds
The cancellation of bookings has emerged as a significant challenge under GST. If a buyer cancels after paying installments with tax, the promoter must issue a credit note and refund the GST. However, credit notes must be issued within a specific time period, failing which the promoter cannot adjust tax liability.
If the buyer rebooks later, the new booking is subject to tax at the rates applicable at that time. This requires developers to carefully track each cancellation, maintain documentation, and coordinate refunds with the tax system. Buyers also face delays in receiving refunds, leading to friction.
Impact on Affordable Housing
The concessional 1 percent rate for affordable residential apartments has given a major push to housing for the middle-income segment. However, strict definitions based on carpet area and value must be met to qualify. Developers often face challenges in ensuring compliance with both criteria simultaneously.
In metro cities where property prices are high, it is difficult to offer apartments under the forty-five lakh limit. As a result, very few projects in premium urban areas qualify for the 1 percent rate, limiting the impact of the concession. In contrast, in non-metro areas, the definition has been more beneficial to buyers and developers alike.
Compliance Burden on Small Developers
While large real estate companies may have the resources to manage GST compliance, smaller developers often struggle with the burden. The requirement for project-wise accounting, supplier registration checks, reverse charge on shortfall, and multiple return filings creates disproportionate pressure on small businesses.
Many small developers continue to rely on unregistered contractors and vendors, which complicates compliance further. Professional assistance is often required, but the costs are significant relative to the scale of operations. The compliance burden has, in some cases, discouraged smaller players from entering new projects.
Audits and Departmental Scrutiny
GST authorities have increased scrutiny of real estate projects, given the sector’s size and history of informal practices. Audits focus on whether developers have correctly classified projects, maintained procurement records, complied with reverse charge rules, and issued proper invoices for advances.
Instances of mismatch between reported figures and actual construction progress have led to investigations. Some developers have faced penalties for non-maintenance of project-wise accounts. As audits become more frequent, developers must strengthen internal controls and documentation.
Future Outlook for GST in Real Estate
Looking ahead, further refinements in the GST framework for real estate are expected. Stakeholders have called for reintroduction of input tax credit to avoid cascading of taxes, particularly as the current system without credit has led to hidden costs being passed on to buyers.
There is also discussion about standardising treatment of redevelopment and rehabilitation projects, simplifying valuation of development rights, and reducing compliance burden on small developers. Clarifications on treatment of common input services across projects are also anticipated.
Digitalisation of compliance, project-wise online reporting, and closer integration with real estate regulators may be the next steps in improving transparency. The goal remains to balance revenue collection with affordability and ease of doing business in one of the most vital sectors of the economy.
Conclusion
The introduction of GST in the real estate sector has been a transformative reform, replacing a complex system of multiple indirect taxes with a more unified structure. While the shift initially created confusion and interpretational disputes, successive amendments and clarifications, particularly the changes from 1 April 2019, have provided greater certainty to developers, contractors, and buyers.
The reduced rates of 1 percent for affordable housing and 5 percent for other residential and commercial apartments have made taxation simpler and more predictable. At the same time, the withdrawal of input tax credit has posed challenges in terms of higher project costs and reduced flexibility in tax planning. Developers must now ensure strict compliance with procurement norms, project-wise accounting, and documentation, making GST compliance a central element of real estate management.
Judicial rulings, advance rulings, and circulars have played an important role in shaping practical interpretation, particularly around issues such as occupancy certificates, redevelopment projects, valuation of development rights, and cancellation of bookings. These rulings continue to evolve, highlighting the dynamic nature of taxation in this sector.
For buyers, GST has brought transparency and clarity in pricing, with tax being charged openly rather than hidden in multiple levies. For developers, it has increased accountability, compelled formalisation of procurement, and created a uniform national framework. The impact on affordable housing has been significant, though challenges remain in metro markets where pricing and size criteria limit applicability.
Looking ahead, the sector may see further refinements, including possible reconsideration of input tax credit, simplification of compliance for small developers, and standardisation of treatment for redevelopment and rehabilitation projects. Digitalisation of project-specific compliance and greater integration with real estate regulators could further streamline processes.
In essence, GST has reshaped the real estate industry in India into a more structured, transparent, and accountable sector. While challenges remain, the direction is clear: a move towards greater formalisation, ease of compliance, and long-term stability for one of the most critical pillars of the economy.