The introduction of the Goods and Services Tax created one of the most significant shifts in the Indian indirect tax framework. Real estate, being a sector with multiple stakeholders and complex contractual arrangements, has been particularly affected. Unlike goods, where taxation largely follows supply and consumption, real estate involves land, construction, development services, and leasing arrangements. Each of these has a different treatment under GST, making this sector uniquely complex.
While the stated intent of GST was to simplify taxation and create a single unified market, the reality for developers, investors, and buyers is more nuanced. The applicability of GST depends on the type of property, the stage of its completion, and the way in which the consideration is structured. Understanding these nuances is essential for anyone transacting in real estate, as compliance and pricing depend heavily on classification.
Under-Construction Properties
One of the most critical aspects of GST in real estate is its application to under-construction properties. These are properties where the buyer enters into an agreement with the builder before the completion certificate is issued. In such cases, GST is applicable on the portion of the property value that has been paid before the completion stage.
From April 1, 2019, the government rationalized the applicable rates. Affordable housing is subject to a concessional rate of 1 percent without the benefit of input tax credit. Affordable housing projects are defined based on prescribed carpet area and value thresholds. Non-affordable residential housing falls under a 5 percent rate, again without the benefit of input tax credit. For commercial apartments forming part of real estate projects, the applicable rate is also 5 percent without credit.
The restriction on availing input tax credit has created a challenge for developers. While buyers benefit from a lower upfront GST rate, developers are unable to set off the taxes paid on inputs such as cement, steel, and subcontracted services. This often increases the effective cost for developers, leading to an indirect pass-through to the buyer.
Works Contracts and Construction Services
When contractors provide construction services to developers under works contracts, these services are taxed at 18 percent with full eligibility of input tax credit. This creates a dual framework where contractors charge GST at 18 percent on their supplies, but developers selling residential units under the new regime are not entitled to claim credit. As a result, developers absorb the cost, which influences the pricing of units.
For projects launched before April 2019, developers could opt to remain under the old scheme where input tax credit was available, albeit at higher rates of output GST. The shift to the new scheme was designed to make housing more affordable by lowering the headline GST rate, but it has created complications in managing credits and reversals.
Completed Properties
The treatment of completed properties is markedly different. Once a completion certificate has been issued or the first occupation has taken place, the sale of such property is considered as neither a supply of goods nor a supply of services under Schedule III of the CGST Act. Consequently, no GST is applicable on such transactions.
This has made ready-to-move-in properties an attractive option for buyers who wish to avoid the burden of GST. However, from the perspective of developers, selling units after obtaining the completion certificate can lead to a loss of input tax credits, since such sales are considered exempt. This requires careful planning of sales strategies to balance tax efficiency with market demand.
Land Transactions
The sale of land has always been a point of debate in the indirect tax regime. Under GST, the sale of land, whether developed or undeveloped, is outside the scope of taxation. This is in line with the constitutional position that land and immovable property transactions should remain outside the purview of indirect taxes.
However, development services connected with land have a different treatment. Where a developer provides services such as levelling, laying of drainage, roads, or infrastructure facilities, and charges separately for them, these are taxable at 18 percent. The Central Board of Indirect Taxes and Customs issued Circular 177 of 2022 clarifying that where the cost of such development is included in the price of the plot, the entire transaction remains classified as the sale of land and is not subject to GST. This interpretation was upheld in the Gujarat High Court in the Munjaal Manishbhai Bhatt case.
The challenge arises where contracts are not structured clearly. If a developer separately bills for development services, GST applies. If such costs are embedded within the plot value, the transaction is treated as a sale of land and remains outside GST. Proper documentation and structuring of agreements are therefore critical.
Commercial Properties
Commercial real estate, like office spaces, retail shops, and industrial units, also follows a dual framework similar to residential properties. The sale of a commercial unit during the construction stage is subject to GST, while once the unit has received a completion certificate, its sale is treated as a transfer of immovable property and does not attract GST.
This distinction affects both developers and buyers. Businesses purchasing commercial units during construction must factor in GST at 5 percent without input tax credit, while those acquiring completed properties avoid GST altogether. However, leasing and renting of commercial units is treated differently and is subject to GST at 18 percent, creating ongoing tax obligations for landlords and tenants.
Lease and Rental Transactions
The GST treatment of lease and rental transactions is another area of significance in real estate. Rentals of residential properties for dwelling purposes are exempt from GST. This exemption ensures that individuals and families renting homes are not burdened with additional tax.
In contrast, the rental or leasing of commercial properties, including offices, shops, warehouses, and industrial units, attracts GST at 18 percent. Landlords providing such rental services must register for GST if their turnover exceeds the prescribed threshold. Tenants, particularly businesses, are often able to claim credit on such GST, provided the property is used for business purposes.
Long-term leases of land present their own complications. Under GST law, such leases are treated as the supply of services. In the case of a 99-year lease or similar arrangements, one-third of the consideration is deemed to represent the value of land and is excluded from GST, while the balance is taxable. This deeming fiction seeks to separate the land component, which is exempt, from the service component. However, disputes often arise as to whether very long leases are, in substance, outright sales. Judicial precedents, including those involving Lavasa Corporation, have dealt with this question. The current position is that unless a transaction clearly qualifies as a sale of land, GST continues to apply.
Residential versus Commercial Rentals
The distinction between residential and commercial use is critical in lease and rental transactions. Residential rental, when used for dwelling purposes, is exempt, but if a residential property is rented out for commercial purposes such as running a guesthouse or office, GST becomes applicable. Similarly, commercial rentals are always taxable, whether for shops, warehouses, or industrial spaces.
This classification requires landlords to be careful in drafting agreements. The stated purpose of the rental agreement, the actual usage, and the nature of the tenant’s business all determine GST applicability. Misclassification can lead to disputes and demands for back taxes.
Importance of Classification
The applicability of GST in real estate ultimately rests on classification. Whether a property is under construction or completed, whether a transaction is a sale of land or a development service, and whether a lease is residential or commercial all dictate whether GST is payable. Developers must structure agreements with clarity, bifurcating land value, development charges, and additional facilities wherever necessary. Buyers must also be aware of these nuances, as they directly impact the cost of acquisition.
The GST framework for real estate is thus a careful balancing act. It aims to provide relief to homebuyers by lowering tax rates but denies credits to developers, thereby indirectly raising costs. It seeks to exclude land and completed properties but keeps development services and under-construction units within its scope. These distinctions shape market dynamics and influence both pricing strategies and consumer behavior.
Input Tax Credit in Real Estate and Related Considerations
One of the most debated and complicated issues under the Goods and Services Tax framework in real estate is the treatment of input tax credit.
While GST was introduced with the objective of eliminating cascading taxes, the real estate sector has faced limitations and restrictions in claiming credits, especially after the new regime of April 2019. Developers, contractors, and buyers all need to understand how input tax credit operates, the restrictions imposed, and the impact on project costs and pricing.
The Concept of Input Tax Credit
Input tax credit allows businesses to offset the tax paid on inputs such as goods and services used in the course of business against the tax payable on outputs. In a manufacturing or trading context, this ensures that only the value addition is taxed at each stage. In real estate, however, the principle has been applied with modifications, resulting in limited benefits for developers and almost no direct benefits for buyers.
For developers, materials like cement, steel, aluminum, glass, electrical fittings, and services like design, architecture, and engineering all attract GST. Ideally, the tax paid on these inputs should be creditable against the GST collected from buyers. But due to concerns about tax leakage and the government’s policy decision to lower the tax burden on homebuyers, restrictions were introduced.
Old Regime of Input Tax Credit
Before April 1, 2019, developers selling under-construction properties collected GST at higher rates, generally 12 percent on residential units and 8 percent for affordable housing, with the benefit of input tax credit. Developers could set off the tax paid on construction inputs and services against their liability on sales.
This regime was advantageous for developers who could manage their tax liability more efficiently. However, buyers often felt the burden of a higher upfront GST rate on property purchases. There was also criticism that developers were not passing on the benefit of input credits to customers in the form of reduced prices, leading to anti-profiteering investigations.
New Regime Without Input Tax Credit
From April 1, 2019, a new system was introduced with lower GST rates on residential properties but without allowing developers to avail input tax credit. Under this system, affordable housing projects attract a concessional rate of 1 percent while other residential projects attract 5 percent. Developers opting for this scheme cannot claim any credits for taxes paid on inputs.
The logic behind this change was to give visible relief to homebuyers by lowering the rate charged on the invoice. However, since developers are unable to claim credits, the actual cost of construction has increased. Taxes on inputs become embedded in the cost structure, and though the rate of output tax is low, the overall price of housing may not always fall significantly.
Transitional Issues Between Old and New Schemes
Projects that were launched before April 2019 but continued beyond that date faced transitional complications. Developers had the option to either remain under the old scheme with credits or shift to the new concessional rate without credits. Choosing between the two depended on the stage of construction, unsold inventory, and input credit accumulated.
If significant input tax credits were already availed or expected to be availed in the future, remaining under the old regime was often beneficial. On the other hand, if most sales were to be made post-2019 and buyers were more sensitive to the GST rate on invoices, shifting to the new scheme could be advantageous. The transitional provisions required detailed calculation and reporting, and many developers had to re-examine their costing and pricing strategies.
Proportionate Input Tax Credit Reversal
One of the complexities in real estate arises from the fact that developers often deal in both taxable and exempt supplies. For example, the sale of under-construction units is taxable, but the sale of completed units after obtaining the completion certificate is exempt. Under section 17(3) of the CGST Act, developers are required to reverse a proportionate amount of input tax credit to the extent that inputs and services are used for making exempt supplies.
This means that even under the old regime, where input tax credit was broadly available, a portion of it had to be reversed when projects included both taxable and exempt sales. Calculating the exact reversal requires developers to track the utilization of inputs and the stage of construction, which often involves complex formulas prescribed in the GST rules.
Impact on Project Costing
The denial of input tax credit in the new scheme has a direct impact on project costing. Cement, for example, attracts GST at 28 percent. Steel attracts 18 percent, and various subcontracted services also fall under the 18 percent bracket. Without credit, these taxes become part of the cost base for developers.
Developers must either absorb this additional cost, reducing their margins, or pass it on to buyers in the form of higher base prices. Although the headline GST rate on invoices appears lower, the embedded tax cost increases the overall property value. This is particularly evident in high-cost projects where input intensity is greater.
Buyers and Input Tax Credit
Buyers of residential properties do not directly benefit from input tax credit. Even if GST is charged on the purchase of an under-construction property, buyers cannot claim credits unless they are registered businesses purchasing for commercial use. For individuals purchasing for personal residential purposes, the tax paid is a final cost.
In the case of commercial property purchases, if the buyer is a registered business using the property for business purposes, GST paid on the purchase may be creditable. However, this applies only when the purchase is of an under-construction commercial unit subject to GST. Completed commercial properties, which are outside the scope of GST, do not involve any tax and therefore no credits.
Judicial and Administrative Clarifications
The government has issued several circulars and clarifications regarding input tax credit in real estate. Judicial rulings have also shaped the understanding of how credits can be availed and when reversals are required. For example, various Authority for Advance Ruling decisions have emphasized that if development services are separately charged, they attract GST and allow credits. On the other hand, where transactions are treated as the sale of land or completed property, credits are not available.
Circulars have clarified issues like treatment of developed plots, preferential location charges, and additional facilities. The consistent approach has been to deny credits where transactions are classified as sale of land or completed property, but to allow credits where taxable services are involved.
The Anti-Profiteering Dimension
A key policy reason for the shift away from credits in residential projects was the concern that developers were not adequately passing on the benefit of input tax credit to buyers. Under the GST anti-profiteering framework, businesses are required to pass on the benefit of reduced tax rates or increased credits by way of commensurate price reduction.
Several investigations and orders in the real estate sector highlighted situations where developers were alleged to have retained the benefit of credits rather than passing it on. This prompted the government to adopt a simplified regime with lower output tax rates but no credits, thereby reducing disputes and improving transparency for buyers.
Ongoing Compliance for Developers
Even though credits are largely unavailable in the new regime, developers must still maintain compliance systems to track inputs, calculate reversals where required, and maintain documentation. For projects where both taxable and exempt supplies exist, the calculation of reversals under section 17 continues to apply. Developers must also ensure proper invoicing, classification of supplies, and adherence to timelines for credit reporting.
Another compliance dimension is the treatment of joint development agreements. In such arrangements, where landowners contribute land and developers provide construction services, input tax credit treatment becomes even more complicated. The sharing of units between landowners and developers, and the subsequent sales by each party, create multiple tax events with corresponding credit implications.
The Practical Reality for Market Participants
From a market perspective, the restriction of credits has changed the way real estate is priced and sold. Developers must take into account embedded tax costs when quoting prices, while buyers often compare the tax implications of purchasing under-construction units versus completed units. The absence of credits in residential projects has made ready-to-move-in properties more competitive, since they do not attract GST.
Commercial buyers, particularly corporates and businesses, remain sensitive to GST treatment because they can claim credits in certain cases. For them, the distinction between under-construction and completed properties becomes crucial. Leasing arrangements also add another layer of credit considerations, as tenants may or may not be able to claim credit depending on their business nature.
Looking Ahead at Input Tax Credit Policy
While the current framework favors lower headline tax rates without credits, there have been ongoing industry representations for allowing credits to avoid cascading taxation. Developers argue that denial of credits goes against the principle of GST and leads to higher embedded costs. However, the government remains cautious, balancing the objective of affordable housing with revenue considerations and the need to prevent disputes.
Any future reform in this area would likely require a reassessment of the balance between lower output rates and credit eligibility. For now, the framework continues with credits restricted in residential projects, limited applicability in commercial projects, and ongoing complexity in mixed-use developments.
Judicial Precedents, CBIC Clarifications, and Special Transactions in GST on Real Estate
The Goods and Services Tax regime has redefined how real estate transactions are taxed in India. While the law itself sets out broad rules, much of the practical clarity comes from judicial pronouncements, Authority for Advance Ruling decisions, and clarifications issued by the Central Board of Indirect Taxes and Customs.
These sources help address the complex issues of classification, taxability, and valuation that often arise in this sector. Additionally, there are certain special categories of transactions, such as damages, forfeitures, and long leases, which require careful interpretation to determine whether they are taxable under GST.
Importance of Judicial and Administrative Guidance
The real estate sector has a wide variety of contractual arrangements and structures. Developers, landowners, contractors, and buyers all interact through agreements that do not always fit neatly into the standard categories of supply.
Judicial rulings and administrative circulars fill this gap by providing interpretations of ambiguous provisions. They also resolve disputes on whether certain receipts are consideration for taxable supply or merely compensatory charges outside the scope of GST.
Sale of Developed Plots
One of the most debated issues has been whether the sale of developed plots attracts GST. In such cases, the land is sold after providing infrastructure such as roads, drainage, and electricity connections. The primary question is whether this is simply the sale of land, which is excluded from GST, or whether it amounts to a works contract or construction service.
The CBIC through Circular 177 of 2022 clarified that the sale of developed plots is not a supply for GST purposes. Even if land has been leveled, roads laid, or drainage constructed, the transaction remains the sale of land. This clarification aligned with judicial decisions such as those of the Gujarat High Court in Munjaal Manishbhai Bhatt, where the court held that such transactions cannot be taxed as services. The Authority for Advance Ruling in various states, including in cases like Dharmic Living Pvt Ltd, also confirmed this view.
However, if a developer provides development services independently to a landowner and charges separately, then such services are taxable at 18 percent. The distinction lies in whether the cost of development is embedded in the sale price of land or billed separately as a service.
Preferential Location Charges and Ancillary Facilities
Another common issue relates to charges levied by developers for preferential location of apartments, such as a sea-facing unit or a garden-facing plot. Initially, there was uncertainty about whether these charges would be treated as part of the land value and exempt from GST or as additional consideration for supply of services.
The CBIC clarified in its circulars that preferential location charges are intrinsically linked to the land and form part of its value. Therefore, they are not taxable under GST. On the other hand, additional facilities such as clubhouses, gyms, swimming pools, and parking areas are distinct supplies that attract GST at applicable rates. Judicial authorities have upheld this distinction by treating amenities as separate supplies because they are not inherent to the land transaction.
Long Lease Transactions and Their Classification
Leases of land and buildings are another area of significant debate. Under GST, long-term leases, especially those spanning 99 years or more, have often been compared to outright sales. Judicial pronouncements such as the decision in the Lavasa Corporation case recognized that a very long lease is essentially similar to a sale.
Despite this, the GST framework treats long leases as taxable unless specifically exempted. The law deems a lease of land for a long term to be a supply of service, subject to GST. However, when such leases form part of a real estate project covered by special concessional rates, a notional deduction is allowed by excluding one-third of the value towards the cost of land. This deeming provision has been challenged in courts, with arguments that the arbitrary one-third deduction does not reflect the actual value of land in many cases. The jurisprudence continues to evolve, with courts balancing the intent of GST to tax supplies against the constitutional exclusion of land transactions from the tax net.
Input Tax Credit in Joint Development Arrangements
Joint development arrangements between landowners and developers have given rise to complex disputes on input tax credit. Under these arrangements, the landowner contributes land and the developer undertakes construction, with both parties sharing the resulting units or revenue.
Advance ruling authorities and courts have emphasized that the developer’s construction service provided to the landowner is taxable. At the same time, when the landowner sells their share of units after obtaining a completion certificate, those sales are outside GST. This creates input tax credit reversal obligations for the landowner, who cannot set off taxes on inputs used for exempt sales.
The CBIC has also issued clarifications in this area, but practical compliance challenges remain. Developers and landowners must carefully structure agreements to avoid unintended tax liabilities.
Refrain, Tolerate, and Permit Transactions
One of the less understood provisions in GST is paragraph 5(e) of Schedule II, which classifies certain transactions as supply of services when they involve agreeing to the obligation to refrain from an act, to tolerate an act, or to do an act. This provision has led to disputes over whether damages, penalties, or forfeitures should be taxed.
Non-Taxable Compensation and Damages
Several judicial pronouncements and circulars have clarified that genuine compensation for breach of contract is not taxable. For example, liquidated damages payable by contractors for delay in project completion are compensatory in nature and not consideration for any service. Similarly, forfeiture of earnest money when a buyer cancels a property deal is not a taxable supply because it does not involve an activity undertaken in return for consideration.
Courts have also held that penalties for delayed construction or for dishonor of cheques are compensatory and not taxable. The reasoning is that such payments are not for receiving a service but are consequences of default.
Taxable Charges Linked to Main Supply
On the other hand, certain charges have been treated as taxable because they are directly connected to the main supply. Termination fees paid by tenants for early surrender of a lease are considered part of the supply of leasing services and attract GST.
Similarly, late payment surcharges, prepayment penalties on loans, and ticket cancellation forfeitures have been held taxable because they are incidental to the main supply and not independent compensatory payments. This distinction between genuine damages and consideration for altered performance of a contract continues to be refined through judicial interpretation.
Works Contract Services
Works contract services related to immovable property remain taxable at 18 percent with input tax credit eligibility. This category covers contracts for construction, repair, or renovation where both material and labor are involved.
The distinction between a works contract and the sale of completed property has been significant in judicial rulings. For example, if a contractor undertakes development for a landowner and hands over the completed building, it is treated as a works contract subject to GST. However, if the building is already complete and sold with a completion certificate, it is outside GST.
The CBIC has clarified that works contracts linked to real estate projects fall within the taxable bracket, and the concessional rates applicable to residential projects do not extend to independent works contracts.
Rentals and Lease Income
Rental income has been another area where judicial and administrative guidance has been necessary. The law exempts residential rental income when used for dwelling purposes, but commercial rentals attract GST at 18 percent.
Judicial rulings have reinforced this distinction by clarifying that residential property let out for commercial purposes, such as guest houses or offices, is taxable. Similarly, renting of immovable property by charitable trusts for business purposes has been held taxable. These decisions ensure consistent treatment and prevent misuse of the exemption available for genuine residential renting.
The Role of Anti-Profiteering
Anti-profiteering provisions have also featured in judicial reviews concerning real estate. The requirement that developers pass on the benefit of reduced rates or increased credits by way of commensurate price reduction has been tested in various cases.
Tribunals and courts have generally upheld the principle that developers cannot retain benefits meant for buyers. At the same time, they have recognized that calculation of commensurate benefit requires a reasonable methodology, considering the stage of construction, market conditions, and contractual terms. The balance between protecting consumer interest and avoiding excessive burden on developers has been a recurring theme in these rulings.
Continuing Disputes and Industry Concerns
Despite multiple clarifications, disputes continue in areas such as classification of long leases, valuation of land deductions, treatment of incidental charges, and input tax credit reversals. The large number of Authority for Advance Ruling decisions reflects the complexity of the sector. Since AAR decisions are binding only on the applicant and jurisdictional authorities, different states often issue divergent rulings, leading to further uncertainty.
Industry associations have consistently represented that the restrictions on credit, the artificial one-third land deduction, and the treatment of certain charges create distortions and increase litigation. While the CBIC’s clarifications have helped in many cases, judicial forums remain the ultimate authority in resolving disputes.
Practical Considerations for Developers and Buyers
For developers, the key takeaway from judicial and administrative guidance is the importance of precise contractual drafting and careful classification of supplies. Clearly distinguishing between the sale of land, provision of facilities, and development services can help avoid disputes. For buyers, understanding the taxability of different components, from preferential location charges to maintenance fees, is essential to evaluate the total cost of property ownership.
Conclusion
The Goods and Services Tax regime has brought both clarity and complexity to real estate transactions in India. On the one hand, it consolidated multiple indirect taxes into a unified framework, reducing cascading effects and standardizing treatment across states. On the other hand, the sector’s unique features, ranging from under‑construction sales to developed plots, joint development models, rentals, and long leases, have required nuanced interpretation to determine taxability.
The key principle that emerges is the clear separation between what falls inside GST and what remains outside its scope. Sale of land and completed buildings is excluded, while under‑construction properties, development services, and works contracts are taxable. Rental and lease arrangements are governed by the nature of the property and its use, with residential dwellings generally exempt and commercial rentals attracting tax.
Input tax credit remains one of the most debated aspects, particularly after the 2019 shift to concessional rates without credit for residential projects. Developers must carefully manage credit reversals and structuring of projects to remain compliant. Buyers, too, must recognize that tax incidence is embedded in property pricing, with limited opportunity to claim credits.
Judicial rulings and CBIC clarifications have played a crucial role in resolving disputes, especially around developed plots, preferential location charges, long leases, and damages. Courts have consistently emphasized substance over form, ensuring that GST applies only where there is a real supply of goods or services and not to compensatory or penal charges. At the same time, they have upheld the intent of the law in taxing ancillary and incidental charges that form part of the commercial transaction.
The evolving jurisprudence highlights the need for precision in drafting contracts, transparent segregation of land and service components, and adherence to compliance processes. Developers and landowners engaged in joint development arrangements must be especially vigilant, as errors in classification or credit reversal can lead to substantial liabilities.
Looking ahead, industry stakeholders continue to advocate for rationalization of certain provisions, particularly the notional one‑third land deduction and the bar on input tax credit for residential projects. Policy refinements in these areas could enhance neutrality and reduce litigation.
In essence, GST in real estate is a balancing act between taxing economic activity and respecting the constitutional exclusion of land and completed buildings. With clearer rules, judicial consistency, and better compliance practices, the framework can achieve its intended objective of transparency, efficiency, and fairness for both developers and homebuyers.