GST on Real Estate Transactions – Key Considerations | Processes

How is GST applicable to real estate transactions?

The applicability of Goods and Services Tax (GST) to real estate transactions in India involves several factors, depending on the type and stage of the property involved. Here’s a general overview of how GST is applied to various real estate scenarios:
Under Construction Properties: GST is applicable to the sale of under-construction properties or properties that are part of a work-in-progress project. The GST rate has been reduced significantly for residential properties. Affordable housing attracts a lower rate compared to non-affordable housing units.
Completed Properties: No GST is charged on the sale of completed properties or ready-to-move-in homes where the completion certificate has already been issued at the time of sale.
Land Transactions: Sale of land is exempt from GST. However, if it is part of a larger transaction involving construction, then GST might be applicable to the construction component.
Commercial Properties: The sale of commercial properties, such as office spaces or shops within a building, is subject to GST.
Input Tax Credit (ITC): Developers can claim an input tax credit for GST paid on construction materials and services used in the development of the property. This credit can help reduce the overall cost of construction, potentially lowering the sale price for buyers.
Lease and Rental: GST is applicable on the leasing and rental of commercial properties. Residential properties used for rental purposes are exempt from GST.

Table of Contents

1. Coverage of GST on transactions relating to real estate
2. Sale of developed plots by including development cost in sale value of plots is not taxable under GST
3. Refrain from Act or tolerating an Act

Check out Taxmann's GST on Works Contract & Real Estate Transactions which analyses the intricacies of taxability under the GST framework for works contracts and real estate transactions. It spans twenty chapters, detailing aspects like the GST implications on real estate sales, services by housing societies, and nuances of residential and commercial real estate services. It covers key topics such as Reverse Charge Mechanisms, Input Tax Credit provisions, and Valuation Methodologies, each meticulously broken down into background information, definitions, effective GST rates, and special exemptions.

1. Coverage of GST on transactions relating to real estate

The definition of ‘service’ is very wide at it covers anything other than ‘goods’. Thus, technically, any transaction in real estate can be subject to GST. However, sale of land and sale of apartments or buildings or civil structure after completion is neither supply of goods nor supply of services.

However, para 5 of Schedule III of CGST Act states that activity of sale of land and subject to para 5(b) of Schedule II, sale of buildings is neither supply of goods nor supply of services.

Para 5(b) of Schedule II covers sale of complex (now termed as ‘apartment’ after 1-4-2019), building or civil structure or a part thereof, before its completion.

However, for purpose of section 17(3) of CGST Act (proportionate reversal of ITC when taxable person is making both taxable and exempt supply), the expression ‘value of exempt supply’ shall include value of sale of land and sale of completed building – explanation to section 17(3) of CGST Act inserted vide CGST (Amendment) Act, 2018, w.e.f. 1-2-2019.

As per Entry No. 49 of List II of Seventh Schedule to Constitution, ‘taxes on lands and buildings’ is a State subject.

Though Constitution grants concurrent powers to Union and State to levy GST, these are subject to recommendation of GST Council. Thus, GST on transactions relating to land and buildings can be imposed only to the extent recommended by GST Council.

In respect of land and buildings, the CGST Act and SGST Act make some ‘deeming provisions’ in Schedule II of CGST Act.

Thus, excluding those ‘deemed supply’ provisions, GST cannot be imposed on other transactions relating to land and buildings

1.1 Coverage of Real Estate transactions under GST

As per deeming provisions contained in Schedule II of CGST Act and SGST Act, GST can be levied on following transactions relating to real estate.

• Any lease, tenancy, easement, licence to occupy land [The lease of tenancy of land can be of any period – even 99 or 999 years].
• Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly [This covers renting or leasing of building. Even renting of part of residential complex for business or commerce will be subject to GST].
• Renting of immovable property [Since lease of building and land is already covered in aforesaid clauses, this can cover other immovable property like plant and machinery].
• Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. [This covers sale of apartments before it is occupied.].
• Works contract as defined in section 2(119) of CGST Act [The definition covers only works contracts relating to immovable property]

Matters excluded from definition of supply of goods or services – As per Schedule III of CGST Act read with section 7(2)(a) of CGST Act, following matters will not be treated as supply of goods or services – Sale of land and, subject to para 5(b) of Schedule II, sale of building [Para 5(b) of Schedule II covers sale of complex (now termed as ‘apartment’ after 1-4-2019), building or civil structure or a part thereof, before its completion]Thus, sale of apartment, building or civil structure or part thereof, after its completion or first occupation will not be subject to GST.

1.2 No separate tax for supply of land or undivided share of land as part of composite supply of apartments

When a promoter sales apartment (residential or commercial) to buyer, he also transfers to him undivided share of land by way of lease or sub-lease, the service falls under heading 9972.

In such cases, the value of service for GST is Nil, if the amount charged for such lease or sub-lease is one-third of total amount charged for composite supply or less than one-third of total amount charged. This applies to construction of apartments (residential or commercial) in real estate Projects (REP) or Residential Real Estate Projects (RREP). The project may be new after 1-4-2019 or ongoing as on 31-3-2019 -Sr No. 16(ii) of Notification Nos. 11/2017-CT (Rates) and 8/2017-IT (Rates) dated 28-6-2017 inserted w.e.f. 25-1-2018 and amended w.e.f. 1-4-2019.

2. Sale of developed plots by including development cost in sale value of plots is not taxable under GST

Often a developer purchases land, converts it into plots, develops it by providing internal roads, water drains, compound walls, health club, and then sales individual plots. If he charges separately development charges, then obviously GST is payable on development charges @ 18%. However, if he includes the development cost in value of plots and sales individual plots by paying stamp duty and registration fee on total value, what would be tax liability?

Sale of land after levelling, laying down of drainage lines etc. is sale of land and does not attract GST. Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and does not attract GST. – – However, any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services – para 14 of CBIC Circular No. 177/09/2022-TRU dated 3-8-2022.

In my view, the clarification is legally correct as it is a composite supply where principal supply is of land. This clarification will settle a long time dispute.

Sale of land under Schedule III to CGST Act covers sale of developed land as deduction in terms of Notification No. 11/2017-Central Tax (Rate) is granted for any transfer of land which includes developed and undeveloped land – Munjaal Manishbhai Bhatt v. UOI [2022] 138 taxmann.com 117 = 62 GSTL 262 = 92 GST 327 (Gujarat HC DB) [Really, a very well reasoned judgment and worth reading in full] – same view in Bhopal Smart City Dev Corpn Ltd. In re (2022) 90 GST 858 = 136 taxmann.com 122 (AAR-MP)* Godrej Properties Ltd. In re (2023) 8 Centax 35 = 76 GSTL 261 (AAR- Kar) * Vaishnaoi Infratech and Developers In re (2023) 12 Centax 69 (AAR-Telangana)

In Dharmic Living (P.) Ltd., In re [2021] 131 taxmann.com 164 (AAR – Kerala). It was held that sale of developed plots/land by applicant without receiving any advance from customers for undertaking development activities is neither supply of goods nor a supply of services activities as it is covered by Para 5 of Schedule III of the CGST Act. [really, mere receipt of advance should not alter the position].

In Shantilal Real Estate Services In re (2022) 136 taxmann.com 337 = 58 GSTL 569 (AAR-Goa), it has been (indeed rightly) held that sale of plots with value addition of roads, drainages and poles as per conditions mandated by local bodies for giving NOC is not ‘supply’. Principal supply is sale of land – same view in Ms Rabia Khanum, In re [2022] 143 taxmann.com 298 (AAR – Karnataka) – affirmed in Ms Rabia Khanum, In re [2023] 149 taxmann.com 138 = 5 Centax 120 = 98 GST 75 = 74 GSTL 86 (AAAR – Karnataka).

There were contrary views also, but in view of CBIC circular and aforesaid case law, it is possible to sale plot by including development costs and in that case, no GST is payable as it is composite supply with principal supply of land. However, this applies only to those expenses which add value to land and not for additional facilities provided which do not directly add value to the land.

In Shree Dipesh Anilkumar Naik, In re [2020] 80 GST 505 = 117 taxmann.com 450 (AAR – Gujarat), it was held that activity of sale of developed plots would be covered under paragraph 5(b) of schedule II of CGST Act, as ‘construction of a complex intended for sale to a buyer’; GST is payable on sale of developed plots – view upheld in Dipesh Anilkumar Naik, In re [2022] 135 taxmann.com 99 = 61 GSTL 454 = 90 GST 914 (AAAR-Gujarat).

Activity of purchase of land and selling the said land by converting into integrated residential sub-plots would fall under paragraph 5(b) of Schedule II of CGST Act and would be liable to GST @18% – Satjaya Infratech In re (2020) 81 GST 589 = 117 taxmann.com 260 (AAR-Gujarat).

In PPD Living Spaces P Ltd. In re (2018) 70 GST 579 = 98 taxmann.com 158 (AAR-Kerala), it was held that it is lawful to structure agreement by fixing land cost after development charges. However, there was some confusion that if plots are sold after issuance of completion certificate, ITC has to be reversed on pro rata basis. Really, in case of sale of plots, there is no question of issue of completion certificate.

Additional facilities in complex – In case of facilities like health club, club house, However, in respect of health club, swimming pool, library, club house and play courts, it would be difficult to say that these are part of composite supply of plots. Hence, in my view, these should not be part of services offered to customers. It is advisable to hand them over to club or association, who will provide the services to members on chargeable basis.

Preferential location charges is part of value of land – Location charges or Preferential Location Charges (PLC) paid upfront in addition to the lease premium for long term lease of land constitute part of upfront amount charged for long term lease of land and are eligible for the same tax treatment – para 10 of CBIC Circular No. 177/09/2022-TRU dated 3-8-2022.

Facility of club house and other common facilities taxable – Additional facilities like club house and common facilities are subject to GST – Godrej Properties Ltd. In re (2023) 8 Centax 35 = 76 GSTL 261 (AAR- Kar).

Mere development of land is subject to GST – Mere development of land belonging to landowners is subject to GST when no sale of land is involved – MAARQ Spaces P. Ltd. In re (2019) 111 taxmann.com 368 (AAR-Karn).

2.1 Long lease of land is practically sale of land

In Lavasa Corporation Ltd. v. Jitendra Jagdish Tulsiani [2018] 96 taxmann.com 212 = 149 SCL 396 (Bombay HC), agreement of lease was executed to take apartments on long term lease of 999 years. Almost 80% of the cost was paid and substantial amount of stamp duty and registration charges were paid. Lease rent was nominal of Rs. one per year. It was held that though nomenclature of the document is ‘agreement to lease’ in its real purpose, it is an ‘Agreement to sale’. Law is well settled that the nomenclature of the document cannot be a true test of its real intent. The document has to be read as a whole to ascertain the intention of parties. In reality, the transaction is ‘agreement of sale’.

This judgment is in respect of RERA, and may not apply to GST. Further, specific provisions have been made in respect of GST on long lease in case of real estate projects of residential and commercial apartments.

The judgment was followed in Nagpur Integrated Township P. Ltd., In re [2020] 80 GST 536 = 117 taxmann.com 392 (AAAR-Maharashtra), where long term lease of residential apartments was shown, which was effectively sale of residential apartments.

3. Refrain from Act or tolerating an Act

The group of this service in services classification is 99979.

Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is supply of service – para 5(e) of Schedule II of CGST Act, read with section 7(1)(d) of CGST Act.

[similar provision in Section 66E(e) of Finance Act, 1994 where it was defined ‘declared service’].

Departmental clarification on coverage of service of ‘tolerating and act or situation’ – CBIC has issued circular No. 178/10/2022-GST dated 3-8-2022, stating that for coverage under ‘refrain from act or to tolerate an act’, there has to be express or implied agreement, oral or written, to do an act or abstain from doing an act. ‘Activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’.

An agreement cannot be imagined just because there is flow of money. Unless payment has been made for an independent activity of tolerating an act, such payment cannot be consideration

The taxable service under heading 99979 comprises the aforementioned three different sets of activities viz.

• the obligation to refrain from an act,
• obligation to tolerate an act or a situation and
• obligation to do an act. All the three activities must be under an “agreement” or a “contract” (whether express or implied) to fall within the ambit of the said entry.
• Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation – view reiterated in CBIC Circular No. 214/1/2023-Service Tax, dated 28-2-2023.

Since this circular has been issued on basis of decision of GST Council, it should be binding on department.

Liquidated damages for breach of contract – CBIC circular No. 178/10/2022-GST dated 3-8-2022 also clarifies that ‘Liquidated Damages’ is cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party. Section 74 of the Contract Act, 1972 provides that when a contract is broken, if a sum has been named or a penalty stipulated in the contract as the amount or penalty to be paid in case of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the penalty so stipulated. Liquidated damages for breach of contract are really for not tolerating an act or situation.

Hence following are not taxable:

• Damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc.
• Penalty stipulated in a contract for delayed construction of houses.
• Forfeiture of earnest money by a seller in case of breach of agreement
• Compensation for cancellation of coal blocks
• Cheque dishonour fine/penalty
• Penalty imposed for violation of laws
• Forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period
• Compensation for not collecting toll charges

However, following should be subject to GST, as the amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties. These are at same rate as the main supply, as these supplies are ancillary to the principal supply for which the contract is signed.

• Late fee for delayed payment
• Forfeiture of ticket amount partly or wholly if the passenger does not show up.
• Forfeiture of security deposit in the event of cancellation of tour by the customer.
• Termination fee or penalty for terminating the lease of movable or immovable property before a certain period
• Pre-payment penalty if the borrower wishes to repay the loan before the maturity of the loan period.
• Late payment surcharge or fee for electricity, telephone bill, insurance premium etc.
• Minimum Fixed Capacity charges for Power

AAR and CESTAT decisions in respect of liquidated damages – In South Eastern Coalfields Ltd. v. CCE (2021) 55 GSTL 549 = 124 taxmann.com 174 (CESTAT), it was held that an activity can be said as service only when it is carried out by one person for another for consideration. Thus, compensation charges received for breach of contract, in the form of penalty amount, forfeiture of earnest money deposit and liquidated damages cannot be said as consideration for tolerating an act as neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss – followed in Neyveli Lignite Corporation Ltd. v. CC [2021] 128 taxmann.com 405 (CESTAT) — same view in Northern Coalfields v. CCGST (2023) 71 GSTL 63 = 3 Centax 211 (CESTAT) – Department has decided not to pursue the aforesaid matter further in appeal (thus, accepting these judgments) – CBIC Circular No. 214/1/2023-Service Tax, dated 28-2-2023.

In Steel Authority of India Ltd. v. Commissioner of GST & Central Excise, Salem [2021] 128 taxmann.com 400 (CESTAT), it has been held that service tax (now GST) is not payable on liquidated damages as contract has to be read as a whole. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance.

In Ruchi Soya Industries Ltd. v. CC (2021) 129 taxmann.com 368 (CESTAT), the company had installed a wind mill project. Maintenance contract was given to Suzlon Global Services Ltd. (SGSL). As per the agreement, SGSL was to ensure machine availability of 95.5% and if it falls below level, SGSL would compensate to owner (Ruchi Soya). The owner received compensation of Rs 1.33 crores from SGSL. It was held that there is no ‘service’, This is not ‘tolerating an act or situation’.

In Rajcomp Info Services v. Principal Commissioner, CGST (2023) 5 Centax 52 = 73 GSTL 237 (CESTAT), it has been held that liquidated damages for violating terms of agreement are payments for not tolerating breach of contract and not liable to Service tax.

In Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. v. CCGST (2022) 67 GSTL 86 (CESTAT), it was held that service tax is not payable on liquidated damages as it is compensation for failure of party – same view in Sembcorp Energy v. CC (2023) 385 ELT 245 = 6 Centax 193 (CESTAT).

In Achampet Solar (P.) Ltd., In re [2023] 148 taxmann.com 222 = 4 Centax 172 (AAAR-Telangana), it was held that where assessee’s principal supply is exempt from of GST, liquidated damages received for such supply does not have GST payment implication and it does not qualify as “supply” under GST law.

GST is not payable on liquidated damages recovered due to delay in supply and forfeiture of earnest money/security deposit – Rites Ltd. In re (2023) 97 GST 244 = 147 taxmann.com 416 (AAR-Haryana).

GST is not payable on liquidated damages – Madhya Pradesh Power Transmission v. PC CGST (2023) 385 ELT 152 = 6 Centax 49 (CESTAT).

In Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. v. CCGST (2022) 67 GSTL 86 (CESTAT), it was held that service tax is not payable on liquidated damages as it is compensation for failure of party.

Contrary decision that Liquidated damages recovered for delay in supply of goods are subject to GST – GST is payable on liquidated damages recovered for delay in supply of goods, as it is tolerating an act for delay, but for a price or damages – Maharashtra State Power Generation Company Ltd., In re [2018] 68 GST 494 = 93 taxmann.com 266 (AAR – Maharashtra) – view confirmed in Maharashtra State Power Generation Company Ltd., In re [2018] 70 GST 411 = 97 taxmann.com 408 (AAAR – Maharashtra). It was held by AAAR that service is classified under service code 9997. The recipient can avail ITC, subject to other conditions of CGST Act and Rules. The time of supply will be as per contract terms.