IMPACT OF GST ON REAL ESTATE IN A DOMESTIC RESIDENTIAL

CONSTRUCTION PROJECT

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 INDEX

S.No Topic Name Page No.

1. ABSTRACT 4

2. INTRODUCTION TO REAL ESTATE INDUSTRY 5

3. GST ON REAL ESTATE 7

4. BENEFITS OF GST IMPLEMENTATION 9

5. OBJECTIVES OF THE STUDY 9

6. RESEARCH METHODOLOGY 22

7. DATA ANALYSIS 27

8. CONCLUSION 30

9. REFERENCES 32

ABSTRACT

GST is one of the radical changes in the indirect taxation system of India since its
independence. The important aim in implementing it is to evade the duplication of taxes. The
concentration is on one nation one tax. Further, it intends at growing the tax base.

Real estate sector in India is likely to grow 12% 1yearly till 2020. Also, real estate sector is
going through structural reforms with the implementation of new acts and norms. The
government of India is concentrating on affordable housing plans so that it can attain its
target of providing houses to all by 2022.

GST on real estate has been an argumentative issue particularly with real estate sector in
India facing a challenging time over the last few years. Many representations were made to
the Government for more simplification and decrease of rates, especially for residential real
estate sector, in the expectation that the same would boost demand for that sector. The

ttps://www.academia.edu/35945079/An_Enquiry_Into_the_Effect_of_GST_on_Real_Estate_Sector_of_India).

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Government also has been considering reviewing the tax structure under GST for the real
estate sector, more so for the residential sector, as the incidence of tax on the end customer is
supposed to be very high coupled with the fact that it becomes very tough in this industry to
track compliance with the provisions of anti-profiteering.

In that direction, a distinct tax structure and mechanism was projected and formulated
wherein it was stated that the said mechanism would address the slow-down in this sector and
increase the residential segment.

This report intends to make a study to evaluate the impact of GST on real estate sector of
India. Additionally, this report focus at understanding the consequence of taxes that was
levied previously and effect of GST on Real Estate in the current scenario.

INTRODUCTION TO REAL ESTATE INDUSTRY

The real estate sector is one of the most recognized sectors across the world. In India it is
next to agriculture sector i.e. the second major sector in terms of employment creation. The
growth rate of this sector is expected at 30 %2 over next decade.

Real estate sector can be categorized into four sub-sectors such as retail, hospitality, housing,
and commercial. These sub sectors are also potential for development of infrastructure.

As per section 2 of Real Estate Regulation and Development Act, 2016 (RERA, 2016), “Real
Estate Project" (REP) means the following :
(i)   the development of a building or
(ii) a building consisting of apartments, or
(iii) converting an existing building or a part thereof into apartments, or
(iv) the development of land into plots or apartment, as the case may be,

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https://www.ibef.org/archives/detail/b3ZlcnZpZXcmMzc5MzAmMzgw

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(v) for the purpose of selling all or some of the said apartments or plots or building, as the
case may be, and
(vi) includes the common areas, the development works, all improvements and structures
thereon, and all easement, rights and appurtenances belonging thereto.

Real Estate industry comes under the Industry Sector out of the three sectors of Indian
Economy. As it is a recognized fact that India is one of the fastest rising economies, there is
so much of infrastructure growth in the country at a growth rate in the range of 6-7%.

Industrial sector’s contribution to GDP is 29% of the total GDP. 3In this 29%, construction
industry contributes to 13% of the industry sector. This looks to be a vast digit when it comes
to income generation of the nation. Real Estate sector in India is predicted to attain a market
size of 41 trillion USD by year 2030 from 120 billion USD in 2017. Even the recent annual
budget has given importance to the infrastructure growth as a nation is said to be advanced if
it has the superlative infrastructure services which requests other sectors, leading to
generation of income and development of country.

The housing sector alone contributes 5-6 % to the country's Gross Domestic Product (GDP).
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At the time period of FY 2008-2020, the market size of this housing sector is projected to
grow at a Compound Annual Growth Rate (CAGR) of 11.2 %. Retail, hospitality and
commercial real estate are also showing increase in growth significantly, providing the much-
needed infrastructure for India's rising needs.

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While talking about the employment generation, industry sector is occupying 22% of the
labour force of the country. The real estate sector is the 2nd major employer after the
agricultural sector.

The Indian real estate sector has observed excessive growth in recent times with the increase
in demand for office and residential areas. Amid 2009-18, Indian real estate sector attracted
institutional investments valued 30 billion USD7. Private Equity and Venture Capital
investments in the real estate sector reached 4.47 billion USD in 2018 and 546 million USD

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https://www.business-standard.com/article/news-cm/real-estate-sector-expected-to-contribute-13-to-india-
s-gdp-by-2025-119030800499_1.html
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https://www.ibef.org/industry/real-estate-india.aspx
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https://www.ibef.org/archives/detail/b3ZlcnZpZXcmMzc5MzAmMzgw
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ttps://www.irjet.net/archives/V5/i4/IRJET-V5I4322.pdf
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https://www.ibef.org/industry/real-estate-india.aspx

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in Jan-Feb 2019. It is also expected that in both the short term and the long term, this sector
will fascinate and attract more Non-Resident Indian (NRI) investments.

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As per the data issued by Department of Industrial Policy and Promotion (DIPP), the
construction sector in India has established Foreign Direct Investment (FDI) equity inflows to
24.91 billion USD in the time period April 2000-December 2018.

GST ON REAL ESTATE

GST is an Indirect Tax which has substituted several Indirect Taxes in India. Goods and
Services Tax (GST) is the indirect tax charged in India on the supply of goods and services. It
is a widespread multistage, destination-based tax. It is one indirect tax for the whole country.

GST is considered as one of the revolutionary changes in Indian tax system since 1947. It has
changed present scenario of the indirect tax system. One of the basic objectives of GST is to
avoid duplication of taxes. Further, it aims at removing the controversial tax revenue sharing
system between the centre and state government.

Its main objective is to make the complex tax structure simple on the supply of goods and
services. While this restructuring might have some temporary negative influences on the
economy, it will have long-term benefits for the country.

It will simplify the process of calculating taxes. Further, it will increase the tax base for
collecting indirect taxes. In India, concur GST is applicable on goods and services. Almost

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https://www.ibef.org/industry/real-estate-india.aspx

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every sector of the economy has been affected directly or indirectly by the implementation of
GST.

The purpose of introducing GST is to increase the government’s revenue. The execution of
GST is a part of the government’s tax reformation programme to progress the capability,
effectiveness and transparency of tax administration and management.

The previous indirect tax context had challenges of diversity and cascading of taxes, apart
from other issues, both technical and from the viewpoint of ground-level practices. The tax
restructuring, also referred as a ‘Good and Simple Tax’ is intended at profiting several
sectors by means of improved credits, reduced prices, consistency of pricing across the
nation, permitted movement of goods, etc.,. The real estate sector is of no exception from this
perspective. The significant feature of GST is to eliminate the cascading effect of taxes by
enabling credits completely fungible.

The main objective of implementing GST is to confirm that industries only act as a pass
through for every taxes and GST is lastly borne by end customers rather than businesses. This
is intended to ultimately profit customers by advantage of reduced prices as businesses are
predicted to pass on the benefit of decreased tax charges to final customers in cases where the
tax costs are eradicated. While this is the aim of the GST framework, in what way the similar
thing happens would finally be determined by market forces and probably the efficiency of
the events that the government takes from an anti-profiteering viewpoint.

Introduction of GST has made huge changes in the functioning of all the sectors of the Indian
Economy. Real estate sector of India is not the exception further this sector is going through
the transitional phase of the implementation of new acts and bodies like RERA (Real Estate
Regulatory Authority (2016)), REITs (Real Estate Investment Trusts), InvITs (Infrastructure
Investment Trusts). Government is also focused on providing houses to all (urban poor
population) by 2022 under affordable housing scheme.

The Construction Sector, often known as an “unorganized sector” has been hit by GST the
most as in construction sector there are huge number of activities involved, a large budget is
put initially, knowledge regarding the document management as well as the management of
financial aspects is not done as per the required terms.

In Real Estate industry, there has always been a need to improvise the way of working to
achieve better results, saving in time, energy and cost. In doing so, there are lot of shortcuts

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taken, lots of time saving activities are conducted which results in inadequate data regarding
all aspects of the projects.

There are specific things which are totally inattentive when it comes to documentation of all
the project data on closure of project. In all these things, there exists a scope of improvement,
in order to regularize this, the finance ministry has put up Goods & Service Tax (GST) in
order to regularize the Real Estate industry. Introduction of Goods & Service Tax (GST) by
the government of India has led to a lot of ambiguity in the Construction industry because it’s
not only a new thing to deal with but, it will also regularize the so called “Unorganized
Sector”.

GST on real estate has been a contentious issue especially with real estate sector in India
facing a challenging time over the last few years. Several representations were made to the
Government for further simplification and reduction of rates, especially for residential real
estate sector, in the hope that the same would bolster demand for that sector.

BENEFITS OF GST IMPLEMENTATION

 Experts have stated that following will be the benefits of GST implementation
 The tax structure will be made simple
 The whole Indian market will be a combined market which might translate into lesser
business costs.
 It can simplify seamless movement of goods across states and lessen the transaction
costs of businesses.
 Good for export oriented businesses as it is not applied for goods/services which are
exported out of India.
 In the downline, the lower tax burden could translate into lower prices on goods for
consumers.
 The Suppliers, manufacturers, wholesalers and retailers are able to recover GST
incurred on input costs as tax credits. This decreases the cost of doing business, thus
aiding reasonable prices for consumers.

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  It brings more transparency and improved compliance.
 The number of tax departments will decrease which in turn might lead to less
corruption.
 Many business entities will fall under the tax system and thus spreading the tax base.
This might lead to improved and additional tax revenue collections.
 Companies those are under unorganized sector will fall under tax regime.

OBJECTIVES OF THE STUDY

GST compliance for real estate has been a hectic task considering the day to day changes in
the rates, tax structure, GST returns to be filed so on and so forth. Assessee to be tax
compliant has to look for ways and means to make the tax compliance easier. An attempt was
made to simply the GST compliance for real estate and to reduce the GST cost to the ultimate
customer by way of introducing a new scheme for the real estate.

The objectives of this report is -

a. To comprehend the new GST rates on Real Estate

b. To assess the major transactions in Real Estate industry.

c. To analyse the impact of GST on Real Estate Industry in order to find whether real
estate industry has benefited on introduction of GST.

Limitation in data analysis –

The analysis is confined to the data of a particular construction type (domestic residential
construction project) accessed from a journal named “Building Construction: Before & After
GST” published by International Journal of Trend in International Research Journal of
Engineering and Technology (IRJET) in 2018. As this is not a study (i.e.) this is only a report
that focus on analysing the impact of GST and due to lack of time, the analysis is done only
for a single unit of construction area in domestic residential construction project.

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The objectives are explained in detail as follows:

a. Comprehending the new GST rates on Real Estate

At the 33rd GST Council Meeting held on 24th February 2019, new GST rates have been
introduced for residential real estate which has come into effect from the 1st of April 2019.
The residential real estate transactions has new GST rates proposed as follows:

 GST to be charged at 5% without Input Tax Credit (ITC) on residential properties that
are not part of the affordable housing segment.
 GST to be charged at 1% without ITC on residential properties that are included in the
affordable housing segment.
 GST to be charged at 5% for commercial apartments in projects with commercial area
not more than 15%.
 GST to be charged at 12% for commercial apartments in projects with commercial
area more than 15%.

GST Rates before and after 1st April 2019

The GST rates before and after amendment on 1 st April 2019 is exhibited as per Table 1
below.

Table 1: GST Rates before and after 1st April 2019

Type of House Rate till March 31, 2019 Rate after April 1, 2019
Premium, non-affordable 12% with ITC 5% without ITC
housing projects
Affordable housing projects 8% with ITC 1% without ITC

(Source:https://www.caclubindia.com/articles/gst-rate-for-real-estate-projects-w-e-f-1st-
april-2019-36682.asp)

What is Input Tax Credit (ITC) -

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Input Tax with reference to a taxable person, means the Goods and Services Tax imposed on
any supply of goods or services, which are used or planned to be used, during prolongation of
the business.

Input credit means at the time of paying tax on output, one can lessen the tax, the tax payers
have already paid on inputs.

It is the provisions of ITC which essentially make GST a value added tax i.e., collection of
tax at all points of supply chain after allowing credit of tax paid at earlier points.

The new GST rates that has been introduced has no option of availing ITC as the rates that
are been amended is at concessional rates which is very much beneficial for the owner of the
Real Estate Project. So, by also providing the benefit of ITC, the benefit would be more for
the owner of the Real Estate Project and there would be no benefits incurred by the
Government. This is the reason why the new amended rates do not provide the benefit of
availing ITC.

GST Council Definition of Affordable Housing Segment

The amended GST rates are provided based on Affordable Housing Segment and
Non-Affordable Housing Segment. Thus, the GST council has provided a definition for the
Affordable Housing Segment. The affordable housing segment qualifying criteria for a
residential property in India:

 Total carpet area of the residential property cannot exceed 60 square meters in
metropolitan areas.
 Total carpet area of residential property cannot exceed 90 square meters in non-
metropolitan cities and towns.
 Total value of property cannot exceed Rs. 45 lakhs in either metropolitan or non-
metropolitan areas.

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For purposes of this definition, metropolitan areas in India include Delhi NCR (limited to
Delhi, Noida, Gurgaon, Faridabad, Ghaziabad and Greater Noida), Kolkata, Chennai,
Hyderabad, Bengaluru and Mumbai (entire Mumbai Metropolitan Region).

GST on Key Construction Services

The Real Estate sector consists of major and important services involved in the construction
of Real Estate Projects. The GST rates for such key construction services are exhibited in
Table 2 below.

Table 2: GST rates for such key construction services

Key Construction Services GST Rates

Construction of affordable residential apartments by a
promoter in RREP, intended for sale to a buyer wholly or 1.5%
partially
Construction of residential apartments other the affordable
7.5%
residential apartments in RREP
Construction of commercial apartments by a promoter in
7.5%
RREP, intended for sale to a buyer wholly or partially
Construction of affordable residential apartment by a
promoter in a real estate project REP other than RREP, 1.5%
intended for sale to a buyer wholly or partially

Construction of residential apartments other than affordable

residential apartments by a promoter in REP other than 7.5%
RREP, intended for sale to a buyer wholly or partially

Predominantly involving earth work more than 75% 5%

Composite supply of works contract for all specified purpose 12%

Residuary provision 18%

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 The rates will be considered
Any services provided by Sub contractor to main contractor as that of the main
contractor.

(Source: G. Natarajan, Arvind P Datar (Senior Advocate), Justice T S Sivagnanam (Judge.

Madras High Court); Title of book- Demystifying GST for Construction Industry; Publisher -
OakBridge Publishing; 1 Jan 2019.)

However, GST is not applicable to the following construction-related transactions/activities:

 Sale of ready to move in flats

 Resale of property
 Sale/purchase of land

In all the above cases, the sale-purchase activity shall be treated neither as a supply of good
nor a supply of service as per 9SCHEDULE III of CGST Act,2017

Conditions for Availing GST Rates

 For projects commencing after 1-04-2019, the above mentioned are the rates to be
adopted mandatorily.
 For ongoing projects, option is given until 20th May 2019 to either opt for the earlier
rates or adopt the new rates. If not opted then the new rates are deemed to be adopted.
 Invoices for supply of the service can be issued during the period from 1st April 2019
to 20th May 2019 before exercising the option, but such invoices shall be in
accordance with the option to be exercised.
 The tax should be paid in cash only.
 Proportionate ITC attributable at time of supply falling on or after 1.4.2019 shall be
reversed.

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as-supply-of-goods-or-services/

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 80% of the value of input and input services shall be received from registered supplier
only. The exceptions are other than services by the way of development rights and
long-term lease of land, FSI (Floor Space Index), electricity, high speed diesel, motor
sprit and natural gas. FSI is the ratio of the total permissible constructible area to the
area of plot. FSI is used to compute the Total Built Up area of the site and also to
calculate the No. of Floor the building can go. FSI varies from place to place and
types of building.
 Input and input services on which tax is paid on RCM (Reverse Charge Mechanism)
shall be considered to have been purchased from registered person. Reverse Charge
Mechanism is a concept in which the receivers of goods or services pay the tax
instead of suppliers.
 Instances where value of input and input services received from registered suppliers
falls short of the said threshold of 80%, the tax shall be paid by the promoter on the
value of input and input services comprising such short fall @ 18% on RCM.
 If cement is received from unregistered person, the promoter (i.e.) the developer of
the Real Estate Project shall pay tax on such cement at the applicable rates on RCM.
 Tax on cement shall be paid in the month in which cement is received.
 The promoter shall maintain project wise supplies from registered and unregistered
supplier and calculate tax payment on the short fall at the end of the financial year and
shall submit the same in the prescribed form in the portal by the end of the quarter
following the financial year. The short fall shall be added to the output liability in the
month not greater than the month of June following the end of the financial year.
 Ongoing projects, specified projects mentioned under Notification S.No.3 (iv) b, c, d,
da and db and S.no.3(V) b, c, d and da and S.No.3 (vi) c, on 1.4.2019 the same rate of
8% can be opted even after 1.4.2019. Such projects include:
a) Construction of affordable residential apartments by a promoter in a
Residential Real Estate Project (RREP).
b) Construction of residential apartments other than affordable residential
apartments by a promoter in an RREP
c) Construction of commercial apartments (shops, offices, godowns etc.) by a
promoter in an RREP
d) Construction of affordable residential apartments (ARA) by a promoter in a
Real Estate Project (REP) other than RREP

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 e) Construction of residential apartments other than affordable residential
apartments (ARA) by a promoter in a REP other than a RREP

f) Construction of commercial apartments in a REP and Residential apartments other than

affordable Residential Apartments where the new rates are not opted, the Effective Rate
would be 12% (18% on 2/3rd total value including land value).

b. Assessing the major transactions in Real Estate

The major transactions involved in real estate industry are established through a concept
known as Joint Development Agreement (JDA). JDA is a common aspect in the real estate
sector that bounds the landowner and a real estate developer/promoter in an agreement to
construct new projects.

The constructed area would normally be shared between the landowner and the promoter in
agreed ratio and each of them would market their share of constructed area. In this
transaction, there is an element of construction service provided by the promoter to the
landowner.

It may be noted that the promoter is providing a service to his buyers, by way of construction
of individual apartments in the residential complex. Further, the promoter is also providing
service to the landowner, by way of construction of specified number of apartments for them.
So, apparently, the promoter is also liable to pay GST in respect of the services provided by
him to the landowner.

Similar joint developments are undertaken for construction of commercial complexes also.

The landowner provides the land to the promoter while the promoter arranges the capital and
several approvals and licenses from the government to construct the building or the civil
structure of the land.

JDA Transactions

There are three major transactions involved as follows:

1) Transaction 1: Land owner to Promoter

2) Transaction 2: Promoter to Land owner
3) Transaction 3: Promoter /Land owner to End customer (Third Parties)

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1)Transaction 1: Land owner to Promoter

This transaction involves the transfer of the land/ development right (TDR) by the
Landowner to Developer.

The services provided by landowners by way of TDR and transfer of FSI or grant of long-
term lease for construction has been notified under Section 9(4) for the purpose of RCM
(Notification 5/2019).

GST is payable on the above services provided by landowner to the promoters. To the extent
such services are used by the promoter in construction of residential apartments, on which
GST is payable, the GST payable under RCM on TDR, transfer of FSI, Additional FSI, long
term lease of land is exempted.

To the extent of utilisation of such services in respect of construction of commercial

apartments and construction of residential apartments sold after completion without payment
of GST, GST is payable under RCM for TDR, transfer of FSI, additional FSI and long-term
lease of land.

Illustration

E.g.: In a project, let us assume that the value of TDR is R.10 lakhs. Out of the carpet area of
1,00,000 sq. ft, 40,000 sq. ft is residential apartments and 60,000 sq. ft is commercial
apartments. In such case, GST payable on Rs.4 lakhs (Rs,10 lakhs * 40,000 Sq. ft/100000 Sq.
ft) is exempted and the balance GST is payable (If the said 40,000 sq. ft area of residential
apartments are sold on payment of GST).

Out of the 40,000 sq. ft of residential apartments, the promoter has sold only 20,000 sq. ft
during construction stage, on payment of GST and the remaining 20,000 sq. ft sold only after
completion without GST then the promoter shall pay GST under RCM in respect of the value

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of TDR attributable to such portion of residential apartments which are unsold on the date of
completion.

The GST thus paid by the promoter under RCM cannot be availed as ITC by the promoter, as
the residential apartments in respect of which this payment is being made would be sold by
him after completion and no GST would be paid thereon.

GST payable on TDR and transfer of FSI in respect of Commercial apartments shall also be
paid by the promoter under RCM @ 18%.

Valuation

 From the landowner to promoter

i. Transfer of TDR, FSI including additional FSI
ii. Conveyance of land/UDS (Undivided Share of Land) land pertaining to
promoters share of apartments. UDS is a part of the plot given to the owner of
the flat in an apartment complex on which the entire structure is built. This
share of land has no definite boundaries and all the flats built on that specific
plot will have associated UDS.
 From the promoter to Landowner
iii. Construction of specified number of apartments.

So, the value of iii, which is the consideration for i & ii, shall be apportioned between i and ii,
to arrive at the value of i.

Wherever ii is either equal to or more than iii, there shall be no value for i.

Time of Supply

In GST, obligation to remit GST to Government arises at the time of supply. The point of
taxation is the point in time when goods have been considered to be supplied or services have
been considered to be provided. The point of taxation allows us to determine the rate of tax,
value, and due dates for payment of taxes.

In the transaction from landowner to promoter, GST liability on TDR shall arise in the hands
of promoter, on the date of issue of completion certificate for the project or on first
occupation whichever is earlier.

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Rate of GST on TDR

The GST rates on Transferable Development Rights are as follows:

 1% in case of Affordable Residential Apartments (ARA), remaining unsold on

completion.
 5% in case of other residential apartments, remaining unsold on completion.
 18% in case of commercial apartments.
 All the above is payable by the promoter under RCM.

2) Transaction 2: Promoter to Land owner

This transaction involves the transfer of construction service/units to by promoter to the land
owner

It has been laid down hat the value of the services provided by the landowner to the promoter
by way of Transfer of Development Rights is the receipt of construction services from the
promoter and vice versa.

Illustration

A residential complex comprising of 20 apartments is proposed to be constructed in a land

measuring 20,000 Sq. ft. The land is owned by A and he enters into a Joint Development
Agreement with a promoter B for this purpose and A grants the development rights in favour
of B. Out of the total 20 apartments constructed, 10 would be for the landowner (A) and 10
would be for the promoter (B).

Rate of GST

Prior to 01.04.2019, the rate off GST applicable for the services provided by the promoter to
his buyers as well as for the services provided by the promoter to the landowner were the
same. In respect of services provided by the promoter to his buyers, the GST rate shall be
18% on 2/3 value, thus an effective rate of 12%. For the services provided by promoter to
landowner, the value shall be based on value of similar service provided by buyers, which is
2/3 of the total price charged. Thus, GST at 18% on 2/3 of the value would be applicable,
making the effective rate to 12%.

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After the amendment made on 01.04.2019, for the services provided to the Landowner, the
promoter can pay GST at 12% if the carpet area of Affordable Residential Apartments (ARA)
in the complex is more than 50%.

If the carpet area of Affordable Residential Apartments (ARA) in a project is less than 50%,
the applicable GST rate would be 18%.

The above two amendments are as per residual entry (xii) of S.No.3 of Notification 11/2017.

The Promoter would be entitled to ITC in respect of inputs and input services, as GST is
payable at 12% or 18%, by the Promoter for the services provided to Landowner.

If the GST is paid at 12% by the Promoter and if ultimately the carpet area of ARAs turns out
to be less than 50%, the differential GST at 6% has to be paid under RCM by the landowner,
who would be considered as Promoter as per the definition of Promoter.

If the contractor appointed by the Promoter has paid 12% GST as per S.No.3 (va), and if
ultimately the carpet area turns out to be less than 50%, then the differential 6% GST has to
be paid by Promoter under RCM. The Promoter cannot avail ITC of the same.

When the landowner sells his share of apartments, by charging 1% or 5% GST, he is not
entitled for any ITC. But as per S.No.3 of Notification 3/2019, the landowner can avail ITC
of the GST charged on him by the Promoter, in which case, the GST payable by him, upon
sale of his share of apartments shall not be less than the ITC availed.

Thus, the landowner, can avail ITC of the 12% or 18% GST charged on him by the Promoter
and pay same amount of GST, upon sale of such apartments.

There exists an anomaly where, the promoter would be liable to pay GST on the construction
service provide by him to the landowner, only at the time of issue of completion certificate or
first occupation, whichever is earlier. But, if the landowner sells his share of apartments,
before issue of completion certificate or first occupation whichever is earlier, he may not be
entitled to avail ITC, as provided for in the above proviso, as the promoter would not have,
by then paid GST for the services provided by him to the landowner.

3)Transaction 3: Promoter /Land owner to End customer (Third Parties)

This type of transaction involves the transfer the constructed unit to the end customers
considered to be the third party.

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For this transaction, the rates are as per the newly amended GST rates as explained before –

GST to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not
part of the affordable housing segment.

GST to be charged at 1% without ITC on residential properties that are included in the
affordable housing segment.

GST to be charged at 5% for commercial apartments in projects with commercial area not
more than 15%.

GST to be charged at 12% for commercial apartments in projects with commercial area more
than 15%.

c. Analysing the impact of GST on Real Estate Industry

The Government also has been contemplating revising the tax structure under GST for the
real estate sector, more so for the residential sector, as the incidence of tax on the end
customer is perceived to be very high coupled with the fact that it becomes very difficult in
this industry to track compliance with the provisions of anti-profiteering. In that direction, a
special tax structure and mechanism was proposed and formulated wherein it was stated that
the said mechanism would address the slow-down in this sector and boost the residential
segment.

The influence of GST, especially on residential markets is what this report outlines. The
instance of real estate in general and more definitely for residential markets is unique, as
unlike an FMCG product, neither does an apartment have an ‘Best before’ date, nor an
‘MRP’. The government expects that with a typical GST duty, and the advantage of input tax
credit (ITC), residential prices should witness a descending shift.

Often there are shortcuts taken to deal with the tax enhancing activities, which is making the
real estate industry prone to the bad effects of GST on its working and is regularizing it.
There are mythologies that construction sector is facing a slow down due to GST, there is a
rise in the cost of materials, machinery as well as man power due to GST.

GST has fetched the concept of ‘one nation one tax’ system, but its significance on several
industries is somewhat different. The first level of distinction will come in based on whether
the industry deals with manufacturing, distributing and retailing or is providing a service.
19
Thus, the major objective to be studied is to find whether the real estate industry has
benefited on introducing GST or not. The actual scenario is being studied by taking an
existing building if construction as per the old system of taxation and if the same is
constructed as per the GST regime. The difference in the cost is calculated on unit basis to
check the effects of GST on Construction Sector. For this purpose, analysis is made by
comparing the previous tax regime rates and new GST rates for certain key construction
materials used in the construction of a Residential Real Estate Project.

So, to get a clear picture of increase or decrease in cost due to GST, detailed study of a
project before and after GST is done for a check in cost variation.

To arrive at a conclusion, detailed study is carried to depict in details where is the area of
concern where the cost of project has affected due to GST implementation. This study not
only give a clearer picture of what all area of concern are to be seen to eliminate the
unnecessary cost but it will also help to analyse and form such schedules that are met with as
per the scheduled cost and time frame to nullify the effects of cost variation in the real estate
industry.

RESEARCH METHODOLOGY

Research Methodology is the detailed procedures or methods used to categorize, select,

process, and analyse information about a topic. In a research project, the methodology allows
to critically evaluate a study’s overall validity and reliability. This can either be qualitative or
quantitative or mixed. Qualitative Research is primarily exploratory research. It is used to
increase the understanding of fundamental reasons, opinions, and motivations. Quantitative
Research is used to measure the problem by ways of creating numerical data or data that can
be altered into usable statistics. Multimethodology or multimethod research includes the use
of more than one method of data collection or research in a research study or set of related

20
 studies. Mixed method research is much particular in that it comprises the mixing of
qualitative and quantitative data, methods and methodologies in a research study or set of
associated studies. The research methodology process is as per Figure 1.

Figure 1 : Research Methodology Process

FF

Literature Review
FF
Review
Concepts and Interpret
Define Theories Formulate Design Collect Analyse and
Research Hypothese Research Data Data Report
Problem Review previous s
Research
Findings

Defining Research Problem

A research problem is an issue or a concern that a researcher presents and justifies in a

research study. It is a question that a researcher requires to answer or a problem that a
researcher requires to solve.

The research problem concerned here is to find whether there is a significant difference in the
cost of construction of a real estate project before and after introducing GST and that
significant difference has either positive or negative impact on the real estate industry.
Through this, it would be easier to find if the implementation of GST on Real Estate is
beneficial for that sector or not.

21
Literature Review

As per a report published by Economy Watch (2010) – Real Estate Industry Trends all over
the world show a rise in its rate of growth. India is seeing a boom in the construction sector,
in which Real Estate is a part, mainly due to the government initiative in expansion of the
developmental facilities. Economic improvement has also created improved generation of
demand in the real estate sector (both residential and commercial). Real estate Industry in
India is rising at a phenomenal rate of 7 to 8% p.a.

As stated by Nargis Namazi (2011) in an article published in Business Review – across the
world, the construction industry is witnessing a tremendous boom. And India is no exception!
Government procedures and outflow in infrastructure, regeneration and training projects have
aided the sector raise at high levels and the similar pace is probable to be seen in the
upcoming year too. The construction industry is currently growing at 10 per cent per annum
and has a size of 70 billion dollars but with the huge investment in the construction industry,
tremendous growth opportunities are expected.

As per report published by International Journal of Trend in International Research Journal of

Engineering and Technology (IRJET) in 2018 - The GST implementation is part of the
government’s tax reform programme to increase the capability, effectiveness and
transparency of tax ministration and management. The introduction of goods and services tax
(GST) aims to increase the government’s revenue. Building materials and land acquisition
costs are the major construction cost components which are affected due to GST
implementation.

In another report published by International Journal of Trend in International Research

Journal of Engineering and Technology (IRJET) in 2018 - Introduction of Goods & Service
Tax has made large scale changes in the working pattern of all the sectors of Indian
Economy. The Real Estate Industry has been hit by it the most as large number of activities
involved, a big budget is put up initially, knowledge regarding the document management as
well as the management of financial aspects is not done as per the required terms. Often there
are shortcuts taken to deal with the tax enhancing activities, which is making the Real Estate
industry prone to the bad effects of GST on its working and is regularizing the unorganized
sector.

22
Report published by JLL and PwC India - For real estate, the implementation of GST is both
disruptive and calming. Whilst it throws into chaos an earlier order, taxation system
throughout the country. The case of real estate in is unique, because unlike an FMCG
product, neither does an apartment have an ‘MRP’, nor ‘Best before’ date.

As per the booklet on Practical Guide on new scheme of taxation for Real Estate under GST
published by a CA Firm - The transactions in the real estate sector have their own
peculiarities and thereby one has always felt the need for having a separate set of provisions
that would be more specific to this sector rather than the general provisions that would be
applicable to any other sector. This need was felt right from the sales tax ( later VAT) as well
as in service tax regime. However, with the series of changes that have been made effective
from 1st April, 2019 it can be seen that the step in this direction has been taken although it
may not be in line with the GST principles.

Panda and Ratel (2015) analysed the impact of GST (Goods and Services Tax) on Indian Tax
Scenario. They have comprehensive brief explanation of the historical Indian taxation system
and its tax structure. Then the need ascended for the variation in tax structure from previous
to GST model. GST has been discussed in detail in this paper by the authors as the
background, salient features and the impact of GST in the present tax scenario in India.

Shrikant Paranjape (2017), president of CREDAI Pune Metro, maintains that “The impact of
the GST on property prices will be difficult to gauge at this stage because of the lack of
clarity on abatement for land value. In a product, where the major raw material is not covered
by the GST and the completed unit is also not covered by the GST, the tax input benefit will
be hard to calculate or justify. Only the market forces, the ready reckoned rates and time, will
decide whether and how much benefit will be passed on by the developers to the purchasers.”

Data Collection

For the purpose of analysing the research hypothesis, data is collected from a secondary
source (i.e.) secondary data is collected by accessing to an article named “Building
Construction: Before & After GST” which is published by International Journal of Trend in
International Research Journal of Engineering and Technology (IRJET) in 2018.

The data presented here consists of rates of older tax regime and new GST rates of different
construction materials used for construction of a Real Estate Project. The data accessed from
the article is based on the manual published by the government departments.

23
The data that is accessed will be helpful in determining the impact of GST of on real estate
industry thus making it clear to understand whether the effect of GST on real estate industry
is positive or negative.

The procured data that consists of the older tax cost and the new GST cost for certain
construction materials those are important in construction or building of a real estate project,
helps in knowing the increase or decrease in the total construction cost, thus understanding if
the impact of GST on real estate industry is positive or negative.

The following table 3 represents the collection of data for analysis.

Table 3: Data collected for analysis

S.N
Description of item Quantity Basic Cost Old Tax Cost GST Cost
o
1 Exavation 568.276 447337.95 514438.64 527858.78
2 Filling 286.004 508190.28 662632.5 582903.38
3 Rubble So ling 88.9 198819.63 246946.91 214777.48
4 Concrete M 15 53.162 183620.96 224649.93 214905.4
5 Concrete M 25 606.145 3195047.4 3966790.73 3890322.98
6 Concrete M 30 124.648 546934.47 675910.34 654087.51
6002.99
7 Shuttering 4 4478675.08 5131872.58 5226119.55
8 Reinforcement 84.239 5214368.89 6106511.04 6152955.28
9 Block Work 318.224 1553728.41 1841169.57 1828427.04
10 Brick Work 318.224 1770372.84 2114534.35 1970501.52
11 DPC 150mm 172.964 91312.74 111093.94 108376.35
Internal cement 5246.44
12 plastering 15mm 5 1646214.77 1954995.3 1935475.45
Internal gypsum 5246.44
13 plastering 15mm 5 1960845.71 2279873.58 2205893.59
External cement 2347.50
14 plastering 25mm 6 1011758.14 1209036.06 1195178.89
Waterproofing &
Plastering UG WT &
15 OHT 444.65 191640.83 229007.97 226383.23
1669.73
16 Flooring & Skirting 4 2063276 2573000.77 2451163.49
17 Brick Bat Coba 381.877 578149.89 715758.15 664759.59
18 China Mosaic 232.112 209597.71 257989.42 233338.59
19 Dado 975.029 830543.59 1033622.41 990944.41
20 Internal Painting on 4084.71 843070.61 1012681.32 1030051.46

24
 Gypsum Plaster 2
2347.50
21 External Painting 6 710206.47 855505.37 868996.43
1937.33
22 Ceiling Painting 7 586115.22 706026.69 717160.51
2539.94
23 Safety 3 569382.21 661026.52 661368.38
24 OHT Painting 135.435 40974.04 49356.79 50135.14
Internal Painting on 4084.71
25 Cement Plaster 2 1176825.5 1419150.99 1442059.28
26 Block Work in Fix block 318.224 1438673.74 1686555.37 1697635.01
26013596.2
27 Cost of Construction   5 31064901.25 30696187.48
Cost of Sanitation @
28 5%   1300679.81 1553245.06 1534809.37
Cost of Water Supply @
29 5%   1300679.81 1553245.06 1534809.37
Cost of Electrification
30 @ 12%   3121631.55 3727788.15 3683542.5
31 Contingency @ 5%   1300679.81 1553245.06 1534809.37
Work charges
32 Establishment @ 2.5%   650339.91 776622.53 767404.69
Major Tools & Plant @
33 1%   260135.92 310649.01 306961.87
(Source - https://www.irjet.net/archives/V5/i4/IRJET-V5I4322.pdf)

DATA ANALYSIS

The analysis is performed from the gathered data by comparing the old tax cost to the new
GST cost. The comparison is done with help of Excel tool. The steps performed is as follows:

a. The whole data involving the description of the construction items, its quantity, the
basic cost for it, its old tax cost, its new GST costs is loaded into the excel sheet.
b. The difference between the old tax cost and the new GST cost is calculated with the
help of formula ( GST Cost – Old Tax Cost).
c. The difference in terms of the percentage (i.e.) the percentage difference is calculated
with the formula – [(GST Cost / Old Tax Cost) – 1].
d. Thus, from the above two steps the difference and the percentage difference between
the old tax cost and the GST cost is calculated.

25
 e. The difference and the percentage difference values in which the GST cost is higher
than the old tax cost is highlighted with colour Red to indicate a negative impact on
that element. For example, for excavation the GST cost is higher than the old tax cost
which shows that there exists a negative impact on introduction of GST.
f. Those fields, in which the GST Cost is lesser than the old cost, are highlighted with
Green colour to show that there exists a positive impact on introducing GST. For
example, for Concrete M 15 the GST Cost is lower than the old tax cost which shows
that there exists a positive impact on introduction of GST.
g. Finally, the cost is totalled to obtain the total cost of construction and that is compared
with the old tax cost and the GST cost to find the overall impact of GST on Real
estate industry is whether positive or negative.

Thus, the analysis of the data is performed as per the following exhibited process in Table 4
below.

Table 4: Analysis of the data

S. Cost Comparison
N Description of item Quantity
Basic Cost Old Tax Cost GST Cost Difference Difference (%)
o
1 Excavation 568.276 447337.95 514438.64 527858.78 13420.14 2.61%
2 Filling 286.004 508190.28 662632.5 582903.38 -79729.12 -12.03%
3 Rubble So ling 88.9 198819.63 246946.91 214777.48 -32169.43 -13.03%
4 Concrete M 15 53.162 183620.96 224649.93 214905.4 -9744.53 -4.34%
5 Concrete M 25 606.145 3195047.4 3966790.73 3890322.98 -76467.75 -1.93%
6 Concrete M 30 124.648 546934.47 675910.34 654087.51 -21822.83 -3.23%
6002.99
7 Shuttering 4 4478675.08 5131872.58 5226119.55 94246.97 1.84%

26
8 Reinforcement 84.239 5214368.89 6106511.04 6152955.28 46444.24 0.76%
9 Block Work 318.224 1553728.41 1841169.57 1828427.04 -12742.53 -0.69%
10 Brick Work 318.224 1770372.84 2114534.35 1970501.52 -144032.83 -6.81%
11 DPC 150mm 172.964 91312.74 111093.94 108376.35 -2717.59 -2.45%
Internal cement 5246.44
12 plastering 15mm 5 1646214.77 1954995.3 1935475.45 -19519.85 -1.00%
Internal gypsum 5246.44
13 plastering 15mm 5 1960845.71 2279873.58 2205893.59 -73979.99 -3.24%
External cement 2347.50
14 plastering 25mm 6 1011758.14 1209036.06 1195178.89 -13857.17 -1.15%
Waterproofing &
Plastering UG WT &
15 OHT 444.65 191640.83 229007.97 226383.23 -2624.74 -1.15%
1669.73
16 Flooring & Skirting 4 2063276 2573000.77 2451163.49 -121837.28 -4.74%
17 Brick Bat Coba 381.877 578149.89 715758.15 664759.59 -50998.56 -7.13%
18 China Mosaic 232.112 209597.71 257989.42 233338.59 -24650.83 -9.55%
19 Dado 975.029 830543.59 1033622.41 990944.41 -42678 -4.13%
Internal Painting on 4084.71
20 Gypsum Plaster 2 843070.61 1012681.32 1030051.46 17370.14 1.72%
2347.50
21 External Painting 6 710206.47 855505.37 868996.43 13491.06 1.58%
1937.33
22 Ceiling Painting 7 586115.22 706026.69 717160.51 11133.82 1.58%
2539.94
23 Safety 3 569382.21 661026.52 661368.38 341.86 0.05%
24 OHT Painting 135.435 40974.04 49356.79 50135.14 778.35 1.58%
Internal Painting on 4084.71
25 Cement Plaster 2 1176825.5 1419150.99 1442059.28 22908.29 1.61%
Block Work in Fix
26 block 318.224 1438673.74 1686555.37 1697635.01 11079.64 0.66%
26013596.2 31064901.2 30696187.4
27 Cost of Construction   5 5 8 -368713.77 -1.19%
Cost of Sanitation @
28 5%   1300679.81 1553245.06 1534809.37 -18435.69 -1.19%
Cost of Water
29 Supply @ 5%   1300679.81 1553245.06 1534809.37 -18435.69 -1.19%
Cost of
Electrification @
30 12%   3121631.55 3727788.15 3683542.5 -44245.65 -1.19%
31 Contingency @ 5%   1300679.81 1553245.06 1534809.37 -18435.69 -1.19%

27
 Work charges
Establishment @
32 2.5%   650339.91 776622.53 767404.69 -9217.84 -1.19%
Major Tools & Plant
33 @ 1%   260135.92 310649.01 306961.87 -3687.14 -1.19%
Total Cost of 33947743.0 40539696.1 40058524.6
34 Construction   6 2 5 -481171.47 -1.19%
Total Construction
35 Build-up area   2013.37 2013.37 2013.37 0 2013.37
Total Construction
36 Build-up area   21663.82 21663.82 21663.82 0 21663.82
Cost of Construction
37 per Sq.M   16861.19 20135.28 19896.3 -238.98 -1.19%
Cost of Construction
38 per Sq. ft   1567.02 1871.31 1849.1 -22.21 -1.19%
(Source - https://www.irjet.net/archives/V5/i4/IRJET-V5I4322.pdf)

Interpretation and Report

It can be easily observed from the above calculations that even though ITC is not taken in
consideration, there has been a considerable reduction of up to 1.2% of the Project Cost by
application of GST. If the ITC studies are taken in consideration, then this cost will reduce
even more and hence, it can be said that it is a positive effect of GST on Real Estate
Industry.

As per this study report, cost of construction of a real estate project before introducing GST is
more compared to the cost of construction of a real estate project before introducing GST.
Which means that the implementation of GST has a positive effect on the real estate industry.

CONCLUSION

GST can be considered as simple tax system to work with as it has replaced all other
prevailing Indirect taxes. This tax system aims at removing every possibility of duplication of
taxes. It is expected to be a confidence booster for the industry.

28
The radical change in Indirect Taxes will surely foster the ideology of GST i.e. one nation-
one tax. It will attract the interest of buyer and investor by bringing more transparency in the
taxation system. It will benefit both buyer and seller of the property.

While GST has simplified the tax treatment for the real estate sector and has resolved some if
the long-standing issues of valuation, nature of supply, etc., the significant benefit appears to
be only with respect to increased input tax credit on the gaining of materials. The rate of GST
on residential contracts has also reduced with the new amendment on tax rates.

However, concerns remain with respect to the taxability of TDRs when the development
rights are being transferred to builder/ developer and seamless credit availability of ITC to a
constructor/ developer/ works contractor. There is a persistent need for the Government to
look into these matters in more detail to evade any uncertainty that may affect the economic
environment of the country.

The increase in input credit should ideally reduce the construction cost. However, in an
apartment, in addition to construction cost, the land cost also plays a significant role. The
maximum benefit under GST would be available only to projects that are mostly or entirely
executed post implementation of GST.

The project involves the cost of land, which would significantly influence the final savings
the final customer might derive under GST. The projects in which the land cost is minimum,
the savings can be substantial and nearer to the projected savings. However, in which the land
cost is high, the savings on GST might not be significant.

Overall the GST will be an easier taxation system to work with. Finally, we can conclude that
GST along with the present changes in the real estate sector may slow down the pace of
growth in the short run but in future, these changes will be beneficial for the growth and
consolidation of the sector.

29
REFERENCES

1) G. Natarajan, Arvind P Datar (Senior Advocate), Justice T S Sivagnanam (Judge.

Madras High Court); Title of book- Demystifying GST for Construction Industry;
Publisher - OakBridge Publishing; 1 Jan 2019.

2) CA. Sandeep Jhunjhunwala; Title of book- Decoding RERA; Publisher- Karnataka

State Chartered Accountants Association (KSCAA); 2019.

3) CA Madhukar N Hiregange, Shri B.S.V. Murthy, CA Mahadev R, CA Ravi Kumar

Somani; Title of book- A Practical Guide to GST Audits and Certification,2017

4) Journal on “An Enquiry into Effects of GST on Real Estate Sector of India” ;
International Journal of Trend in Scientific Research and Development (IJTSRD) ;
Volume- 1 Issue- 6, 2017.

5) Journal on “Building Construction: Before & After GST”; Research Journal of

Engineering and Technology (IRJET); Volume: 05 Issue: 04; Apr-2018.

30
6) Kunal Wadhwa; Article on Impact of GST on Residential Markets; Pg.nos- 3,4,7,8,9;
published by JLL and PwC; 2018

7) CA Sudhir V S, CA Roopa Naya, CA Ashish Chaudhary; Article on Practical Guide

on new scheme of taxation for Real Estate under GST; Pg.nos- 7,11,21,58,65,67;
published by Team Hiregange; 2019

8) http://www.cbic.gov.in/

9) https://www.paisabazaar.com/tax/gst-impact-on-real-estate/

10) https://cleartax.in/s/gst-real-estate-sector-affect

11) https://www.caclubindia.com/articles/gst-on-transferable-development-right-tdr-in-
real-estate-36611.asp

31