Are You A Business Owner Buying A Property?

Know The GST Rates First

Buying a property has direct as well as indirect tax implications. You may need to pay income tax on the profit from the sale of a property if there is a capital gain. Whereas indirect tax, namely GST, is applicable on the sale consideration irrespective of the profitability. On a brighter note, home buyers are also eligible for tax benefits on purchasing a property. However, not everyone is eligible for income tax benefits.

Business owner buying a property

Whether you are a salaried person or a business owner, the GST applicability on a property is inevitable. As an entrepreneur buying a real estate property, on the one hand, you have to be aware of your GST and income tax liabilities. You have to make sure that you can also avail the tax benefits available.

Before finding out your GST liability on property purchases, you may want to find out your eligibility for tax benefits.

Property related tax benefits for business owners

The income tax benefits provided on property purchase are under multiple sections of the Income Tax Act. Not every business owner may be eligible for all of these tax benefits.

Deductions of up to Rs 1.5 lakhs under section 80C is available for individual and Hindu Undivided Family (HUF) only. Business owners whose businesses are in the form of a company or a partnership will only avail of this benefit in an individual capacity. However, sole proprietors can reduce their business taxability through property purchases.

Similarly, section 24 allows deductions up to Rs 2 lakhs to individuals. Deduction of up to Rs 1.5 lakhs is available to individuals only. Both these deductions are for interests paid against the home loan taken.

GST applicability on real estate properties

In the pre-GST era, there were several state and central indirect taxes applicable to properties. This included Value Added Tax, Service Tax, Central Excise, Entry Tax etc. There was a lack of clarity on their applicability, particularly for the ultimate buyer. Besides, the input credit on the payment of these taxes was also not available in most cases.

GST has been applicable since the 1st of July 2017 and seen a tax rate reduction in 2019. Till March of 2019, the GST rate on property transactions was,

• 8% with the input tax credit in case of affordable housing
• 12% with the input tax credit in case of non-affordable housing

After the rate revision, the GST rate was reduced, but the benefit of the input tax credit was not available. The rate is now,

• 1% in case of affordable housing, and,
• 5% for non-affordable housing.

Thus, the new rates are much more favourable for the involved parties and reduce the property’s overall value. This can also be seen as an encouragement from the government to boost the real estate industry.

The new rate applied to new housing projects, while builders chose between the two rates for ongoing projects.

Scenarios where GST is applicable

Various services and activities within the real estate sector can influence the final purchase price of the business owner who is buying a property. Key among them are,

GST on construction-related service

Services provided for construction activities is taxed in the following tax brackets,

• Under construction home (bought under the Pradhan Mantri Awas Yojana – Credit-Linked Subsidy Scheme) at 8%,
• Under construction project without subsidy at 12%, and,
• Work contract for affordable housing at 12%.

GST on construction materials

There is a wide range of materials used to construct a property, with different GST rates applicable. Natural sand, brick, pebbles, coal etc., are charged at 5%. Marble and granite blocks are charged 12%, while iron blocks, rods, wire, bamboo flooring tiles attract 18%. Items like cement tile, sawdust and ceramic mosaic cubes attract an even higher GST of 28%.

GST on maintenance charges

GST is applicable for maintenance charges if,

• The annual turnover of the resident welfare society is more than Rs 20 lakhs, and,
• All the members pay Rs 7,500 or more like a monthly maintenance charge.

The GST rate applicable in this case is 18%.

GST on rent of the property

If the business owner lets out the property for commercial purposes, GST may become applicable. However, the annual rent paid has to be above Rs 20 lakhs for it to become applicable. The GST rate defined for the rent of the property is 18%.

GST on housing loan

In good news for business owners who plan to apply for a home loan, the loan repayment doesn’t attract any GST liability. However, services provided by financial institutions can have a GST component. Accordingly, the processing fee for your home loan will include GST.

Scenarios where GST is applicable

Any business owner planning to buy a property should also know the areas where GST will not be charged.

• Firstly, there are no GST implications on property registration. However, states do charge stamp duty and registration charges on property registration.
• GST is not applicable in the case of ready-to-move-in properties. As these properties have their occupancy certificate and are complete, their sale is not like work contracts. GST is charged in property transactions which are in the form of work contracts. However, that doesn’t mean that the buyer has not included the GST paid during the construction on your final purchase price.
• If a business owner opts to buy land and plan to develop a property on it, the purchase of land itself will not attract GST liability. Of course, the construction will involve purchases of materials and services as per applicable GST rates.

Business owner and property purchase

As a business-owning home buyer, you are aware that GST is applicable in various aspects of real estate. To begin with, it is worth remembering that GST does not apply to the finished property. However, the builder must have paid GST while buying the materials and services to construct the property. Therefore, such GST is likely to be a part of the builder’s cost of production, thus influencing your purchase price. You have also understood the services and materials that involve GST liability, thus becoming a cost component for the builder.

An under-construction property attracts GST on the property transaction. The rates for the same differs as per the property’s affordable/non-affordable category and mentioned above.

As a property buyer who owns a business, you can avail of the home loan tax benefits and reduce your overall purchase cost. This can neutralise your GST cost to some extent. All you need to do is to ensure that your business is linked to your PAN, and you consolidate your business finances with your own. If you have already upgraded your books of accounts to digital mode, like OkCredit’s digital bahi-khata application, you can easily account for your business and personal finances seamlessly.

Conclusion

Finally, business owners must remember that their business will not see the effects of a property purchase on the business if it is a separate legal entity like a partnership or a company. However, with a sole-proprietorship, your property purchase and GST implications will be closely linked to your business and overall finances.

Also Read:

1)  How to Register for GST on your Own? A Complete Guide
2) What Happens When You Don't Pay GST for your Business?
3) Key Advantages and Disadvantages of GST
4) How to Pay GST Online Easily? A Step-by-step Guide

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FAQs

Q. Do landlords need to pay GST on electricity charges recovered from tenants?

Ans. While GST may apply to landlords who let out their property, they are not liable to pay GST on the amounts recovered for expenses from the tenant. Accordingly, electricity charges recovered from the tenant doesn’t fall under the purview of GST.

Q. Is GST applicable on one-time maintenance deposits as well?

Ans. Builders generally charge a one-time maintenance deposit as the resident welfare associations take time for formation. This is like a service rendered and is chargeable to GST. The GST is deducted only on the utilisation of the money on actual maintenance works.

Q. What if the home buyer has made part payment against an under-construction property after the GST rate change of 2019?

Ans. In this case, the new GST rate will be applicable by default. However, being an ongoing project, the builder can choose to apply the old rate, in which case the old GST rate will be applicable.