New GST rate on under construction property: Here's what builders and buyers must know

Seeking to end the confusion about the new GST slabs for the real estate sector, the Finance Ministry has come out with answers to Frequently Asked Questions (FAQ), clarifying 41 issues. As per the FAQs, a homebuyer cannot decide the GST rate which will be applicable on the amount remaining on an under-construction flat. Only the can exercise the option to pay tax on construction of apartments at the old rate of 12 per cent, by May 10 at the latest. "“If the builder does not exercises his option to continue to pay tax at the old rate...the effective GST rate applicable on all your (buyer) instalments payable to the builder on or after April 1, 2019, shall be either 1 per cent or 5 per cent, depending on whether the apartment is an affordable or other-than-affordable residential apartment,” says the new document. 

The lowered GST rate has become applicable since April 1. 

The tax department has also said that builders will now have to refund GST paid by home buyers in case s/he cancels the flat booked in the last fiscal and will be allowed to avail credit adjustment for such refund. 

The FAQ on the real estate sector has been released by the Central Board of Indirect Taxes and Customs (CBIC). 

The new migration provision, which came into effect from April 1, allows the real estate players to shift to 5 per cent GST rate for residential units and 1 per cent for affordable housing without the benefit of input tax credit (ITC).

For the under-construction projects, builders can either continue in 12 per cent GST slab with ITC (8 per cent for affordable housing) or opt for 5 per cent GST rate (1 per cent for affordable housing) without ITC.

On a question, "Does a promoter or a builder has option to pay tax at old rates of 8% & 12% with ITC?", the new document says, "Yes, but such an option is available in the case of an ongoing project. In case of such a project, the promoter or builder has option to pay GST at old effective rate of 8% and 12% with ITC. To continue with the old rates, the promoter/ builder has to exercise one time option in the prescribed form and submit the same manually to the jurisdictional Commissioner by the 10th of May, 2019. 

"However, in case where a promoter or builder does not exercise option in the prescribed form, it shall  be deemed that he has opted for new rates in respect of ongoing projects and accordingly new rate of GST i.e. 5% / 1% shall be applicable and all the provisions of new scheme including transitional provisions shall be applied. There is no such option available in case of projects which commence on or after 01.04.2019. Construction of residential apartments in projects commencing on or after 01.04.2019 shall compulsorily attract new rate of GST @ 1% or 5% without ITC."
The developer can issue a 'Credit Note' to the buyer as per provisions of Section 34 in case of change in price or cancellation of booking. "Developer shall be able to take adjustment of tax paid in respect of the amount of such Credit Note," the FAQ said.

The FAQ says that in case a real estate developer has collected 12 per cent GST from home buyers beginning April 1, 2019, but later opted for 5 per cent rate, the builder will have to refund the extra tax (7 per cent) collected to the buyer. However, the FAQ don't clarify whether the 7 per cent tax refunded by the builder will be adjusted against his GST liability.