At its meeting on December 17, the Goods and Services Tax (GST) Council made some recommendations that will have wide ramifications. Among other things, it will help a lot of homebuyers, especially those who opt for under-construction properties. The council recommended that the GST rules be amended to allow a buyer to file an application for refund in cases where the contract or agreement for supply of services, like construction of a flat or house, is cancelled and the time period to issue a credit note by the concerned supplier (developer) is over.

In other words, a person who purchases an under-construction house and pays the purchase price and GST but decides to call off the deal before registration of the property will get the GST refund directly from the government if the time allowed for developer to return the amount gets over.

Tax experts welcomed the recommendation, saying it removes a lot of ambiguity.

“Refund to unregistered persons was a sore point for long and the GST Council has finally relented thanks to the buoyancy in monthly collections. It is a major relief for common consumers who used to cancel their flat booking or insurance but were not paid for lack of provisions,” said Shailendra Kumar, chairman, TIOL Knowledge Foundation, a fiscal think tank.

Read on to know when and how much GST is applicable on property purchase and how you can reclaim it if the deal is called off before registration.

GST on house purchase

The levy is not applicable on a residential complex that is fully constructed and has been given an occupancy certificate because a completed property is neither considered goods nor services. So if you are buying a completed property either in the primary market (directly from the developer) or in the secondary market (resale property), you are not required to pay GST on the purchase price.

But if you are buying an under-construction property, you will have to pay the GST over and above the purchase price. However, the rate of GST varies based on the category of house you are buying. In case you are buying a property that falls in the category of affordable housing, the GST rate is 1 percent of the property value, whereas it is 5 percent for other projects.

Affordable houses mean those with a cost of up to Rs 45 lakh and a carpet area of up to 60 sq m carpet area in metropolitan cities and up to 90 sq m carpet area in non-metro areas.

When GST is paid and how to claim it back if deal is called off

Construction of residential real estate projects typically takes three to four years. GST is paid along with the instalment or lump-sum payment you make during the construction. Once GST is paid by the buyer, the collector (developer or builder) needs to pay it to the government within the stipulated time.

However, if you decide to call off the deal, ideally you should get back the money you paid for the house along with the GST paid.

However, developers can only issue a credit note against payment of GST within a permitted time period. “Time-barring period is the last date after which you can't do an act,” said Vivek Jalan, partner, TaxConnect.

Jalan explained it with an example: Suppose a person purchased an under-construction apartment worth Rs 50 lakh in January 2022 and paid GST of Rs 2.5 lakh on it.

However, on December 20, he cancelled this deal. Generally, the builder would have issued a credit note and reversed his GST liability and refunded the GST amount to the customer. However, since the time-barring period to issue credit notes for the builder had already expired on November 30 (as per Section 34 of CGST Act, supplier can't issue a credit note for invoice of FY22 post November 30, 2022), the builder would not be able to refund this GST amount to the consumer. As things stood, the consumer would lose this Rs.2.5 lakh of GST paid. Now, the GST Council has decided that the consumer will get the refund from the government, added Jalan.

To claim the refund, buyers will have to file an application, which would be subject to limitations, conditions and procedures that will be spelt out in the days ahead.