A founder running a small real estate development company sells four flats in the same tower on the same day. Two buyers pay 5% GST. One pays 1%. One pays nothing at all. The founder assumes the accountant has made an error and asks for a correction. The accountant has not made an error — that is exactly what the law requires. The difference between those four invoices is not the flat, it is the date the completion certificate was issued and whether the unit qualifies as affordable housing. Get the classification wrong and you either collect tax you were never entitled to collect, or you fail to collect tax you now owe out of your own pocket with interest at 18% per annum.
This is one of the most misunderstood areas of GST for Indian private limited companies, and the error rate is high because two entirely different tax regimes sit next to each other in the same project.
What the law actually requires
The governing provision is Paragraph 5(b) of Schedule II to the CGST Act, 2017. It treats as a supply of service:
"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."
Read that exception carefully, because everything turns on it. If the entire consideration is received after the completion certificate (CC) or first occupation — whichever comes first — the transaction falls outside the definition of supply of service.
It then falls to Paragraph 5 of Schedule III to the CGST Act, which lists activities that are treated as neither a supply of goods nor a supply of services:
"Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building."
So the completed flat is not exempt in the ordinary sense. It is outside the scope of GST entirely. That distinction matters for input tax credit, and we will return to it.
The rate structure for under-construction property
The current rates come from Notification No. 3/2019-Central Tax (Rate) dated 29 March 2019, which amended Notification No. 11/2017-Central Tax (Rate). For projects that commenced on or after 1 April 2019, and for ongoing projects where the promoter opted into the new scheme:
These are the effective rates. The statutory rate is 7.5% and 1.5% respectively, applied after the one-third deemed deduction for the value of land prescribed in Paragraph 2 of Notification No. 11/2017-Central Tax (Rate). One-third of the total amount charged is deemed to be the value of land and is excluded. This is why founders who compute 5% on the land component and 5% on construction separately arrive at the wrong number — the deduction is already baked into the effective rate.
What qualifies as "affordable" for the 1% rate
The definition is in clause (xvi) of paragraph 4 of Notification No. 11/2017-Central Tax (Rate), as inserted by Notification No. 3/2019. A residential apartment is affordable if it satisfies both conditions:
- Carpet area does not exceed 60 square metres in metropolitan cities, or 90 square metres in cities and towns other than metropolitan cities; and
- Gross amount charged does not exceed ₹45,00,000.
Metropolitan cities for this purpose are Bengaluru, Chennai, Delhi NCR (Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR).
Both tests must pass. A 55 sq m flat in Mumbai priced at ₹48 lakh is not affordable — it attracts 5%. A 70 sq m flat in Coimbatore at ₹40 lakh is affordable — it attracts 1%. The carpet area is as defined in Section 2(k) of the Real Estate (Regulation and Development) Act, 2016, not the super built-up area used in the marketing brochure.
Practical implications
The input tax credit trap
This is where most private limited companies lose money. The 1% and 5% rates are conditional on no input tax credit being claimed. The condition is not optional and not waivable. A promoter charging 5% while claiming ITC on cement, steel, contractor invoices and architect fees is in breach of the notification conditions, and the department's position in assessments is that the entire benefit of the concessional rate is lost — the demand is raised at 18%, plus interest under Section 50 at 18% per annum, plus penalty under Section 122(2).
Worse, Section 17(2) of the CGST Act read with Rule 42 requires proportionate reversal where a registered person makes both taxable and exempt supplies. And Section 17(3) expressly includes within "exempt supply" the transactions in Schedule III other than sale of land and building — but the sale of a completed building is a Schedule III entry, so for the purpose of the ITC reversal computation, the value of completed flats sold post-CC must be treated as exempt turnover. This is the "input tax catch" that surprises companies who thought they were merely selling something outside GST and therefore had nothing to reverse.
Practically: a company that sells 40 flats before CC and 10 flats after CC in a commercial project where ITC was available must reverse credit attributable to those 10 flats, computed under Rule 42, on a monthly basis with a final annual recomputation by September of the following financial year.
The 80% procurement condition
Under Notification No. 3/2019, a promoter opting for the 1%/5% regime must procure at least 80% of the value of inputs and input services from registered suppliers. Where the shortfall exists, the promoter must pay GST at 18% under reverse charge on the shortfall value — and specifically, 28% on cement procured from any unregistered supplier, irrespective of the 80% test, under Notification No. 7/2019-Central Tax (Rate).
The 80% test is computed project-wise for the financial year, and the tax on shortfall is payable through Form GSTR-3B for the month of June following the end of the financial year. Missing this is a common and entirely avoidable error found in GSTR-9C reconciliations.
Penalties and enforcement exposure
- Interest under Section 50(1): 18% per annum on tax short-paid, from the due date to the date of payment.
- Penalty under Section 122(2)(a): ₹10,000 or 10% of tax due, whichever is higher, where the short-payment is not on account of fraud.
- Penalty under Section 122(2)(b): ₹10,000 or 100% of tax due, whichever is higher, where fraud, wilful misstatement or suppression is established.
- Section 76: tax collected from a buyer but not deposited with the government must be paid regardless of whether the supply was taxable at all. A company that wrongly collected 5% on a post-CC flat cannot simply keep it — it must be deposited, with interest.
- RERA overlay: under Section 12 of the RERA Act, misrepresentation of the price payable (including a wrongly stated GST component) in a prospectus or advertisement gives the allottee a right to compensation and withdrawal with interest.
The MCA21 v3 angle
MCA21 v3's linked-data architecture now cross-references financial statement disclosures with GST filings. A real estate company disclosing large revenue in AOC-4 XBRL with materially lower outward taxable supply in GSTR-9 produces a mismatch that is increasingly picked up in departmental scrutiny selection. Where the difference is legitimately explained by post-CC sales falling under Schedule III, that explanation needs to be documented contemporaneously — completion certificate copies, first-occupation evidence and the date-wise consideration ledger — not reconstructed two years later during an audit. Under Section 128(5) of the Companies Act, 2013, books must in any case be preserved for eight financial years.
Step-by-step: what to do
- Build a unit-level classification register. For every apartment, record: carpet area (RERA definition), gross amount charged, city classification (metro/non-metro), CC date, first occupation date, and the date of each instalment received. This register, not the sale deed, is what determines the rate.
- Fix the CC date as the hard cutoff. Any consideration — including booking amount and token money — received even one day before the CC date pulls the entire transaction into the "supply of service" bucket. The exception applies only where the entire consideration is received post-CC.
- Test affordable housing on both limbs. Apply the 60/90 sq m carpet area test and the ₹45 lakh consideration test. Document the arithmetic. Do not rely on the marketing team's classification.
- Confirm your regime election. For projects that were ongoing as on 31 March 2019, the promoter had a one-time option, exercisable in Annexure IV to Notification No. 3/2019, to continue at the old 8%/12% rates with ITC. If your company exercised it, keep the filed annexure — assessments in 2026 are still turning on whether that option was validly exercised and evidenced.
- Compute Rule 42 reversal monthly. Where any ITC is being claimed, apportion between taxable and exempt (post-CC) turnover monthly, and complete the final annual recomputation before the September GSTR-3B of the following financial year. Interest applies on any excess reversal shortfall.
- Run the 80% registered-procurement test annually. Compute project-wise for the financial year, and discharge shortfall tax at 18% (and 28% on cement) through the June GSTR-3B.
- Reconcile before GSTR-9C. Where turnover exceeds ₹5 crore, Part II Table 5 of GSTR-9C must reconcile audited turnover with GST turnover. Post-CC sales are the single largest reconciling item in a real estate GSTR-9C — present them as an identified adjustment, not as an unexplained gap.
- Correct wrongly collected tax immediately. If GST was collected on a post-CC sale, deposit it under Section 76 and issue a credit note under Section 34 only within the window permitted — by 30 November following the end of the financial year, or the date of filing the annual return, whichever is earlier.
FAQ
Q: If I sell a completed flat, is it exempt or out of scope?
Out of scope. It falls under Paragraph 5 of Schedule III and is neither a supply of goods nor services. But for the purpose of ITC apportionment under Section 17(3) and Rule 42, its value is treated as exempt turnover, so reversal still applies.
Q: What if a buyer pays a ₹2 lakh booking amount before the CC and the balance after?
The exception in Schedule II 5(b) requires the entire consideration to be received after CC or first occupation. A pre-CC booking amount destroys the exception. The full transaction is a supply of service and attracts 1%, 5% or 12% depending on classification.
Q: Can I charge 5% and still claim input tax credit on cement and contractor bills?
No. The 1% and 5% rates in Notification No. 3/2019 are expressly conditional on ITC not being availed. Claiming ITC forfeits the concessional rate and exposes the company to a demand at the standard rate with 18% interest and penalty under Section 122(2).
Q: Does the one-third land deduction apply on top of the 5% rate?
No. The 5% and 1% are effective rates already computed after the deemed one-third land deduction (statutory rates of 7.5% and 1.5%). Applying the deduction twice understates the liability.
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