Impact of GST on Real Estate
GST on Real Estate in India | Impact of GST Real Estate in India | GST for builders and developers in India
Introduction
The Goods and Services Tax (GST) was implemented on 1 July 2017 with the motto of “One Nation, One Tax -One Market”. GST is expected to be cure of ills of erstwhile Indirect Tax regime. GST has subsumed major Indirect Taxes, thereby, reducing the problem of cascading effect and high compliance cost. Further, GST is expected to ensure seamless flow of credit, growth in GDP by 2% and increase in tax collections as a result of increased compliance level.
The Real Estate sector is vital to Indian Economy. It contributes significantly to GDP, is a huge employment generation sector and stimulates various ancillary industries. However, taxability of construction activities under Indirect Tax regime has always posed challenges and invited litigation.
Taxability of Real Estate Sector
In the pre-GST regime,for properties under construction, buyers had to pay multitude of Central and State taxes on goods and services such as Value Added Tax (‘VAT’), Service Tax, stamp duty etc. Further, VAT and stamp duty varied from state to state. Major problem for the developer was offset of Input Tax Credit (‘ITC’)of Excise duty and VAT credit against the Service Tax, hence the roadblock to seamless flow of credit. Additionally, there were difficulties in the segregation and valuation of supply of goods and/or services. This led to an increased cost and resultant amplified burden on the buyer.
With the implementation of GST on 1 July 2017,the taxability of Real Estate Sector was redefined.
As per Section 7(2) read with Schedule III CGST Act, 2017, GST is not leviable on the sale of land and subject to clause (b)*of paragraph 5 of Schedule II, sale of building.
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*Clause (b) of paragraph 5 of Schedule III has been produced hereunder:
The following shall be treated as supply of services, namely:
(a) “ ...”
(b) 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.
Explanation for the purposes of this clause --
(1) the expression "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:
- an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or
- a chartered engineer registered with the Institution of Engineers (India); or
- a licensed surveyor of the respective local body of the city or town or village or development or planning authority
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Before the introduction of New Taxation Scheme with effect from (W.E.F) 1.4.2019 i.e.,from 1 July 2017 to 31 March 2019, GST on properties under construction was levied at an effective rate of 12% (with ITC) and 8% (with ITC) on commercial as well as residential project sand on residential projects covered under Credit Linked Subsidy Scheme (CLSS) respectively.The unified rate and availability of ITC provided relief to the developers as well as the buyers.
Intention behind the New Taxation Scheme
While the prior GST rates on Real Estate Projects up to 31.03.2019 delivered the promise of a unified tax rate and credit chain, it caused slippage of revenue at the hands of authorities. While GST was charged at reduced rates (12% and 8%), most of the inputs required for supply of construction services such as bricks, iron rods, cement, etc. were chargeable at the higher rates of 18% and 28%. This resulted into a case of refund of ITC on account of inverted duty structure (tax on input being higher than the tax on output)**. Thus, the Revenue had dual loss:
- The GST collections were at reduced rates;and
- Refund of unused ITC owing to inverted duty structure.
To plug the revenue loss, government introduced taxability of Real Estate Projects under the New Taxation Scheme,which is the focus of this document.
Taxability of Real Estate Sector W.E. 1.4.2019
Definitions***:
We have produced below the definitions relevant for the purpose of our document:
➢“Real Estate Project” (‘REP’) means development of a building where the carpet area of the commercial apartments is more than 15 per cent of the total carpet area of all the apartments in the project.
➢“Residential Real Estate Project” (‘RREP’) means a “Real Estate Project” in which the carpet area of the commercial apartments is not more than 15 per cent of the total carpet area of all the apartments in the project.
➢“Affordable residential apartment” is a residential apartment in a project which commences on or after 01-04-2019, or in an ongoing project in respect of which the promoter**** has opted for new rate of 1% (effective from 01-04-2019) having carpet area up to 60 square meter in metropolitan cities and 90 square meter in cities or towns other
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(2) the expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure;
**Section 54(3)(ii) of CGST Act, 2017
***As provided in FAQs issued by CBIC vide F. No. 354/32/2019-TRUdated 7thMay, 2019
****The terms Promoter, Builder and Developer have been used interchangeable
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than metropolitan cities and the gross amount charged for which, by the builder is not more than forty five lakhs rupees. [Cities or towns in the notification shall include all areas other than metropolitan city as defined, such as villages.]
In an ongoing project in respect of which the promoter has opted for new rates, the term also includes apartments being constructed under the specified housing schemes of Central or State Governments.
[Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their geographical limits prescribed by Government.]
➢“Ongoing Project”: A project which meets the following conditions shall be considered as an ongoing project.
(a) Commencement certificate for the project, where required, has been issued by the competent authority on or before 31stMarch, 2019, and it is certified by a registered architect, chartered engineer or a licensed surveyor that construction of the project has started (i.e.,earthwork for site preparation for the project has been completed and excavation for foundation has started) on or before 31st March, 2019.
(b) Where commencement certificate in respect of the project, is not required to be issued by the competent authority, it is to be certified by any of the authorities specified in (a) above that construction of the project has started on or before the 31st March, 2019.
(c) Completion certificate has not been issued or first occupation of the project has not taken place on or before the 31st March, 2019.
(d) Apartments of the project have been, partly or wholly, booked on or before 31stMarch, 2019.
Please note that as per the FAQs issued by CBIC (refer footnote 3),where commencement certificate has been issued even for part of the project on or before 31-03-2019, it shall be treated as an ongoing project provided other requirements of the definition of ongoing project are met.
GST Liability in case of Ongoing Projects
A promoter has an option to pay GST at the old effective rates i.e.,at 12% or 8% with ITC or shift to new 1%and 5% rates without ITC. Where the promoter opts for the old scheme, in such cases he is also expected to pass the benefit of the credit availed by him to the buyers. To continue with old rates, the promoter has to submit manually Annexure IV with the Jurisdiction Commissionerate by 10.5.2019 (later extended to 20.05.2019) in respect of each project, failing which it shall be deemed that they have opted for the new taxation scheme and the new rates shall be applicable on all the future installments.
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 at1% or 5% without ITC.
Further, the promoters have to perform cost benefit analysis to opt between the two options. The promoter shall issue the debit or credit notes for the change in price or cancellation of booking in accordance with the provisions of Section 34 of CGST Act, 2017.
Taxability of Real Estate Projects commencing on or after 1.4.2019
With effect from 01-04-2019, effective rate of GST applicable on construction of apartments by promoters in a real estate project areas under:
Further, a promoter shall purchase at least 80% of total value of inputs and input services, from registered suppliers. If the value of purchases from registered suppliers is less than 80%, the promoter shall be liable to pay GST under Reverse Charge at the rate of 18% (except for cement, taxable at the present rate of 28%) on all such inward supplies to the extent of such shortfall. Only 20% of total supplies are admissible from unregistered suppliers.
While the taxability of RREP at effective rate and notified rate does not affect the tax liability, it shall affect the net tax liability to be discharged in cash in case of commercial REP since ITC is admissible.
Time of supply shall be determined according to the provisions of Section 13(2) of CGST Act, 2017. ITC to the buyer is blocked in case of residential apartment under section 16 (2) read with section 17(5). Further, ITC for commercial apartment is also blocked under section 17(5) as the same constitutes as works contract*****.
Joint Development agreement‘JDA’ (Area Sharing)
Under the JDA, the landowner offers the development rights to the developer for undertaking development of property.
Transfer of Development Right (‘TDR’) to the developer by the landowner is a supply of service as per Section 7(1A) read with Schedule II to CGST Act, 2017.
Here, the consideration from the developer to the landowner is construction service (consideration in kind)and monetary consideration(if any). For the developer, itis the TDR by the landowner.
GST on TDR:
GST on TDR shall be payable by the promoter at the rate of 18%under Reverse Charge Mechanism and value shall be determined as per Rule 27(b) of CGST Rules 2017 i.e.,the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply (here, the value of apartments).
Time of Supply of TDR shall be the issuance of completion certificate, where required, by the competent authority or its first occupation,whichever is earlier. However, in case of a mixed project (having residential as well as commercial carpet area or only commercial carpet area) where the monetary consideration has also been received for grant of TDR, such consideration only in respect of commercial REP shall be taxable on the date of payment.
The Government vide Notification No. 04/2019-Central Tax (Rate)on 29-March-2019 added entries 41 A & 41 B to the Notification No 12/2017 –Central Tax (Rate) 28.06 2017.
As per Para 3 of Entry No. 41 A, Maximum Amount of Exemption available for Service by way of transfer of development rights on or after 1st April, 2019 for construction of residential apartments by a promoter in a project, 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, shall be:
(GST payable on TDR for construction of the project) x (carpet area of the residential apartments in the project ÷ Total carpet area of the residential and commercial apartments in the project) x carpet area of the residential apartments in the project which remain un-booked on the date of issuance of completion certificate or first occupation.
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*****As per Section 2 (119) of CGST Act, 2017 ‘works contract’, means a contract for building, construction, fabrication,completion, erection, installation, fitting out, improvement, modification, repair,maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;
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To summarize, it can be stated that TDR for RREP shall be exempt provided that all the apartments are booked before the issuance of completion certificate. If, all the units are not sold, then, GST shall be levied @18% on the value of TDR for RREP pertaining to un-booked apartments subject to the maximum of 1% and 5% of value of residential apartments in case of affordable RREP and other than affordable RREP respectively. Further, TDR for commercial REP shall be taxable at the rate of 18%.
GST on consideration in kind (construction service)received by the landowner:
As per Section 7(1A) read with clause (b) of Paragraph 5 of Schedule II of CGST Act,2017, provision of construction service by the promoter to the landowner is Supply of service.
Value of such service shall be‘open market value’ determined under Rule 27(a) of CGST Rules, 2017,i.e., the market value of apartment being supplied to the external customers on such date. GST shall be levied at an effective rate of 12% / 1% / 5% for commercial REP, affordable and other than affordable RREP, respectively, as the case maybe.
Time of supply in such a case has been notified to be the date to allotment letter or the date of issuance of completion certificate whichever is earlier.
Input Tax credit shall be available to the land owner in case he is further engaged in the supply of apartments under construction.
GST on Monetary consideration paid by the developer to the land owner:
The same is out of the scope of GST and hence no GST liability will arise.
Practical Challenges
➢ GST liability on the landowner arises at the time of booking the apartment prior to the issuance of completion certificate while ITC on the GST levied for the consideration in kind received from the promoter in lieu of TDR is eligible only on the issuance of completion certificate. Thus, in substance, land owner will not be able to utilize the ITC available to him.
➢ Credit note for a Financial Year (‘FY’) is required to be issued by the promoter upto 30 September of the immediately following FY in accordancewith the provisions of Section 34. This results into major difficulty since construction is a continuous supply of service spanning more than one FY.
Conclusion
The benefits of reduced rate of GST on REP might appear lucrative prima facie, though the samecomes at the cost of ITC. Hence, there may be little or no benefit to the end buyer. Further, in reality, it might also increase the costs due to unavailability of ITC.