After announcement of rates Finance Minister Mr Arun Jaitley said that

“There is hardly anything where rates have been high, either the present levels have been maintained or brought down, besides being a more efficient tax is also going to be consumer friendly.”

But the said statement made by the Finance Minister is not true for Real Estate Industry which is explained in detail in this article. 

The fitment of rates of services was discussed on 19 May 2017 during the 14th GST Council meeting held at Srinagar, Jammu & Kashmir. The Council has broadly approved the GST rates for services at Nil, 5%, 12%, 18% and 28%, few which are related  to Real Estate Industry is listed below,

Sr.
No.
DESCRIPTION OF SERVICES GST  RATE
19. Construction of a complex, building, civil structure or a part thereof, intended for
sale to a buyer, wholly or partly.
[The value of land is included in the amount charged from the service recipient]
12%
With Full ITC
but no refund of
overflow of ITC
27. Composite supply of Works contract as defined in clause 119 of section 2 of CGST
Act
18%
With Full ITC
 

36.

All other services not specified elsewhere 18%
With Full ITC

At present under Service tax regime, Developers are paying Service tax on sale of under- construction of residence @ 30% of 15% i.e. 4.5% if value of land is included as per Notification No 9/2013 – Service Tax dated 08-05-2013 in metro cities as value of flats exceeds Rs 1 crores & @ 25%  of 15% i.e. 3.75% if value of flat does not exceed RS 1 Crore.

CENVAT Credit on Input services is allowed but Excise duty, MVAT/ CST on Inputs like cement, steel is not allowed.

In the said notification No 9/2013- Service Tax dated 08-05-2013, in the TABLE, for serial number 12 of Notification No. 26/2012- Service Tax dated 20-06-2012 and the entries relating thereto, the following serial number and the entries shall be substituted, namely:-

 “12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-

(a) for a residential unit satisfying both the following conditions, namely:– (i) the carpet area of the unit is less than 2000 square feet; and (ii) the amount charged for the unit is less than rupees one crore;

25%

(b) for other than the (a) above.

30 %

Conditions

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004; (ii) The value of land is included in the amount

Serial No. 12 of Notification No. 26/2012- Service Tax New Delhi, the 20th June, 2012 is also reproduced below for better understanding,

12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority 25 (i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.

(ii)The value of land is included in the amount charged from the service receiver.

At present MVAT @ 1% is also payable on registration of agreement under composition scheme & no set off of input is allowed.

So total maximum hit is 5.5% of MVAT (1%) & Service Tax (4.5%) after getting set off of CENVAT credit on input services & set off of Input is not allowed.

Now under GST serial no. 19

Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly.
[The value of land is included in the amount charged from the service recipient]

GST Rate

12% With Full ITC but no refund of overflow of ITC

Analysis of above changes as per my best estimate

1) Proposed Rate is higher than 6.5% (i.e. under GST 12% less at present 5.5% Service tax & MVAT) as compared to present scenario which is very high.

I have compared many rates in the GST wherein many items’ rates are higher by 1.5% to 2% but this difference of 6.5% is not acceptable. I can’t resist myself in saying that Jago (wake up) Real Estate Industry Jago & also Jago Grahak (consumer) Jago, otherwise it will be too late.

2) At present Developer also has to pay 5% Stamp duty apart from Service Tax & MVAT on Market value i.e. “Ready Reckoner” rate to pay stamp duty multiplied by square meter or agreement value whichever is higher is to be paid along with Registration of 1% of market value of agreement value or RS 30,000 whichever is less is to be paid.

3) So to reduce the gap of 6.5%, stamp duty should be merged with GST i.e. stamp duty is to be abolished so then difference will remain only 1.5% which is fine.

4) Under GST set off of GST paid on Inputs like cement, steel etc will also be allowed which is presently not allowed.

5) No refund of overflow of ITC will be given. This again is negative for the Industry. Also Government’s claim that GST will eliminate full cascading effect of taxes will not be achieved. However practically such a scenario of getting overflow will not arise as developer will always have to pay difference because while paying GST of 12% on Supply, they have to pay on Sale Value of Flats which will be always higher as the same also includes value of land which is always significant.

6) If government will not merge Stamp duty with GST then some abatement is to be given otherwise Government’s mission of housing for all by 2022 will be at task. The same is because if stamp duty is not merged under GST and also if no abatement is given then flat buyers have to pay 12% GST plus 5% Stamp duty plus Rs 30,000 registration which will increase the cost of residence further. So for example on 2BHK flat at Mulund (before completion certificate is received) is sold at Rs 2 crores then that flat will cost RS 2,34,30,000 which is explained as under,

Value of Flat RS 2,00,00,000
GST @ 12% RS    24,00,000
Stamp duty @  5% Rs     10,00,000
Registration Rs          30,000
Total cost of flat RS 2,34,30,000

     Therefore flat buyers have to pay 17% extra plus RS 30,000 for Registration which is too much.   

7) Interpretational Issue in getting credit

Apportionment of credit & block credits

Section 17 of CGST Act & Section 17 of The Telangana SGST Act

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following,
namely:—

(c) works contract services when supplied for construction of an immovable
property (other than plant and machinery) except where it is an input service for further supply of works contract service;

Section 2 (119) of CGST Act defines works contract as

(119) “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;

Now suppose Developer is hiring a contractor which is a Pvt Ltd. company so at present they are charging 40% of 15% i.e. 6% Service tax under works contract category & 6% MVAT under composition scheme. Now Developers are getting set off of 6% Service tax & 6% MVAT is not allowed as a set off as they pay MVAT @1% on registration of sale agreement under composition scheme wherein set off of input is not allowed..

But now under GST contractor will charge GST @ 18% to the Developer (as GST rate is 18% for works contract)  i.e. if contractor is of Mumbai & giving works contract service at projects located in Mumbai so they will charge to Developer 9% CGST & 9% SGST under works contract. So prima facie Developer will get set off of entire 18% against 12% they will charge to the customers i.e. 9% Input CGST (works contract) set off against 6% Output CGST (construction of a complex service) & 9% Input SGST (works contract) set off against 6% Output SGST (construction of a complex service). (i.e.GST rate is divided equally between CGST & SGST in above example).

The said set off is prima facie allowed  because  “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

So only condition of getting Input service tax set off is, service should be used in the course or furtherance of business which is satisfied here.

But whether section 17 (5) (c) will restrict Input GST Credit of works contract against output  GST of construction service because in that section it is mentioned that works contract input GST is only allowed as set off only against further supply of output works contract service.

The said interpretation may not be the intention of the Government so necessary clarifications have to be issued by the Government /GST council on immediate basis.

8) Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly.
[The value of land is included in the amount charged from the service recipient]

GST Rate is 12%

 GST rate of 12% is there for construction of a complex service (if sold before completion certificate is received) if intended for sale to a buyer and value of land is included. It means under redevelopment model Developer will pay 12% GST in case of free sales (i.e. out of free FSI against redevelopment) made to new buyers for a consideration & they may have to pay under GST @ 18% under works contract service against new flats given to existing tenants/landlords/members in case of redevelopment without consideration because it is not a sale to a buyer.

Under present scenario Department is insisting from the developer to pay service tax @ 6% even if no consideration is received by the developer on  new flats given to tenants/members/landlord by following Circular no 151/2/2012-ST dated 10-02-2012. That too department is insisting on payment of 6% on value of similar flats sold which is unfair as Developer is not getting any consideration from landlord/members/tenants so asking Service tax @ 6% on value of similar flats sold by the developer is too harsh. So at present much litigation is going on with the service tax department. Because many Developers are either not paying service tax as no considerations is received by them or few developers are paying 6% under works contract service on construction cost with or without their mark up by following Rule 3(b) SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006;

SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 is reproduced below for better understanding.

3. Manner of determination of value.– Subject to the provisions of section 67, the value of taxable service,1 where such value is not ascertainable, shall be determined by the service provider in the following manner:– (a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration; (b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

The same kind of dispute will also be prevailed under GST regime in this area of flats given by the developer to members/tenants/landlord without any consideration against Development rights given to the Developer unless some clarifications will be issued by the Government/GST council.

The same is explained below also because as per Determination of Value of Supply Rules under GST

1. Value of supply of goods or services where the consideration is not wholly in money
Where the supply of goods or services is for a consideration not wholly in money, the value of the supply
shall,

(a) be the open market value of such supply;

Explanation.- For the purposes of this Chapter,-

(a) “open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.   

Here again Department will ask GST to be paid by the Developer on open market value of supply of similar flats supplied to new buyers at market value for supply of new flats given to landlord/members/tenants without consideration against development rights given to the Developer.

But Developers will be willing to pay GST by following Rule 4 of Determination of Value of Supply Rules of GST & will pay on 110% on cost of provision of such service under works contract service, at the GST Rate of 18% i.e. against supply of flats given to Landloard/members/tenants in case of redevelopment without consideration against development rights given to the Developer.

Rule 4 is reproduced below for better understanding.

Determination of Value of Supply Rules of GST

4. Value of supply of goods or services or both based on cost

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.

9) Under GST 12% With Full ITC but no refund of overflow of ITC rate is there for Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. [The value of land is included in the amount charged from the service recipient]

Building or civil structure is not defined it means it may be residential building or civil structure or commercial building or civil structure but GST rate will be same only i.e. 12% With Full ITC but no refund of overflow of ITC.

10) Service Tax Exemptions to be continued in GST as decided by GST Council

Serial No. Services
7. Services by way of renting of residential dwelling for use as residence
67. Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex;

 

 a) Here again under GST also services by way of renting of residential dwelling for use as residence will be exempt & services by way of renting of commercial places for e.g. Renting of Shops/office places in MALLs etc will be taxable @ 18% under serial no 36.

 

36.

All other services not specified elsewhere 18%
With Full ITC

But to avoid confusion it is better that GST council will specify GST rate of 18% with Full ITC in case of renting of commercial places separately.

b) Under GST regime Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex is exempt. So people who are constructing 2nd holiday homes at Lonavala, Deolali etc will be exempt.

Conclusion:

1) Real Estate Industry should file their representation on points explained above otherwise Real Estate Industry which is fighting at present due to lack of demand, harsh RERA provisions, demonetization impact, higher interest cost due to slower project approvals will face further heat because of above higher GST rates from present & other interpretational issues due to GST provisions which is also explained above.

2) If Government/GST Council will rectify above defects pointed out above then it will help in reducing inflation & also help in achieving Government’s mission of creating employment, creating smart cities, good infrastructure & ‘Housing for All’ mission by 2022.

(Author- CA. Jinesh Premji Gada, B.Com., A.C.A., ISA, M.B.A.- Head of Accounts & Taxation with HBS Realtors Pvt Ltd. )

Author Bio

More Under Goods and Services Tax

Posted Under

Category : Goods and Services Tax (4205)
Type : Articles (13926) Featured (4135) Trending (230)
Tags : goods and services tax (2770) GST (2356)

17 responses to “Analysis of Goods & Service Tax (GST) on Real Estate Industry”

  1. Ajay Shirke says:

    In one of the recent article posted in tax guru regarding GST on Immovable property….GST would not be attracted on Land value.Is it correct????

  2. VIKAS SARAF says:

    A1. In case of redevelopment where original flat owners get new flats in lieu of developments rights for construction new flats for sale, the consideration for this supply of service to original flat owners is the Open Market Value of the new flats.

    A2. Having said the above, a redevelopment project is supply of WORKS CONTRACT service in course of business with consideration for the supply of the service being BARTER-in-nature involving no money, i. e., the right to sell new flats built out of unused or additional FSI.

    It, therefore, follows that redevelopment DOES NOT fall under Service Category of: “Construction of Complex, building, civil structure or part thereof, etc. intended for sale to buyer, wholly or partially with the value of land included” as:

    i) In redevelopment, there is no purchase of land as the Society/Landlord always remains the owner of the land and accord (after Conveyance has been secured in favour of the Society/Land Owner) only the right to construct the building to the developer.

    ii) Further, it should be noted that the phrase “…wholly or partially” relates to sale-part and not to any construction per se – as it may happen either in case of phase-wise project execution or the right to sell a part of a building as received as a consideration.

    iii) Therefore, only when a developer purchases a land and then carries out the construction activity thereon, it shall be treated as Supply of Services, as per GST Schedule II, under Construction of Complex, building,… etc. with Levy of GST @ 12% on value that includes value of land and with FULL ITC.

    Pertinent to note that, unlike under Service Tax Act, the part “except where the entire consideration is received after issuance of certificate of completion by a competent authority” has been omitted under the GST Act from the definition of the particular service to remove complications arising out of this part and to firmly classify all construction activities as Supply of Services AT ALL TIMES.

    B1. Therefore, the redevelopment projects are Supply of Service under category of WORKS CONTRACT with levy of GST @ 18% ONLY on OPEN MARKET VALUE of NEW FLATS.

    B2. In so far as ITC is concerned, as per Sec. 17(5)(c) of CGST, ITC shall not be allowed in case of:

    “Works Contracts services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service”

    Now, GST Schedule II considers various supplies as Service and includes:

    “Works Contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract”

    In case of redevelopment, the developer is recipient of works contract service for further supply of work contract service as it included transfer of property (immovable, here) – whether considered as goods or a tangible asset in some form – FULL ITC is available.

    Would welcome comments.

    • VIKAS SARAF says:

      If I may add:

      The redevelopment right is a wholesome contract of supply of flats to the original flat owners – even with additional FSI to them – paid for by way of right to the developer to sell unused & additionally purchased FSI in the form of new flats and cannot be divided in to multiple supplies of services.

      The additional FSI given to the original flat owners is an expense requiring purchase of FSI, if needed, and construction thereafter. This expense to the developer gets allocated as cost incurred for – and included in the valuation of – the new flats.

  3. CMA ANIL SHARMA says:

    On sale of flats only Stamp duty is applicable at the rate applicable which varies from state to state…

    Good analysis and by keeping cement in 28% category the cost of houses will go up and as rightly pointed out it will defeat the purpose of Housing for all…..

  4. PRAVIN M VORA says:

    Good article sir

  5. Sanjay gupya says:

    Sir, you haven’t set off ITC of cement n steel, thereafter, there will be lesser increase in rate of GST

  6. SHWETAL OSWAL says:

    abatement of 25% does not exist anymore

  7. SHWETAL OSWAL says:

    I AGREE WITH MR. ABHISHEK GUPTA

  8. vswami says:

    To ADD:
    On the alternate demand for reduction of stamp duty, as per the view canvassed in some quarters, in any case, such a clamor is quite logical and backed up by sound reasoning. The reference is to the recent amendment of sections 50C ..to the effect that, for CGT, the ‘cost of acquisition’ to buyer should be taken at the same value as factually and actually agreed upon, and paid/received, in terms of the ‘agreement’ to sell’ (also, of the registered conveyance deed); not at any higher amount arbitrarily fixed – and increased from to time, by the local authority, the so called ‘guideline’ -/ ‘circle’- ‘ value’.

    For a dilation, refer the Posts on Linkedin and Facebook.

  9. vswami says:

    INSTANT
    The analytical study wprt to the major impacts on the Realty Sector the provisions of the GST Code is potent with makes for a useful read. And, the points focused on under ‘Conclusion’ are worth taking a special note of.

    As regards the long standing demand for abolition or reduction of stamp duty, that has only assumed greater momentum, with the GST regime expected to be ushered in not long before.

    To know more, and for useful hints and guidance, especially on the stamp duty aspect, suggest to Google search and look through the host of material , in inter alia the form of experts’ studies / views available.

  10. Vijay Kumar Shetty says:

    Hello sir what about VAT in present condition we are paying 4% VAT in Karnataka so to 4.5%ST+ 4%VAT total 8.5%

  11. CA Umesh Agrawal says:

    After considering input tax credit on many items like Cement, Steel, Sand etc, difference would not be as high as 6.5% as claimed by you. It would be hardly 1 or 2%, which is fine to maintain uniformity of tax rates.

    • CA Vijay Patil says:

      if credit of GST paid on input like steel/cement etc., is available, then Obviously rate of 12% shouldn’t be a concern subject to the builder is passing on the benefits to the buyer.

      But, if we refer section 17(5)(c) & (d) of CGST Act, it denies credit of goods/services used in construction of an immovable property.

      so, in my opinion if credit is restricted in this way, then rate of 12% would definitely become really higher than that of present effective rate.

  12. Vinod Kumar Tyagi says:

    After allowance of credit of tax on inputs, i.e steel cement etc. the net outflow of GST will not be a big issue in my opinion. The more serious issue would be Antiprofeteering provisions under GST, which discourages the assessee (builders in this case) to enjoy reduced net tax liability on account of GST regime.
    Here is the section 171 of the CGST/SGST Act:–
    (1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.

    And here lies the matter of contention:

    (2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority or empower an existing Authority
    constituted under any law for the time being in force, to examine whether
    input tax credits availed by any registered person or the reduction in the tax
    rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him

  13. Abhishek Gupta says:

    Abatement rate for flats whether price exceeds Rs. 1 crore or less is 30% as on date. 25% abatement rate doesnt exist anymore.

  14. Subramaniam Iyer says:

    At present no Service Tax is payable on sale of flat after OC is received. Will the buyers be required to pay CST of 12% after 1st July?

  15. AMARNATH says:

    what is the provision in GST for Transport vehicle.

Leave a Reply

Your email address will not be published. Required fields are marked *