Real estate and GST – 8 critical issues you must know about recent proposed amendments

CA Jayesh Gogri*

Analysis on decisions of 34^th GST Council Meeting held on 19^th March, 2019

In its 34^th meeting, the GST Council, in its much- awaited attempt to revamp the GST structure (or simplifying the GST framework) for the real estate sector has put across some path breaking propositions. However, we need to deliberate whether the propositions are indeed path breaking and may bring about simplicity in GST framework or it may prove to be a nightmare for the real estate sector. We have put across our primary interpretations of the press release issued on 19 March 2019 and its possible repercussions on the sector and the home buyers; though we await notifications from the Government in this regard:

1. Option:

a. As per the proposed scheme, every builder will have to pay GST @ 5% in case of non- affordable housing projects and 1% in case of affordable housing projects with effect from 1^st April, 2019. In both the options, Builder won’t be able to claim set off of input tax credit (ITC) in respect of GST paid on goods and services purchased by Builder

b. However, if Builder chooses, he can also continue paying GST under the current regime i.e. @ 12% on non-affordable housing projects and 8% on affordable housing projects (after considering 33% of the value as a deduction towards the land value) in case of ongoing projects

c. One may wonder why a Builder would choose to go for a ‘higher rate’ option. Here are some of the reasons:

i. Builder’s eligibility to claim credit: In the new scheme, though the rates of taxes are attractive viz. 5% and 1% but ITC is not available at all. In certain cases, Builder’s credit element can be as high as 8% or 9% or even more of the construction cost. So even if Builder chooses to pay GST at the rate of 12%/8% and is able to collect from the customer @ 5%/1% (which normally a customer would be willing to pay under the new scheme), balance GST may be paid out of Builder’s ITC pool. And accordingly, Builder may leverage out its cash flows and cost.

For example:

Particulars	Amount (In Rs.)
Value of a flat is say	1,00,00,000
ITC available proportionate to the flat (say)	10,00,000
Outward GST payable @ 12% is	12,00,000
Tax collected from the customer (Instead of 12%) @ 5%	5,00,000
Tax Payable to the Government = tax liability minus ITC available (Rs. 12,00,000 – Rs. 10,00,000)	2,00,000
Benefit available to the builder – Tax collected minus tax paid (Rs. 5,00,000 – Rs. 2,00,000)	3,00,000

ii. Builder’s eligibility to recover tax as per the old regime: By virtue of the contract or understanding with the customers, if the builder is able to continue with the old rates (which is allowed by Government for ongoing projects), Builder may find the old option to be beneficial as the same entitles him to claim credit.

d. Calculations:

Detailed workings will be needed to ascertain the possible proportion of credits and possible net liabilities under both the options. Accounting, Cost estimation and GST experts would be of great help to decide the business strategies to choose the right option and make best out of both the schemes based on case specific workings and forecasts of: Sold/unsold inventory, credits claimed/to be claimed, credits lying unutilised as on 31^st March, 2019, anti-profiteering elements, etc. These workings can further be matched with RERA (Real Estate (Regulation and Development) Act, 2016) declarations and overall project forecasts. Appropriate workings can result into good amount of benefits to Builders and/or flat-buyers and shall enable builders to make the right choice.

It is also anticipated that Government should provide adequate time to the industry so that proper choice of option can be made by Builders after detailed examination of pros-cons based on the actual wordings of notifications.

e. Intimation:

If Builder intends to opt for the old scheme, Builder needs to intimate selected option to the department within the time frame to be prescribed; failure to do so may lead to denial of this option and Builder in that case will have to follow the new rates of taxes. Therefore, Builders shall be cautious to choose right option at right time.

2. Subject to challenge:

a. Experts express a view that it is compulsory for a Builder to follow the new tax system in case of projects starting on or after 1^st April, 2019. One will have to pay GST @ 5% or 1%, as the case may be, on the entire value of flat

b. In other words, in the new system there is no deduction for land value, which is available in the current tax regime to the extent of 33% of the total value of flat

c. Asking for tax on the value of land (which is neither goods nor service) may lead to challenges in the form of writs /public interest litigations before judiciary by the flat buyers or may be even by Builders.

3. Lower amounts to be transferred under anti-profiteering:

a. Any benefits in terms of either reduction in rates of taxes or increase in tax credits needs to be transferred by the builders in terms of Section 171 of the Central Goods and Services Tax Act, 2017

b. Recently, in the case of Pyramid Infratech[1], National Anti-Profiteering Authority had held that Builders must pass on the credits to all buyers which they were not eligible to claim in the service tax/VAT regime but are eligible to claim under GST law. Therefore, many Builders were forced to work out their potential tax benefits occurring due to introduction of GST regime and pass on the same to the buyers

c. Anticipated ITC now may get reduced as the same is not allowed in the new tax scheme and therefore, the benefits to be passed on to the customer will get reduced to the extent of GST on goods and services which are going to be consumed post 1^st April, 2019. There could also be an issue of unutilised ITC as on 31^st March, 2019

d. There could be cases, where Builders would have already passed on the benefits of tax credits on certain estimates in anticipation that ITC will flow till the end of the project and now one may find it difficult to recover the same from the customers to the extent of ITC which won’t be available in respect of new inward supplies post 1^st April 2019

e. Considering the reduction in rate of GST, enquiries from anti-profiteering authorities may not be ruled out. Builders may have to prove that the prices have not been increased to offset the impact of reduction in rate of tax.

4. Issues with regard to ITC and transition credit:

a. Para 6.2 of the press release appears to be loosely drafted. If the same gets reproduced in the notification verbatim, it can lead to variety of interpretations and some chaotic situations

b. Based on the ambiguity in wordings, it may also appear that one may be required to repay ITC which has already been consumed in excess of the pro-rata eligible ITC

c. If one takes any business decision before reading actual notifications which are yet to be issued, the same may turn out to be a disaster.

5. FSI/TDR/Joint and redevelopment taxability – no relief:

a. FSI/development rights etc. are nothing but land as per the Constitution of India. Supply of land is not subjected to GST as per Schedule III of the CGST Law. However, Government is time and again making attempts to collect GST on the transactions of such rights which is highly debatable

b. Based on the discussions during 33^rd GST Council meeting, it was hoped that there will not be any tax on such transactions. However, as per the press release dated 19^th March, 2019, it seems there is no complete exemption

c. Moreover, it appears that the Government is also making repeated attempts to collect taxes on free flats given in joint and redevelopment cases. Such attempts have not found favour with the judicial forums. Therefore, the rounds of litigations will continue on such highly contentious issue.

6. Whether cost of flats become cheaper at flat buyer’s end?

In spite of reduction of GST rates in the new scheme, due to non-availability of ITC, GST paid on goods and services consumed during construction will add up to the overall cost and which may ultimately be recovered from flat buyers by way of an increase in price of flat. Therefore, the intention of Government to rationalise overall price for home buyers, may not be fulfilled.

7. Possibility of tax evasion on inward side:

Government needs to consider the possibility of tax evasion by suppliers of goods/services to Builders. As no ITC is available, there will not be any incentive to Builder to meticulously cross check the tax payments by his suppliers. This may pave way to tax evasion or indiscipline at the end of certain unscrupulous suppliers who may take undue advantage of the situation.

On the other hand, the permissibility of having supplies upto 20% from the unregistered suppliers may also lead to some intentional manipulations by some unscrupulous Builders.

8. Various open issues:

This press release has opened pandora’s box and various open issues need concrete answers:

a. The concepts like project, new project, ongoing project need to be well defined

b. Even if one chooses to pay GST on joint development and redevelopment projects, the burning issue of valuation would continue to persist. Many Builders are ready to pay GST on cost of construction whereas Taxmen insist levy on the market value of flats given free of cost.

Considering all the above points, it may be imperative for the industry to align itself with new changes which are likely to be implemented very soon.

[1] M/s. Pyramid Infratech Pvt. Ltd. (Order No. 7/2018 dated 18^th September, 2018) which is stayed by Delhi High Court presently in Writ Petition (C) 10999/2018. Next hearing in the matter is fixed by Delhi high Court on 26^th April, 2019

*(Author is Director of GSC Intime Services Pvt. Ltd. And can be reached at Email: info@gscintime.com , Tel: 022- 4612 5600 Ext. 601, Website: www.gscintime.com)