In re Prime Property Developers (GST AAR Kerala)
The GST rate for the construction of residential apartments, excluding affordable ones, has been a topic of discussion. A recent ruling by AAR Kerala addresses this issue, providing clarity on the applicable GST rate and taxable value for such constructions. In this article, we will examine the ruling and understand the implications for Prime Property Developers and the real estate sector.
Analysis: The ruling analyzes the GST rate and taxable value for the construction services of villas provided by Prime Property Developers. As per the contention of the applicant, the villas fall under the category of residential apartments other than affordable ones. The applicant refers to specific notifications, including Notification No. 11/2017 Central Tax (Rate) and its amendments, to support their argument for a GST rate of 7.5% for such villas.
The ruling acknowledges the new tax structure introduced for the real estate sector, effective from April 1, 2019. It clarifies that the services of construction of villas provided by Prime Property Developers fall under the description mentioned in Item (ia) of SI. No. 3 of Notification No. 11/2017 Central Tax (Rate). Accordingly, the applicable GST rate for these services is 7.5% (3.75% CGST + 3.75% SGST) subject to the conditions mentioned in the respective entry.
Regarding the taxable value, the ruling refers to Paragraph 2 of Notification No. 11/2017 Central Tax (Rate). It states that the value of land or undivided share of land in such supplies is deemed to be one-third of the total amount charged. This allows the applicant to claim a deduction of one-third of the total amount charged when determining the taxable value.
Conclusion: The AAR Kerala ruling provides clarity on the GST rate and taxable value for the construction of residential apartments other than affordable ones. Prime Property Developers, in this case, is liable to pay GST at a rate of 7.5% for their villa construction services, as per the applicable entry in Notification No. 11/2017 Central Tax (Rate). The ruling also allows for a deduction of one-third of the total amount charged for determining the taxable value.
Question 1: When an agreement for construction is entered into with a purchaser before the execution of a sale deed for land, is PPD (Payment on Progressive Development) eligible for an effective rate of 5% on the gross value of land and construction?
Answer 1: No, the applicant is liable to pay GST at the rate of 7.5% (3.75% CGST + 3.75% SGST) for the services of constructing residential apartments, excluding affordable residential apartments. This is as per the entry at Item No. (ia) of SI. No. 3 of Notification No. 11/2017 Central Tax (Rate). The rate remains the same regardless of whether the agreement for construction is entered into before or after the execution of the sale deed for land.
Question 2: When an agreement for construction with a purchaser is entered into after the execution of a sale deed for land, is PPD eligible for an effective rate of 5% on the gross value of land and construction?
Answer 2: Yes, the effective rate of 5% on the gross value of land and construction is applicable in this case. This is based on the answer provided in Question 1, indicating that the rate remains the same regardless of when the agreement for construction is entered into.
Question 3: Can GST on supplementary items of works executed by PPD for the purchaser prior to the completion of construction be charged at 5% without input tax credits?
Answer 3: No, the amount charged by the applicant for supplementary items of works carried out before the completion of construction will be treated as part of the total amount charged for the supply. As per the explanation to Para 2 of Notification No. 11/2017 Central Tax (Rate), it will be liable to GST at the same rate specified in Item No. (ia) of the said notification, subject to the conditions prescribed therein. Therefore, the same rate as mentioned in Answer 1 (7.5%) will be applicable for GST on these supplementary items of works.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, KERALA
M/s. Prime Property Developers (Hereinafter referred to as the applicant) is a partnership firm registered under the Indian Partnership Act and engaged in the business of construction and sale of real estate projects, including villa projects.
2. At the outset, the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act) and the Kerala State Goods and Services Tax Act, 2017 (hereinafter referred to as KSGST Act) are same except for certain provisions. Accordingly, a reference hereinafter to the provisions of the CGST Act, Rules and the notifications issued there under shall include a reference to the corresponding provisions of the KSGST Act, Rules and the notifications issued there under.
3. The Applicant requested advance ruling on the following:
1. When agreement for construction is entered into with a purchaser before the execution of sale deed for land in favour of the purchaser, is PPD eligible for effective rate of 5% on gross value of land and construction (i.e.; availing 1/3rddeduction towards land on effective rate of 7.5% as per notification number 03/2019 dated 29.03.2019)?
2. When agreement for construction with a purchaser is entered into after the execution of sale deed for land in favour of the purchaser, is PPD eligible for effective rate of 5% on gross value of land and construction (i.e.; availing 1/3rd deduction towards land on effective rate of 7.5% as per notification number 03/2019 dated 29.03.2019)?
3. Pursuant to the agreement for sale of land and agreement for construction entered into with a purchaser, there may be supplementary items of works executed by PPD for the purchaser prior to completion of construction of the villa. Can GST on such extra works be at 5% without input credits?
4. Contentions of the Applicant:
4.1. The applicant submits that for villa projects they identify land for the project and either buys the land outright or enters into agreement for sale with the Landowners. The agreement for sale is to purchase the property in their name or in the name of their nominees in one or more deeds. A combination of outright purchase of a part of the property and agreement for sale for the remaining area may also be followed. Then they prepare layout plan and get it approved by the local authority.
4.2. After obtaining layout approval they start the project. They initially do development work of common amenities like compound wall for the entire project area, internal roads, electrification, plumbing and sanitary works, recreational facilities etc. Then, they obtain registration for the project with Kerala Real Estate Regulatory Authority and carry out marketing activities and identify purchasers.
4.3. Once a purchaser confirms his interest to purchase a plot together with a villa, an agreement for sale of the plot together with undivided share in common land is entered into between the purchaser and Landowners. The, plot together with undivided share in common land is transferred to the purchaser, once the purchaser makes full payments for land, through execution of a sale deed.
4.4. The applicant also enters into agreement for construction with the purchaser wherein the purchaser) agrees to pay for the proportionate cost of common development works and for the construction of his villa. This agreement may be entered into either before or after execution of the sale deed for the plot and undivided share in common land in favour of the purchaser.
4.5. The Building Permit for the Villa is obtained in the name of the purchaser or in the name of the original Landowners. If the Building Permit is in the name of Landowners, then the name is changed to that of the purchaser after the sale deed for land is executed in favour of the purchaser, through an application to the Local Authority.
4.6. The purchaser makes payment to the Applicant for the construction part as per the agreement for construction. On completion of construction including any additional works, the possession of the Villa is handed over to the purchaser by the applicant after occupancy certificate is received and all payments have been completed. Before completion of construction and handing over of the Villa, some of the Villa buyers may request the applicant to make changes, add Additional area, undertake interior works or extra items etc for which the applicant charges extra amount based on a supplementary agreement or by endorsement on the construction agreement itself. In respect of some Villas for which the purchasers cannot be initially identified by the applicant, construction is undertaken by the applicant using their own funds and transferred to the purchasers when they are identified. In some cases such transfers will be done after the occupancy certificate for the Villa is obtained.
4.7. The applicant is currently promoting a villa Project namely; “Prithvi” in 509.81 ares of land in Attipra Village, Thiruyananthapuram Taluk. Majority of the land area; i.e., 308.76 ares of land is owned by the applicant and for the remaining portion of land they have entered into agreements for sale with the Landowners. A copy of the agreement with one such Landowner is attached as Annexure – A. The applicant has obtained Development Permit from the Corporation of Thiruvananthapuram and the permit is attached as Annexure -B. They have started initial work and had obtained registration from Kerala Real Estate Regulatory Authority and the Certificate of Registration is attached as Annexure-C. The agreements entered info with purchaser comprising agreement for sale of land is attached as Annexure -D and agreement for construction is attached as Annexure -E. The gross amount [Land + Construction] for all the Villas is expected to exceed Rs. 45 lakhs and hence do not fall under affordable apartment category.
4.8. The applicant has started the Villa Project “Prithvi” after 01.04.2019 and is covered under Notification No. 11/2017 Central Tax (Rate) as amended by notification number 03/2019 dated 29.03.2019. Since all the Villas under the project are having a gross value of above Rs. 45 lakhs they are not covered under the definition of affordable residential apartments and accordingly the rate applicable are as follows;
