Real Estate (Regulation and Development) Act 2016 – importance of Financial Year End Reconciliation
Wishing all our members and readers abundant success in their financial journeys, with ample opportunities for both wealth creation and preservation. May you find greater peace of mind and contentment in your financial endeavors. Here’s to seeing all your financial aspirations manifest into reality!
1. As we embark on the new financial year of 2024-25, it’s also time to conclude the books of accounts for the preceding financial period of 2023-24. Financial year end closure involves a series of essential tasks and activities that entities and promoters/professionals must undertake to adhere to legal, regulatory, and accounting/tax standards. It’s a critical process for ensuring transparency, uniformity and accountability to all stakeholders involved.
2. One of the key objectives of RERA (Real Estate Regulatory Authority) is to foster transparency within the Real Estate Industry. Transparency has emerged as a fundamental aspect of economic operations, and this holds especially true for the real estate sector given its regulatory, economic, social, and environmental significance. While strides have been made in recent times, there remains a pressing need for further measures to enhance transparency within real estate markets and entities.
3. Digitalization plays a pivotal role in bolstering transparency, yet the real estate sector has been sluggish in embracing new technologies to streamline manual processes. Data accessibility remains disparate and inconsistent across various departments within organizations.
4. Recognizing transparency as an integral component of sustainability communication, and acknowledging the crucial role of digitalization in achieving it, numerous studies have delved into the perceptions of real estate entities regarding transparency enhancement in their interactions with stakeholders, including regulators, investors, lenders, customers, the market, and tax authorities. Additionally, these studies examine the integration of information and communication technology into their operational frameworks.
5. Through qualitative analyses, various groups have scrutinized sustainability reports published by real estate firms, which serve as vital repositories of non-financial information for stakeholders. Transparency predominantly manifests in corporate governance practices, as real estate entities increasingly prioritize maintaining transparent relationships with stakeholders and incorporating their expectations into their strategic approaches. Notably, research findings indicate a widening scope of transparency both within entities and in reports that include assurance statements.
6. The reporting being specific to industry, the regulators constantly monitoring the developments of the industry and the eco-system. Real estate is not an exception to it. Post RERA all the stakeholders of the real estate cognizant about the RERA registration, periodical updates, funds utilisation reporting, approval of modification of plans and specifications, approval for change of promoters in the project, compliances to the advertisement and adherence to terms of the agreement of sale.
7. RERA being the novel statute and regulators are notifying the various regulations, notifications etc based on their experiences, on government and stakeholders demand depending on the situation or circumstances that spew from time to time.
In this article, we would like to bring the important data points/details to be considered by the Real Estate entities (promoters of the real estate projects), advisors, professionals etc., considering the various aspects as mandated under RERA. The promoters and professionals shall consider and comply with the Regulatory Compliances to mitigate the risks –
1. Prior Registration of the project – Section 3
2. Financial management under RERA – Section 4
a. Quarterly update / Quarterly progress report – Section 11
b. Annual Audit under RERA – Section 4
3. Prior Registration of the project–
a. Section 3(1) of the RERA Act 2016 mandates the prior registration of the real estate project (building or plotted) before sale, marketing, invitation, collection of advances –
i. It is important for the professionals to consider, while verification, reporting and certification, whether the promoter has advertised or collected money prior to registration of the real estate project with the RERA Authorities.
ii. The registration details can be verified on Rera website https://rera.karnataka.gov.in/projectViewDetails
iii. Further the professionals can verify by looking at the bank account receipt, agreement of sale entered.
iv. The RERA authorities have levied a penalty for advertisement or collection of money prior to RERA registration.
4. Further the promoter might have allotted the unit against the advance/borrowing. If so, further emphasis should be made and verify the transaction to satisfy and comply with Section 3(1) of the RERA Act 2016
a. Eg., Balance Sheet of 31stMar 2023 showing balances under Borrowings or current liabilities. During 2023-24, units are allotted against such borrowings.
b. Relevant documents to prove and satisfy the advances are converted to unit/flat advances post RERA registration.
4. Financial management under RERA– Section 4(2)(L)(D) of the RERA Act 2016 mandates the promoter of the real estate project to deposit 70% of the amount realised from the allottees to the project RERA designated bank account from time to time –
a. The RERA designated bank account can be verified for each project at https://rera.karnataka.gov.in/projectViewDetails
b. Verify the total sales register or collection register.
c. Verify amount credited to project RERA designated bank account.
d. Reconcile the collection and 70 % deposit. Any variances, collect the reasons for future references.
e. Further verify and confirm that the realisation from sale of landowners units should also be deposited in a RERA designated bank account.
f. Refer RERA Bank Account directions 2020 and Karnataka RERA Regulations 2022 for details.
g. Verify whether the promoter have collected the professional certificate of Engineer, Architect and Chartered Accountant Certificate for withdrawal of funds from the project RERA designated bank account from time to time in proportion to completion of the project works.
h. Excess withdrawal at any point of time shall be recorded and reported if any
5. Compliance checklist and Reconciliation under RERA: preparation of reconciliation statements to ensure accuracy and completeness, as well as reconciling any discrepancies or differences between reports submitted with various stakeholders –
|
Sl No |
Stakeholder/s | Reconciliation items |
| 1 | RERA Authority –Mandatory Compliances under RERA Act 2016 | Mandatory compliances under RERA – Post the Registration of Real Estate Project –
a. filing of quarterly updates – b. RERA annual audit annual reports c. application for extension of end date – Section 6 d. further extension of end date of the project – Section 7 e. Reporting and modification of plan and specifications in the project – Section 14 f. Advertisement guidelines – Section 11 and Section 12 g. Liability or action against the orders passed by the Authority or Adjudication officer for the complaints filed under Section 31 / Sections 35 h. Liability or action against the orders passed by the Appellate Authority 43 i. Filing of Completion report |
| 2 | Financial Institution / Bankers – Lenders | a. Arrive at the Drawing power based on the inventory or receivables
b. Total number of Sold units / unsold / inventories in the project. c. Communication to the lenders for NOC from the lenders for the units sold and agreements entered. d. Receivables from the Sold units Vis-à-vis books of accounts e. Unsold inventory as per books of accounts and average value of the receivables from unsold inventory to cover the balance dues / outstanding loans or borrowings. f. Status of construction progress of the project. g. Provision of interest on borrowings. h. Disclosure of status of borrowing – in case of non-performing asset and providing the interest there on |
| 3 | Goods and Services Tax – GST | a. Report / disclose of Percentage of completion of the project
b. Total amount received/supply based on the agreement and GST discharged on the amount received or due. c. Reporting of RCM transaction and discharge of liability (Legal Fees, Development rights, transport expenses, purchases less than 80% etc) d. Availing the eligible Input Tax credit e. Satisfaction of 80 % criteria of registered GST purchases f. Discharge of unregistered GST purchases if any or lower than 80 % criteria g. Reversal of ineligible GST Input Tax Credits h. Reconciliation and allocation of GST incase of Mixed Development Project (Residential and Commercial) i. Taxation on Plotted development |
| 4 | TDS deducted by the buyers @ 1 % U/s. 194 IA of Income Tax Act 1961 | a. Reconcile the total receipt of money from the allottees.
b. Check 26 AS whether 1 % has been credited against the receipt from the customers/allottees. c. If not, communicate the same to the allottees and insist them to remit and share the details. d. This will help the revenue reconciliation vis-à-vis TDS Credits |
| 5 | Inventory Valuation – stock lying at the site or at yard | a. Physical verification of stock / inventory
b. Construction materials lying at the site or yard c. 3rd party materials / equipment’s at site |
| 6 | Revenue Reconciliation | a. Recognition of revenue as per Accounting Standard and Tax Standards and reconciliation with the data as provided to RERA –
i.e., realisation of money from the allottees vis-à-vis revenue recoginsed based on % of completion of the project |
| 7 | Provision for the delay compensation (delay in delivery of the unit to the allotees –
a. Based on Terms of the Agreement b. Based on the orders of the Authority or Adjudicating officer |
c. Provision of expenses for the delay compensation payable to the allottees as per the terms of the agreement and as per the RERA Act 2016 (SBI MCLR + 2% interest) – Section 13 read with K RERA Rules 8A
d. Applicable GST payable compensation payable on such delayed delivery of the project e. TDS by the promoter on such provision of expenses |
| 8 | Management Information System – MIS to Investors etc | a. Reconciliation of various values as per MIS and Books of Accounts |
–
|
Registration Checklist (in case project registered during the FY 2023-24 |
Estimated cost of Land As per RERA Registration | Estimated cost of Construction As per RERA Registration | Project RERA Designated Bank Account | Number of Inventory |
| Project RERA Registration Number and Project Name | Rs. XXXX | Rs. XXXX | 1. Bank Name
2. Account Number 3. IFSC Code |
XXX Units |
–
| Quarterly Updates | June 2023 | September 2023 | December 2023 | March 2024 |
| Due Date of Filing | 15th July 2023 | 15th October 2023 | 15th January 2024 | 15th April 2024 |
| Actual Filing Date | DD/MM/YYY | DD/MM/YYY | DD/MM/YYY | DD/MM/YYY |
| Architect Certificate – % of Completion | XX % | XX % | XX % | XX % |
| Value as per Engineer Certificate – in INR | Rs. XXXX | Rs. XXXX | Rs. XXXX | Rs. XXXX |
| CA Certificate – | ||||
| Construction cost incurred | Rs. XXXX | Rs. XXXX | Rs. XXXX | Rs. XXXX |
| Total Cost Incurred | Rs. XXXX | Rs. XXXX | Rs. XXXX | Rs. XXXX |
| Total % of Completion | XX % | XX % | XX % | XX % |
| Amount Eligible to withdraw | Rs. XXXX | Rs. XXXX | Rs. XXXX | Rs. XXXX |
| Actual withdrawn | Rs. XXXX | Rs. XXXX | Rs. XXXX | Rs. XXXX |
| Balance Available to withdraw | ||||
| Amount withdrawn is utilised for the project | ||||
| Observation / Remarks |
–
| Annual Audit FY 2022-23 | Due date of filing (Extended due date 31.12.2023 | Delay if any | Remarks / Observation | Details of CA |
Note – there should be a separate Chartered Accountant for issuance of CA certificate in Form 4 and Form 7 (annual audit)
| Advertisement | Mode
Print – Hoarding, Newspaper, Social media, website, FM, Calls etc |
RERA Registration Number as per RERA Guidelines | Remarks / Observation | |
| Date of Advertisement | ||||
| DD/MM/YYYY | ||||
Acknowledging the discrepancies that may arise, we strongly advise promoters or professionals to maintain reconciliation statements meticulously. This proactive measure can safeguard them against any unforeseen notices from tax authorities in the future.
In conclusion, it is imperative for project promoters to provide consistent and uniform data to all stakeholders, aligning with the objectives outlined in the RERA Act 2016 and adhering to various statutory requirements. Failure to do so may expose them to penalties or legal consequences for non-compliance. Moreover, professionals must diligently advise their clients in accordance with the provisions laid out in the RERA Act, Rules, Notifications, and Circulars to ensure full compliance and mitigate risks effectively.
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The author is a partner at M/s. Venu & Vinay, Chartered Accountants, He can be reached on vinay@vnv.ca
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