Before analyzing the 34th GST Council meeting decisions, let us look at the key decisions of the 33rd GST Council meeting. The 33rd GST Council meeting held on 24th February 2019 proposed the rates of tax for the Construction sector being:
1. 5% without ITC on residential properties outside affordable segment
2. 1% without ITC on residential properties on affordable housing properties,
If the area of the house is less than 90 square meters(968 sq ft approx.) in non-metropolitan cities and 60 square meters(646 sq ft approx.) in Metropolitan cities, then such houses shall fall under the category of affordable segment provided the value of the property is less than Rs. 45 lakhs.
The 34th GST Council on 19th March 2019, was on framing the operational mechanism of the GST Rates proposed in the 33rd Council meeting. If one is a builder, then life would become hard for him as compliances have increased once again.
ONE TIME OPTION
One time option is proposed to continue with the older rates (effective rate of 8% or 12% with ITC) on on-going projects which have not been completed by 31.3.19. In other words, for an on-going project where the bookings have already been made before 31.3.19, the older rates shall continue. In the case of on-going projects where bookings have not been made, an option is provided to the builder to continue at 12% rate.
The option shall be exercised within the specified time limit which shall be prescribed by the CBIC and once the time has lapsed, then the new rates will apply automatically.
Clarity on the definition of the on-going project would be required to avoid misinterpretations as the press release defines as projects where construction and booking have started.
REVISED TAX RATES
New rate of 1% without input tax credit (ITC) on construction of affordable houses shall be available for,
(a) All houses which meet the definition of affordable houses as decided by GSTC (area 60 sqm in metros / 90 sqm in non- metros and value upto RS. 45 lakhs), and
(b)affordable houses being constructed in ongoing projects under the existing central and state housing schemes presently eligible for concessional rate of 8% GST (after 1/3rd land abatement).
New rate of 5% without input tax credit shall be applicable on construction of,-
(a) All houses other than affordable houses in ongoing projects whether booked prior to or after 01.04.2019. In case of houses booked prior to 01.04.2019, new rate shall be available on instalments payable on or after 01.04.2019.
(b)All houses other than affordable houses in new projects.
(c)commercial apartments such as shops, offices etc. in a residential real estate project (RREP) in which the carpet area of commercial apartments is not more than 15% of total carpet area of all apartments.
CONDITIONS ATTACHED
The new tax rates of 1% (on construction of affordable) and 5% (on other than affordable houses) shall be available subject to following conditions,-
(a) Input tax credit shall not be available, (Comments-This was discussed in the previous meeting)
(b) 80% of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease (premiums)) shall be purchased from registered persons. On shortfall of purchases from 80%, tax shall be paid by the builder @ 18% on RCM basis. However, Tax on cement purchased from unregistered person shall be paid @ 28% under RCM, and on capital goods under RCM at applicable rates. (Comments-This was NOT discussed in the previous meeting. This definitely came as a shocker personally, as section 9(4) of the CGST Act was specifically amended to specify a class of registered persons who shall pay tax on RCM on specified purchases from unregistered dealers. Representations from the Trade Bodies and Associations are expected towards compliance for this clause of 80%. Further, it would become a challenge to track the 80% threshold.
In fact, this amendment would make the lives miserable as the builders would feel happier to pay 12% with ITC, with no restrictions on purchases rather than 5% without ITC along with a restriction on purchases to purchase from registered dealers. This amendment is a sure success if the Govt is concerned as it has on one hand restriced the ITC utilization and on the other has forced the builders to purchase from registered dealers ensuring constant flow of GST to the Govt’s kitty. Further, it is surprising that an option to pay at 12% or a higher rate would not be available at all, making this move as a forced sugar-coated pill. With hindsight, one may say that if the benefits of GST had been passed, this amendment may not even have surfaced.)
TRANSITION SCHEME FOR ON-GOING PROJECTS
The transition to the reduced rates in case of on-going projects has also been discussed in the meeting. The transition formula approved by the GST Council, for residential projects extrapolates ITC taken for percentage completion of construction as on 01.04.2019 to arrive at ITC for the entire project. Then based on percentage booking of flats and percentage invoicing, ITC eligibility is determined. Thus, transition would thus be on pro-rata basis based on a simple formula such that credit in proportion to booking of the flat and invoicing done for the booked flat is available subject to a few safeguards. Similar scheme is also proposed for mixed projects with commercial portions. (Comments- This would be a pure mathematical approach based on ratios and proportions).
TDR/ FSI AND LONG TERM LEASE FOR PROJECTS COMMENCING AFTER 01.04.2019
Further to the discussions in the 33rd GST Council meeting on TDR/FSI that if the ultimate residential property is taxed, then the transfer of TDR shall not be taxed, it has been stated that Supply of TDR, FSI, long term lease (premium) of land by a landowner to a developer shall be exempted subject to the condition that the constructed flats are sold before issuance of completion certificate and tax is paid on them
Exemption of TDR, FSI, long term lease (premium) shall be withdrawn in case of flats sold after issue of completion certificate, but such withdrawal shall be limited to 1% of value in case of affordable houses and 5% of value in case of other than affordable houses. (Comment- This is an equalization move to bring parity between under construction and ready-to-move appartments). The liability to pay tax on TDR, FSI, long term lease (premium) shall be shifted from land owner to builder underthe reverse charge mechanism (RCM)(Comments-Another compliance issue for the builders). Further, the liability to discharge tax has been shifted to the date of issue of completion certificate instead of the date of sale of TDR/FSI. The liability of builder to pay tax on construction of houses given to land owner in a JDA is also being shifted to the date of completion.
AMENDMENT TO THE ITC RULES
ITC Rules have been proposed to be amended to bring clarity on monthly and final determination of ITC and reversal thereof in real estate projects.
The above proposed changes would be given effect to through notifications which is expected before the end of this month as the above changes have been recommended to be effective from 1st April 2019.
Disclaimer: Any information or links contained in this article do not constitute professional advice. Any information contained in this article is subject to change without notice. Readers of this article are advised to seek their own professional advice before taking any course of action or decision, for which they (the readers) are entirely responsible, based on the contents of this article.
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