Analysis of GST on Real Estate Sector-Simplified

Analysis of GST on Real Estate Sector: GST on real estate very interesting and also confusing topic so let us discuss today in very simplified manner.

Meaning of Real Estate- Real Estate means Property in form of land in isolation or Land and Building taken together.

Real Estate Project means the development of a building or a building consisting of apartments, or converting an existing building or a part thereof into apartments, or the development of land into plots or apartment, as the case may be, for the purpose of selling all or some of the said apartments or plots or building, as the case may be, and includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto.

Now from above defination it is clear that real estate can take any form – Development of plots or self construction on own land or JDA (Joint development Agreement)-two parties involved -land owner and developer- who performs construction services on land for purpose of selling the building or flats.

Taxability of Real Estate Transactions after GST

Some important points to remember-

1. Goods include only movable property only.

2. Services means anything other than goods meaning immovable property can be termed as services.

3. Capital goods means goods thereby Capital goods includes only movable property.

4. Composite Supply, Works Contract, Construction Service-

Composite Supply (Section 2(30)) -means a supply made by a taxable person

to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Schedule II-Activities to be treated as supply of Goods or Supply of Services:

Composite supply is a wider term…

Schedule II -Para 6- Composite supply

The following composite supplies shall be treated as a supply of services, namely: —

(a) Works contract as defined in clause (119) of section 2 and Para 6 of Schedule II has specified that Works Contract is a Composite Supply as it also includes supply of goods and supply of services or both and also specified that the principal Supply for works contract to be treated as supply of services.

Meaning of works contract- Sec 2(119)- 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;

Works contract is a wider term and also only in relation to immovable property and not in relation to movable property. Transfer of property in goods is also important to constitute the supply as works contract supply.

Meaning of Construction Service-

Construction Service -Construction Service is not separately defined in the CGST Act,

but works contract service includes construction as a part of it and hence Construction Service is a subset of Works Contract Service. However, in Explanation to Section 17(5) clauses (c) and (d), the expression “construction’’ include re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation to the said immovable property.In case of work –contract service , such condition is not necessary.

In case of supply of construction service, involving transfer of property in land or undivided share of land – Value of construction service will be Total amount charged for supply minus 1/3 rd of total amount charged for such supply for value of undivided share of land. For example flat is sold for Rs 90 lacks, Then value of construction service will be 90 lacks – 1/3 rd of Rs 90 lacks = Rs 60 lacks. Liability to pay GST on Rs 60 lacks .

Importand definations-

1. Residential Apartment- shall mean an apartment for residential use.

2. Commercial Apartment means an apartment other than residential apartment.

3.  Affordable Residential Apartment-

Affordable residential apartment shall mean, –

(a) in a project which commences on or after 1st April, 2019, or

(b) in ongoing projects in which old tax rates are not opted for, having carpet area not exceeding

i) 60 square meter in metropolitan cities

or

ii) 90 square meter in cities or towns other than metropolitan cities and

iii) gross amount charged is not more than 45 Lakhs Rupees

Gross amount charged shall be sum total of consideration charged for construction services plus amount charged for undivided share of land plus any amount charged by promoter from buyer.

Residential Real Estate Project (RREP) shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent of the total carpet area of all the apartments in the REP.

Tax liabiity on sale before and after completion: Real estate property can be sold either before completion or after completion. Before completion means completion certificate has not been issued and it will not be treated as building as per Schedule III and will be liable to tax.

Taxability of real estate transactions after 31.03.2019: Amendments brought out in real estate transactions after 31.03.2019. Builders were provided an option to opt for the new tax regime or to stay in the old tax regime for the transactions to be done post 31.03.2019 for their ongoing project as on 31.03.2019. I will discuss new tax regime of taxation-

1. Affordable Residential Apartment(REP) – 1% without ITC

2. Non-Affordable Residential Apartment(REP)- 5 % without ITC

3. Commercial Apartment(REP)-12 % with ITC

Now Schedule III PARA 5 states that if person is exclusively delaing in sale of landand building then he is not liable to get registration as he is not making any suppply but if person sells building before completion then as per Schedule II, Registration provisions will apply to him..

Development Agreement- Means agreement between land owner and developer to build a new project on land of owner. Owner will provide land and developer constructs a building on that land.

Value of supply post 01.04.2019-

• Value of Transfer of Development Rights- Value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.

• Value of Construction Services Total Amount charged for similar apartments in the project from the independent buyers, other than the person transferring the development right or FSI (including additional FSI), nearest to the date on which such development right or FSI (including additional FSI) is transferred to the promoter, less the value of transfer of land.

Land owner transfers development rights and promoter provides construction services so both services are barter exchange so value of both services will be same.

Who will pay GST- GST to be paid by promoter only post 01.04.2019.

Let’s understand with example- Total flats -200

• Flats with Land –Owner- 140-(Own use-60,Flats sold before completion -40,Flats sold after completion -40)
• Flats with Promoter- 60( Flats sold after completion -40, Flats sold before completion -20)
• Rate- 1%/5% as case may be
• Date of transfer of development right- 01-10-2020(F.M.V -30 Lakhs per flat)
• Date of completion certificate/First occupation -01.10-2021(F.M.V -60 Lakhs per flat)
• Valuation of service -140 flats of land owner- 140*30*2/3=2800 lakhs
• GST LIABILITY to be paid by promoter-2800*5%= 140lakhs (Forward charge)
• Flats with promoter (60 Flats) – GST liability will be different for un-booked flats and Booked Flats at the time of completion.
• GST Liability for 40 flats (un-booked) =40*30(M.V at transfer of development right )*18% =Rs 216 lakhs subject to maximum of 40*60(M.V on date of completion certificate)*5% =Rs 120 lakhs. Liability will be Rs 120 lakhs.
• GST Liability for 20 flats (booked)- 20*Actual sale price*5%

Now lest us discuss ITC PROVISIONS applicable w.e.f 01.04.2019-

• Mandatory tax Rates of 1.5% (effective rate 1%) and 7.5% (effective rate 5%) without any ITC for Affordable and Non-Affordable Housing Projects for new Projects commencing on or after 01.04.2019.
• Under new scheme, ITC shall not be eligible and any available ITC balance also cannot be used for payment of GST liability.
• No ITC for goods and services used in available except to extent prescribed in Annexure-I &II to the NN-03/2019
• At least 80% of inputs and input services (other than capital goods, TDR/ JDA, FSI,long term lease (premiums), electricity, high speed diesel, motor spirit, natural gas) shall be purchased from registered persons. On shortfall of purchases from 80%, tax shall be paid by the builder @ 18% on RCM basis u/s 9(4). However, Tax on Cement purchased from unregistered person shall be paid @ 28% under RCM, and on capital goods under RCM at applicable rates only.
• For the purpose of Calculation of 80% of threshold limit for the payment of tax under reverse charge u/s 9(4), value of Exempted Goods/ Services shall be included in the value of purchases from unregistered persons.
• The tax liability on the shortfall of inward supplies from unregistered person so determined shall be added to his output tax liability in the month not later than the month of June following the end of the financial year.

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