The amendments made to the GST for the real estate sector has created a self contained code with the issuance of notifications 3/2019 to 6/2019 all dated 29/03/2019 effective from 01/04/2019. However these notifications have created more issues than they have solved. The said notifications reflects the government’s desire to tax every part of transaction of real estate development. This has led the GST regime to move to a double taxed system thereby violating the very fundamental basis of value added tax. Some instances are blocked input credit after completion of project, taxation on long term leases which are essentially transfer of immovable property, withdrawal of input credit for residential real estate development, artificial limitation on land value abatement, levy of gst on assignment of leasehold rights, etc. These issues have now reached the doors of the highest court.
Additionally, there are issues in determining the point of taxation, value of services, etc. due to introduction of notifications 3/2019 to 6/2019 dated 29/03/2019 applicable with effect from 01/04/2019. Some of these issues are discussed hereunder in the hope that someone who can make a difference will read these and try to mitigate them.
Schedule II of CGST Act provides for levy of GST on the lease premium paid to the development authority / government for acquiring land on long term lease. The exception is lease of industrial land. The other types of land leased continue to be liable for GST@18%. The Builders Association of Navi Mumbai has unsuccessfully challenged such levy before the Bombay High Court reported at 2018 (4) TMI 461 (Bom.). The said matter is now sub-judice before the Supreme Court. The contention raised by the builders was that such allotment of land by. Development Authority is in the nature of transfer of immovable property which is exempt under Schedule III to the GST Act. However, the Bombay High Court in its decision dated 28/03/2018, held that such lease is separately provided as liable for tax and hence, provisions of Act has to be applied. Prior to 01/04/2019, the Developers could take solace from the fact that such GST paid on lease premium was available as input credit against the GST collected on the sale of units. However, with effect from 01/04/2019 even that input credit has been taken away from development of a residential real estate project. Even though under the said notifications, the GST on such lease premium is deferred for residential portion until completion of project, yet the commercial project continues to be taxed front end, with no input credit available on the sale consideration of such portion.
The situation gets piquant here:
(I) as per the relevant notifications, the GST on lease premium is payable in proportion to the commercial portion at the time of allotment of land by the government. However, at that stage the proportion of the commercial area is not known to the developer since the building plans are not even prepared and put up for sanction. So logically the incidence of taxation should get shifted to the day plans are sanctioned when the percentage of commercial units vis a vis residential units are available. However, the authorities do not accept this contention citing notification no. 06/2019 and insist that GST be paid at the time of payment of lease premium in proportion to the extent of commercial area. Even the FAQ dated 07/05/2019 released by Government of India, Ministry of Finance Department of Revenue (Tax Research Unit) in Q. no. 15 states that in case of supply of long term lease of land for construction of commercial units, tax shall be paid by the promoter immediately.
(II) Further, the said notification does not provide for a remedy, if subsequently due to amendment of plans, the commercial portion as a percentage to total development reduces at a later date. Such an amendment could happen due to availability of additional FSI which in turn could happen due to a number of reasons including amendment in the relevant development control regulation. There is no remedy for claiming a refund. Does it result in unjust enrichment of the State. Anybody’s guess.
(III) The relevant notification further provides for 12% GST on sale of commercial units, determination of GST rate on commercial if the total commercial portion in a project is more than 15% of total project area. Such project is a “real estate project” (REP) and input credit is available to the developer. Now, what happens, if in future due to amendment in plans the residential area increases leading to reduction in commercial portion below 15% thereby the project becoming a RREP. How does the developer and the authorities treat such modification. Whether a developer has to continue to charge 12% or has to now charge 5% on sale of commercial units. Whether ITC continues to be available to the developer. These are complex unanswered issues.
The above are real issues being faced by real estate developers in absence of clarity by the legislature on one hand and massive exercise of audits and verification by the GST department on the other, to maximise the revenue. Probably the real estate developers are now immune to operating in a highly litigated environment and will figure out how to handle such lack of clarity in the times to come.
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