Taxing real estate sector has always been a difficult proposition due to numerous practices followed, division of power between union and states. As it affects the headlines rate of GST, the government tries to keep the headline rate lower while making all the effort to tax the sector as much as possible. The sector makes a substantial contribution to the economy and required to taxed appropriately for tax collection kitty.

Real estate consists of normal construction activities and development of residential or commercial property for sale. The changes which is being brought into force with effect from 01.04.2019 is not affecting the normal construction services; it merely affects the real estate projects developed by promoters.

The new notifications use the term “promoter” and state that it has the same meaning as defined under Real Estate Regulation Act.

Prevailing Rates:

Such construction services attract a GST rate of 18% and 12%, except for a few specified services, with value abatement of 1/3 in case of services involving transfer of land or transfer of undivided share in land. Thus, the effective rate comes out to be 12% and 8% respectively.

New Rates under Exemption Notification and Conditions:

Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019 has been issued [Effective from 01.04.2019] notifying new rates on certain conditions. The effective rate are 1% for EWS/affordable housing; 5% on other residential housing and 12% on shops/offices. Following conditions are required to be followed to avail benefits of the notification;

(i) The tax shall be paid in cash. The persons opting for these notifications are not eligible to take credit.

(ii) The registered person shall pay, by debit in the electronic credit ledger or electronic cash ledger, an amount equivalent to the input tax credit attributable to construction in a project, time of supply of which is on or after 1 st April, 2019, which shall be calculated in the manner as prescribed in the Annexure I in the case of REP other than RREP and in Annexure II in the case of RREP.

(iii) Where a registered person (landowner- promoter) who transfers development right or FSI (including additional FSI) to a promoter (developer- promoter) against consideration, wholly or partly, in the form of construction of apartments, –

  • the developer- promoter shall pay tax on supply of construction of apartments to the landowner/promoter, and
  • such landowner – promoter shall be eligible for credit of taxes charged from him by the developer promoter towards the supply of construction of apartments by developer- promoter to him, provided the landowner/promoter further supplies such apartments to his buyers before issuance of completion certificate or first occupation, whichever is earlier, and pays tax on the same which is not less than the amount of tax charged from him on construction of such apartments by the developer/promoter.

(iv) Eighty percent of value of input and input services, [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas], used in supplying the service shall be received from registered supplier only.

(v) Where value of input and input services received from registered suppliers during the financial year (or part of the financial year till the date of issuance of completion certificate or first occupation of the project, whichever is earlier) falls short of the said threshold of 80 per cent., tax shall be paid by the promoter on value of input and input services comprising such shortfall at the rate of eighteen percent on reverse charge basis and all the provisions of the Central Goods and Services Tax Act, 2017 (12 of 2017) shall apply to him as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Well, the trade was expecting a simplified scheme real estate sector. The scheme is so complicated that it shall invite constant scrutiny from the unscrupulous revenue officers. The simplified scheme shall result in compliance nightmare.

Even on rate from, no benefit has been given to the real estate developers. Earlier they were paying GST at the rate of 12%. If GST is paid at the rate of 18% on 80% of the supply, it covers almost all tax payment requirement. The taxes paid shall be credited and encashed when 12% rate shall be charged from the buyers. In the proposed so-called exemption notification, the real estate developers shall not take credit, pay taxes on all inputs, keeps record of all inputs and at the same time pay 5% GST on cash. The scheme is worth avoiding.

Exercise of Options:

There is a dangerous provision in the said notification, required to be understood. It says,“Provided that in case of ongoing project, the registered person shall exercise one-time option in the Form at Annexure IV to pay central tax on construction of apartments in a project at the rates as specified for item (ie) or (if), as the case may be, by the 10th of May, 2019;

Provided also that where the option is not exercised in Form at annexure IV by the 10th of May, 2019, option to pay tax at the rates as applicable to item (i) or (ia) or (ib) or (ic) or (id) above, as the case may be, shall be deemed to have been exercised.”

Normally an exemption notification provides for exercise of option to avail certain benefit of the notification. The provisions are very tortuous in the present notification- if no option is exercised, it shall be deemed that the option has been exercised.

Thus, merely avoiding this notification is not enough. The assessee must go to the GST portal and exercise option not to avail the so-called benefit of this notification. This provision is a trap. Many sleeping real estate developers shall fall in this trap and deemed to have exercised option by not exercising the option!! Once they exercise the option in this unique way of not exercising option; huge liability on them shall follow.

Reverse Charge Liability on Promoters:

CBIC vide Notification No. 05/2019 IGST (Rate), has specified two services on which liability shall be discharged by the promoter on RCM basis. This notification shall come into force, w.e.f., April 1, 2019. These services are-

(i) Transfer of development rights or Floor Space Index (FSI) (including additional FSI).

(ii) Long term lease of land (30 years or more) by any person against consideration in the form of upfront amount (called as premium, salami, cost, price, development charges or by any other name) and/or periodic rent for construction of a project by a promoter.

This liability is under Section 9(3) of the CGST Act and promoters, whether or not availing benefit under the Notification 3/2019 are required to pay it.

Reverse Charge Liability on Promoter opting for Notification 3/2019:

CBIC vide Notification No. 07/2019 CGST (Rate), has notified that on all goods and services, received by a promoter availing Notification 3/2019, if supplied by an unregistered supplier, the promoter (recipient) shall pay GST under RCM. This notification shall come into force, w.e.f., April 1, 2019. On all goods and services, the rate of tax shall be 18%, except on cement and capital goods, on which the rate applicable on these goods shall be levied.

In view of these, this author is of the view that the Exemption Notification 3/2019 is not beneficial to the promoters. The promoters must exercise their option of not availing this notification for not availing this notification.

Affordable Housing:

Rate wise affordable housing has been given a good rate, 1%. However, coupled with the conditions of 80% procurement from registered persons, liability to pay GST under Section 9(4), various provisions of reversal of ITC; it does not remain so. It is far better to take ITC credit and pay tax at the prevailing rate of 8% with ITC benefit.

[Views expressed are personal views of the author. The author may be contacted on rajesh@rklegal.org]

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