GST on Real Estate Transactions involving JDA/TDR wef 01.04.2019

GST on Real Estate Transactions involving Joint Development Agreements / Transfer of Development Rights wef 1st April 2019 (JDA/TDR)

Construction and Real Estate is a complex business with multiple stakeholders involved in it. It has been a growing sector in India, but ironically has been riddled with litigation owing to multiplicity of taxes and dual administration mechanism; thereby exposing it to the conundrums of both Central and State level complex indirect taxation levy prior to GST regime.

However, with the series of changes that have been made effective from 1st April, 2019 it can be seen as a step in the right direction, although it may not be in line with the GST principles. These changes are enumerated in GST Notification No. 03/2019 – Central Tax (Rate) dt. 29.03.2019 and Notification No. 08/2019-CTR dt. 29.03.2019.

This article is an attempt to summarize the changes made in GST Law effective from 1st April 2019, with respect to its impact on Real Estate Business, involing Joint Development Agreement/Transfer of Development Rights (JDA/TDR) where consideration is in the form of Area Sharing and  / or Revenue Sharing. This article does not cover any of the provisions of GST on Real Estate applicable on or before 31st March 2019, nor any transitional provisions for Ongoing Projects as on 31st March 2019.

Let us now understand the various parties that could possibly be involved in a typical real estate business end-to-end and the implications of GST on transactions between them.

Typically, any real estate transaction starts with Developer acquiring land for constructing a building (Residential/Commercial) upon it. Land is either purchased outright from the Landowner, or the Developer enters in to “Joint Development Agreement” (JDA) with the Landowner, whereby

• The Developer Acquires the Development Rights from Landowner with respect to the Land
• The Development rights entitles the Developer to obtain various types of licenses and approvals from the Government authorities and construct a complex, building, civil structure on the land, either by himself, by acqiring material and labour from Suppliers or getting work done through Works Contractors
• In return for the transfer of development rights by landowner, the Developer gives the Landowner consideration in the form of Cash (Revenue Sharing) or Construction Service for certain agreed number of apartments/offices/shops (Area Sharing) allotted to Landwoer (hereinafter referred to as “Owners Apartment”) or both
• The remaining apartments/Offices/Shops (hereinafter referred to as “Developers Apartment”) are retained by Developer and sold to other Buyers
• Landowner may also sell Owners Apartment independently to Buyers or decide to retain it for own use

So in a nutshell, there are 5 parties typically involved in a Real Estate transaction, which has an impact of GST – Landowner, Developer, Supplier, Works Contractor and Buyer.

Various Transactions in a JDA type of agreement and its GST Impact: Flowchart 1

For ease of reading, we have divided this article into 2 sections as below:

1. Definitions

2. Type of transactions and its taxability

1. Definitions and Terms used in this article

Supply – As per para 5(b) of Schedule II of CGST Act, the following is ‘supply of service“:

• ..(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier

As per para 6(a) of Schedule II of CGST Act, the following composite supplies shall be treated as a supply of services, namely:

• ..(a) works contract as defined in clause (119) of section 2

RREP – Residential Real Estate Project (RREP) means a Real Estate Project in which the carpet area of the commercial apartments is not more than 15 % of the total carpet area of all the apartments in the project.

REP – Real Estate Project (REP) means any project other than RREP.

RCM – Reverse charge (RCM) means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act 2017.

FCM – Forward Charge (FCM) means the liability to pay tax by the supplier of such goods or services

ITC – Input Tax Credit (ITC) means credit of Input Tax

2. Type of transactions and its taxability

2.1 Sale of units by Developer/Landowner to Buyer – Outward Supply for Ongoing Projects (option not exercised for old rates) and New Projects (01.04.2019 onwards)

In this transaction, either the Developer and/or Landowner sells apartments/shops/offices to the Buyer. This is a simple transaction with the Buyer and GST would be leviable as below, if unit is sold before receipt of Completion Certificate or before its first occupation:

Table 1:

If the entire consideration for the property is received after receipt of Completion Certificate or after its first occupation, whichever is earlier, then it is not considered as a Supply and hence GST is not applicable in such transaction.  ITC proportionate to the unsold units as on the date of Completion of the project should be reversed upon completion of the project.

Time of Supply – Continuous supply as per %Completion/Invoicing/Payments received

Input Tax Credit:

• Landowner
  • Entitled to ITC of GST levied by developer on construction of owner’s apartment (refer Flowchart 1) subject to cap of output tax payable on residential apartments sold under construction. For e.g. If the developer charges GST of Rs. 1 lakh to the Landowner, the Landowner should pay at least Rs. 1 lakh as output GST on supply of such apartment to his buyer.
  • However, if developer pays tax on Construction service for apartments allotted to Landlord (on FCM basis), only on completion of the project, Landowner will not be in a position to avail or utilise ITC, since Landowner cannot charge output GST on further sale of Owners apartment to buyers after completion of project in terms of Schedule III to the Act.  Thereby, it seems that even though the landowner is eligible for the credit, its utilisation is doubtful. Whether developer can raise invoice earlier and pay GST before the date of completion of project or first occupation, so that the Landowber can claim ITC, is a question which needs to be considered and clarified by CBIC.
• Developer
  • Not entitled to any ITC in respect of sale of under construction/completed residential units (in any project) and under construction/completed commercial units (in RREP).
  • ITC can be claimed only on inputs and input services used (see Flowchart 1 above):
    • for sale of under-construction commercial units (in exclusive commercial complex), or
    • for sale of under-construction commercial units (in REP), where proportionate ITC can be availed only for the commercial units based on ratio of carpet area of commercial units sold to total carpet area of residential and commercial units
  • ITC attributable to GST paid on RCM basis on transfer of DR/TDR/FSI can be claimed by the Developer only in case of  pure Commercial Projects, or Commercial portion of any Real Esate Project (REP).  Practically, only in case of Revenue Sharing or Outright Purchase type of agreement with Landowner, the Developer will be able to avail benefit of Input Taxes paid on RCM, as the Time of supply in these type of arrangements is generally before Completion of the project or its first occupation (refer section 2.3 for details). However in case of Area Sharing arrangement with Landowner, it may not be possible for Developer to avail benefit of Input Taxes paid on RCM basis, since the Time of Supply of DR/TDR/FSI is earlier of  Completion of the project or its first occupation (refer section 2.3 for details ), so GST on RCM basis is payable by the Developer at the Time of Supply only.  Thereby, it seems that even though the Developer is eligible for the credit, its utilisation is doubtful. Whether developer can raise self-invoice of reverse charge earlier and pay GST before the date of completion of project or first occupation, so that he can claim ITC, is a question which needs to be considered and clarified by CBIC.
• Computation & Reporting of ineligible ITC
  • ITC not availed should be reported every month by reporting the same as ineligible credit in Form GSTR-3B.
  • On the final computation done for the financial year, the final adjustment (excess/short) needs to be carried out in Form GSTR-3B or through Form GST DRC-03 in the month not later than the month of September following the end of financial year in which the cut-off date occurs (ie Project is completed), as follows
    • Excess ITC availed: Such excess need to be reversed along with interest @18% from 1st of April of such financial year till the date of reversal.
    • Short ITC availed: Same can be claimed as credit in the return filed not later than September following the financial year in which the cut-off date occurs (ie Project is completed).

Mode of Payment of Output Tax:

80% Condition:

The new lower GST rates on construction of residential housing or commercial units in RREP is subject to procurement of 80% of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease premiums)) from registered persons.

However, the value of the following services used in the construction of residential apartments are excluded for this calculation:

• Grant of developmental rights
• Long term lease of land
• Floor space index
• Value of electricity
• Value of high-speed diesel
• Motor spirit and natural gas
• Salary to employees (neither a good nor a service as per clause 1 of the Schedule III of CGST Act, 2017)
• Land value (as per Schedule III, Entry No 5, of CGST Act, sale of land is not a supply)

On shortfall of purchases from the 80 percent from registered dealers, builder shall be required to pay tax under reverse charge (RCM) at 18 percent, provided that on procurement of cement from unregistered dealers the rate shall be 28 percent rate and procurement of capital goods from unregistered dealers shall be liable to the applicable rate of tax. The tax liability on the shortfall of inward supplies from unregistered person would be added to his output tax liability in the month not later than the month of June following the end of the
financial year in which inputs/input services were purchased.

2.2 Transfer of DR/TDR/FSI for Construction of Residential apartments / Residential part of Mixed Project (having both Residential and Commercial Apartments)

Transfer of development rights by Landowner to Developer is treated as Supply in which Development Rights are transferred in return for consideration in kind, by way of wholly or partly, in the form of Construction Service of Complex, Building or Civil Structure (Owners apartment) and/or monetary Consideration from the Developer to the Landowner (refer Flowchart 1 above)

• Taxability:
  • Transfer of DR/ TDR/ FSI used for sale of under construction residential units is exempt
  • Taxable to the extent of unsold residential apartments on the date of issuance of completion certificate or first occupation, whichever is earlier
• Person liable to pay Tax: Promoter – Developer (to be paid under RCM)
• Input Tax Credit of tax paid under RCM by Developer – ITC not eligible
• Time of Supply / Payment of Tax (In area sharing, revenue sharing or outright purchase of DR/TDR/FSI):
  • Earlier of
    • Issuance of Completion certificate; or
    • First occupation of project
• Value of Supply (Value of DR/TDR/FSI):
  • Area sharing: value of similar apartments charged by promoter from independent buyers nearest to the date of transfer of DR/TDR/FSI;
  • Revenue sharing: monetary consideration paid to the Landowner as revenue share;
  • Outright purchase: value of monetary consideration paid for outright purchase
• GST Tax to be Paid:
  • Lower of
    • 18% on Value of DR/TDR/FSI in proportion to carpet area of such unsold residential apartments & all commercial apartments to total carpet area of residential apartments & commercial apartments; or
    • 1% / 5% of Value of such unsold apartments & all commercial apartments. Value of unsold apartments is deemed to be equal to value of similar apartments charged by the promoter nearest to
      the date of completion certificate or first occupation, whichever is earlier

2.3 Transfer of DR/TDR/FSI for Construction of Commercial apartments

Transfer of development rights by Landowner to Developer is treated as Supply in which Development Rights are transferred in return for consideration in kind, by way of wholly or partly, in the form of Construction Service of Complex, Building or Civil Structure (Owners apartment) and/or monetary Consideration from the Developer to the Landowner (refer Flowchart 1 above)

• Taxability:
  • Fully taxable
• Person liable to pay Tax: Promoter – Developer (to be paid under RCM)
• Input Tax Credit of tax paid under RCM by Developer:
  • For RREP (with Commercial portion less than 15%) – ITC not eligible
    For REP – ITC attributable to Commercial portion can be claimed
    For Commercial projects – ITC is eligible
• Time of Supply / Payment of Tax (In area sharing, revenue sharing or outright purchase of DR/TDR/FSI):
  • Area Sharing: Earlier of:
    • Issuance of Completion certificate; or
    • First occupation of project
  • Revenue Sharing:
    • SRA Projects (continuous supply of service) – Periodical release of FSI;
    • JDA projects – Date of transfer of DR/FSI irrevocably
  • Outright purchase – Date of transfer of DR/TDR/FSI
• Value of Supply (Value of DR/TDR/FSI):
  • Area sharing: value of similar apartments charged by promoter from independent buyers nearest to the date of transfer of DR/TDR/FSI;
  • Revenue sharing: monetary consideration paid to the Landowner as revenue share;
  • Outright purchase: value of monetary consideration paid for outright purchase
• GST Tax to be Paid:
  • 18% on Value of DR/TDR/FSI

2.4 Construction Service for Owner’s Apartment (aplicable only in case of Area Sharing agreement)

Developer provides Construction service to Landowner over a period. The Developer hands over the ownership rights of certain percentage of the developed area ie. Super Structures like complex, building or civil structure or apartments to the landowner (in Area Sharing JDA), referred to as Owner’s Apartment in Flowchart 1 above.

• Taxability:
  • Fully taxable
• Person liable to pay Tax: Promoter – Developer (to be paid under FCM)
• Input Tax Credit to Landowner (for tax paid under FCM by Developer):
  • Landowner would be eligible to take credit of taxes paid by him to the developer and can be availed for paying the taxes on sale of the owners apartment to his buyers before issuance of completion certificate or first occupation, whichever is earlier, sold by the Landowner independently.
  • However, as discussed before, if developer pays tax on Construction service for apartments allotted to Landlord (on FCM basis), only on completion of the project, Landowner will not be in a position to avail or utilise ITC, since Landowner cannot charge output GST on further sale of Owners apartment to buyers after completion of project in terms of Schedule III to the Act.  Thereby, it seems that even though the landowner is eligible for the credit, its utilisation is doubtful. Whether developer can raise invoice earlier and pay GST before the date of completion of project or first occupation, so that the Landowber can claim ITC, is a question which needs to be considered and clarified by CBIC.
• Time of Supply / Payment of Tax:
  • Earlier of:
    • Issuance of Completion certificate; or
    • First occupation of project
• Value of Supply (Value of Construction service for Owners Aprtments):
  • Value of similar apartments charged by promoter from independent buyers nearest to the date of transfer of DR/TDR/FSI;
• GST Tax to be Paid:
  • Developer shall pay tax on owner’s area at the time of completion certificate or first occupation, whichever is earlier. Rate of tax will be either 1%, 5% or 12% depending on whether the owners apartment is affordable Residential, Residential or Commercial unit (see Table 1 above)

Conclusion

Time will tell whether the reduced GST rates for under-construction properties will give the necessary fillip to the real estate sector which is currently witnessing adversities. The concern regarding the reduced rate of 5% and 1% is that it is offered without the ability for developers to take input tax credit, which could actually lead to an escalation of costs.

In addition, more clarity from CBIC needs to be provided on how the Landowner can avail input tax credit in respect of  the GST on construction service for Owners apartment charged by the Developer, as discussed in earlier sections, as this could also have a significant impact on price point of the apartment sold to ultimate buyers.

Disclaimer: The views, opinions and arguments presented in this article are those of the author and may not necessarily reflect legal standing. While every effort has been taken to provide correct information, the author will not be liable for any loss, expense, liability, detriment or deprivation suffered arising out of any action based on the information provided above. The readers are expected to cross-check the facts and information with government circulars and notification.

Author: CA Rahul Jain can be reached at [email protected]. More details on http://rahuljainassociates.in