How to pay RCM by a Real Estate Promoter or developer on the shortfall in procurement from Registered Persons?

Notification 03/2019 Central Tax (Rate)  dated 29th March 2019 brought in yet another major change which had a huge impact on the real estate sector. Though the buyers of the flat saw this as a huge relief as tax rates were apparently slashed from 18% to 1.5%/7.5%, they did not realize the fact that ITC on the materials and services procured by the promoter were no longer available to them.

However the promoters who were also happy with the lowering of the taxes as they  felt that these would help in offtake of the flats, they also felt that they had do some deep study of the notification to understand the impact of the same on the operation and regulation of the real estate sector.

Today I am going to share about one such area which the real estate sector needs to take care every year. It is regarding payment of GST by real estate promoter/developer supplying construction of residential apartment  on the  shortfall of the value of   inward supplies from registered supplier at the end of the financial year.

Wef 1/4/2019 Supply of Construction of residential apartments other than for which entire consideration was received after the completion certificate was taxable as per following:

Affordable Housing Other than Affordable Housing Ongoing Projects
Actual GST Rate – 1.5% Actual GST Rate – 7.5% Actual GST Rate – 18%
Effective GST Rate – 1% Effective GST Rate – 5% Effective GST Rate – 12%
ITC – Cannot be availed ITC – Cannot be availed ITC – Can be Availed

However amongst other conditions some of the condition for availing rates of 1%/5% as per  NN 11/2017 ( as amended)  put against entry (i, ia, ib,ic and id) in serial number 3 in the table are

“Provided also that 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

Provided also that 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

Provided also that notwithstanding anything contained herein above, where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates 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 such supply of cement;

In the recent past we got some queries relating to this through different forums. Hence I am attempting to clarify some FAQs through this article.

FAQ 1 How do we ascertain the amount of tax payable on RCM basis?
FAQ 2 What is the rate applicable for payment under RCM?
FAQ 3 When  the payment has to be made?
FAQ 4 How will the payment be made ?
FAQ 5 Under which section the payment under RCM has to be made?
FAQ 6 Which is the form prescribed for submitting the calculations?
FAQ 7 Will I have to submit the form even if I have no shortfall?

#FAQ1  How do we ascertain the amount of tax payable on RCM basis?

SCENARIO 1 : More than 80% procured from Registered Person

A promoter has procured following goods and services [other than capital goods and services by way of grant of development rights, long term lease of land or FSI] for construction of a residential real estate project during a financial year.

Sl. No. Name of input goods and services Percentage of input goods and services received during the financial year Whether inputs received from registered supplier?

(Y/ N)

1 Sand 10 Y
2 Cement 15 Y
3 Steel 25 Y
4 Bricks 10 Y
5 Flooring tiles 10 Y
6 Paints 10 Y
7 Architect/ designing/ CAD drawing etc. 5 N
8 Aluminium windows, Ply, commercial wood 15 N
100

So here the promoter has procured 80% of the goods and/or 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], from a Registered Person. So here he will have not have to pay GST  under RCM since he has purchase goods other than Cement from unregistered person upto a limit of 20%.

Scenario  2 : More than 80% procured from Registered Person but Cement purchased from Unregistered Person.

Sl. No. Name of input goods and services Percentage of input goods and services received during the financial year Whether inputs received from registered supplier?

(Y/ N)

1 Sand 10 Y
2 Cement 20 (10 –Y, 10 –N)
3 Steel 15 Y
4 Bricks 10 Y
5 Flooring tiles 10 Y
6 Paints 10 Y
7 Architect/ designing/ CAD drawing etc. 10 Y
8 Aluminium windows, Ply, commercial wood 15 Y
100

So here the promoter has procured more than 80% of the goods and/or 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], from a Registered Person. But since he has purchased a portion of the cement (10% of total) from unregistered person, so he will have to pay GST  under RCM at applicable rates.

Scenario 3 : Less than 80% procured from Registered Person  ( RTP)

Sl. No. Name of input goods and services Percentage of input goods and services received during the financial year Whether inputs received from registered supplier (RTP)?

(Y/ N)

1 Sand 10 N
2 Cement 10 N
3 Steel 15 Y
4 Bricks 10 Y
5 Flooring tiles 10 Y
6 Paints 15 Y
7 Architect/ designing/ CAD drawing etc. 10 Y
8 Aluminium windows, Ply, commercial wood 20 N
100

In this scenario the promoter has procured less than 80% of the goods and/or 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], from a Registered Person. So the final RCM calculations shall be as follows

Total Mandatory Purchase from Registered Persons A   80
Less : Compulsory RCM on Cement B   10
Less :  Procurement made from Registered Persons C   60
Shortfall of Procurement from Registered Person ( A-B-C) D   10

Here since RCM on Cement is compulsory the promoter will have to pay RCM on the same at applicable rates. And on the balance shortfall also RCM has to be paid.

# FAQ 2 : What is the rate applicable for payment under RCM?

I would like to reproduce the second and third proviso again for the sake of clarity as they have a bearing on rates.

Provided also that notwithstanding anything contained herein above, where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates 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 such supply of cement;

Provided also that 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

Author’s Note – On a combined reading of the above two provisions it can ascertained that on Cement purchased from Unregistered person, rate of cement will be applicable and on the balance shortfall tax rate of 18% will be applicable. 

# FAQ 3:  When  the payment has to be made?

As discussed above the promoter will have to pay the tax under reverse charge basis on purchase of cement from Unregistered person and/or for any shortfall of purchase below the mandatory limit of 80%.

Here I would like to reproduce the two explanations as provided against entry (i, ia, ib, ic and id) against serial no 3 of NN 11/2017 CTR ( as amended)

1. The promoter shall maintain project wise account of inward supplies from registered and unregistered supplier and calculate tax payments on the shortfall at the end of the financial year and shall submit the same in the prescribed form electronically on the common portal by end of the quarter following the financial year. 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.

2. Notwithstanding anything contained in Explanation 1 above, tax on cement received from unregistered person shall be paid in the month in which cement is received.

So from the above two explanations it can be derived that

Tax on Cement received from Unregistered Person Month in which cement is received
Tax liability on the shortfall of inward supplies from unregistered person ( other than Cement) Month of June following the end of the financial year. **

**However for FY 2019-20 vide NN 35 and 55 the due date for this compliance is extended till 31/08/20.

# FAQ 4 : How will the payment be made ?

As per para 4 of   Instruction No. 3/2/2020- GST dated 24th June 2020 issued by TRU

“It has been decided that FORM GST DRC-03, as already prescribed, shall be used for making the payment of such tax by promoter/developer. Accordingly, person required to pay tax in accordance with the said notification on the shortfall from threshold requirement of procuring input and input services (below 80%) from registered person shall use the form DRC-03 to pay the tax electronically on the common portal within the prescribed period.”

So on the basis of the above instructions the payment has to be made through DRC 03 for the shortfall. However since the same was not known to many registered persons they may have added the same to their output liability and discharged their liability. So in  the opinion of the author in that case you would need to intimate the Proper officer about the payments already made towards this liability through your returns along with the calculation for the shortfall.

# FAQ 5 : What is the section that has to be mentioned in DRC 03 for payment of the tax under RCM?

Reply : As per NN 7/2019 CTR the promoter shall pay tax on the supplies received from an unregistered supplier  on reverse charge basis as recipient of such goods or services or both and payments for the shortfall will have to be made under section 9(4) of CGST Act, 2017. So the same has to be chosen as Section while filing the DRC 03 and the reason would be shortfall in procurement from registered suppliers.

# FAQ 6 : As per the explanation 1 mentioned in FAQ 3 above,  we need to  calculate tax payments on the shortfall at the end of the financial year and shall submit the same in the prescribed form electronically on the common portal by end of the quarter following the financial year. Which is the form prescribed for the same. 

Reply : As mentioned in the FAQ 4, that as per the instruction dated 24th June 2020 we would need to make the payment of taxes vide DRC 03. So since no separate form has been provided for intimation of the calculations for short payments, in the opinion of the author the same form DRC 03 has to be used to submit the relevant information.

#FAQ 7 : We calculated the procurements made from registered and unregistered persons project wise and we have not purchased cement from unregistered person and we also don’t have any shortfall in procurement from registered persons. Do we still need to file any form? 

Reply : As per the explanation 1 to the entry (I, ia, ib,ic and id)  of NN 3/2019 as mentioned above

The promoter shall maintain project wise account of inward supplies from registered and unregistered supplier and calculate tax payments on the shortfall at the end of the financial year and shall submit the same in the prescribed form electronically on the common portal by end of the quarter following the financial year.

So from the above explanation it can derived that the statement has to be furnished only if there is a shortfall at the end of the financial year. Hence if there is no shortfall the requirement to furnish any statement will not arise. Moreover since the information has to be given along with the DRC 03 payments, if you don’t have any liability you cannot file DRC 03.

Disclaimer : The article is purely for educational purpose of the reader and has no legal validity. Hence no liability shall arise to the author whatsoever for relying on the above. Thanks for sharing the  suggestions relating to subjects  articles, by mailing me at dgarup@gmail.com. However due to paucity of time will be taking them one by one. Till then you can enjoying reading and please do keep sharing your suggestions either on mail or  in the comments section.

Author Bio

Qualification: CA in Practice
Company: ARUP DASGUPTA
Location: kolkata, West Bengal, IN
Member Since: 11 Jun 2020 | Total Posts: 3

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One Comment

  1. TRINADHA RAO MARISETTY says:

    Nicely presented on the issue in the subjected topic. Thanks to the author as well as taxguru for providing platform for the views of authors and knowledge to readers

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