Purchase of ‘Input and Input Services’ for construction from unregistered supplier and RCM liability
Summary: The GST regime mandates that promoters in the real estate sector procure at least 80% of their input and input services from registered suppliers to qualify for concessional tax rates. If this threshold isn’t met, the promoter must pay tax on the shortfall under the Reverse Charge Mechanism (RCM) at 18%, except for services like grant of development rights, long-term lease of land, or additional Floor Space Index (FSI). Cement, if purchased from unregistered suppliers, attracts a GST of 28%, regardless of the 80% rule. Promoters are required to track project-wise purchases from both registered and unregistered suppliers and account for any tax shortfall by the end of the financial year. Additionally, monthly reporting of ineligible Input Tax Credit (ITC) through GSTR-3B is mandatory. This mechanism ensures accountability and tax compliance in real estate projects while discouraging reliance on unregistered suppliers.
To give effect the new tax rate as decided by the GST Council in its 34th meeting held on 19th March 2019, it was necessary to amend the existing Notification, if any, already issued by the Central Government to notify GST rate on various ‘services’. We all know that the Central Government has already issued a Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017 [i.e. Notification for CGST Rate on ‘Services’] for intra-state supply of certain services and Notification No. 1/2017- Central Tax (Rate) dated 28.06.2017 [i.e. Notification for CGST Rate on ‘Goods’] for intra-state supply of certain goods.
So to give effect of the GST Council recommendations, the Central Government amended Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017 through Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019, Accordingly, Serial No. 3 [Heading 9954 (Construction Services)] for item (i), and the entries relating thereto in column (3), (4) and (5), item (i) to (if) was substituted, in Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017 to include the new rate for real estate sector/transaction subject to some conditions.
Now, in this chapter, we are going to talk about some conditions in respect to purchase of ‘input and input services’ from unregistered dealers by Promoter, except TDR/FSI/Long term lease of land (Premium) and tax liability thereon shall be discharged under RCM basis.
Purchase of input and input services from unregistered dealers by Promoter [Except TDR/FSI/Long term lease of land (Premium)]
In the conditions of availing concessional tax rate (i.e. New GST Tax Rate for Real Estate Project) of which is provided in Item No. (i) to (id) in Serial No. 3 of amended Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017 through Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019, it is one condition that 80% 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.
It is further provided 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%, tax shall be paid by the promoter on value of input and input services comprising such shortfall at the rate of 18% on RCM basis and all the provisions of the CGST Act, 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.
Further, it is also provided that ‘inputs and input services’ on which tax is paid on reverse charge basis shall be deemed to have been purchased from registered person.
It is also provided 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 (i.e. presently it is 28%) on RCM basis and all the provisions of the CGST Act, 2017, shall apply to him as if he is the person liable for paying the tax in relation to such supply of cement. [Please refer to the illustrations in Annexure III provided in Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019,.
Explanation. –
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.
3. Input Tax Credit not availed shall be reported every month by reporting the same as ineligible credit in GSTR-3B [Row No. 4 (D)(2)].
Notified registered person who shall pay tax on RCM basis on certain specified supplies of goods or services or both received from an unregistered supplier.
It is pertinent to mention that a power has been given to the Central Government under Section 9(4) of the CGST Act, 2017 to specify the ‘class of registered person’ who will pay the tax on RCM basis in respect to supply of ‘specified categories of goods or services or both’ from an unregistered person. The provisions of Section 9(4) of the CGST Act, 2017 may be read as under-
#“(4) The Government may, on the recommendations of the Council, by notifications, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.”
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# Substituted by the CGST (Amendment) Act, 2018 (31 of 2018), dated 30-08-2018, w.e.f. 01-02-2019 vide Notification No. 02/2019-Central Tax, dated 29-01-2019. Prior to substitution, sub-section (4) read as under:
“(4) The central tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.”
Earlier i.e. before amendment, the provisions of Section 9(4) of the CGST Act, 2017 deals with the applicability of RCM, wherein, the goods or services or both is being procured by the registered person from the unregistered person.
Due to its wide implication, the said provisions have already undergone various amendments, however, the entire provisions of section 9(4) has been substituted by the CGST (Amendment) Act, 2018 vide published in Official Gazette on 29th August 2018.
However, it is pertinent to note that the new provisions of Section 9(4) of the CGST Act, 2017 were not notified till 29th January 2019. But later on, the new provisions of Section 9(4) of CGST Act, 2017 have been notified by the Notification No. 02/2019-Central Tax, dated 29-01-2019 notifying the CGST (Amendment) Act, 2018 w.e.f. 01.02.2019.
By perusal of the said amended section, we can understand that the provisions of Section 9(4) of the CGST Act, 2017 is not applicable to all registered persons, goods and services. It is applicable only to selected categories of registered persons & goods and services which has to be notified by the Government.
After a long gap, the Central Government has used its power provided under amended Section 9(4) of the CGST Act, 2017. By Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019, w.e.f. 1st April, 2019, the Central Government notified the registered persons and goods and /or services which shall be covered under RCM if received from unregistered suppliers. This notification prescribes the category of service-recipient and goods which shall be covered under section 9(4) of the CGST Act, 2017 on which tax shall be paid by the developer (under RCM basis). This notification will be applicable “Promoter” only for the ‘Specified supplies’.
It is pertinent to mention that under the said Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019, three kinds of supplies have been specified for which ‘promoter’ shall be liable to pay tax under reverse charge.
1. For Input and input Service for Construction of Project:
If ‘Promoter’ (Recipient) purchased input goods and services used in the construction of project from the unregistered person, the he is liable to pay GST under RCM on the supplies made from unregistered supplier under Section 9(4) of CGST Act, 2017. In respect of shortfall from the minimum value of goods or services or both required to be purchases for construction of project.
Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019 prescribes that-
“Supply of such goods and services or both [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)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended”
It is to be noted that the term used in the notification “shortfall from the minimum value of goods or services or both required to be purchased by a promoter” means, the conditions as prescribed in Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3.
As mentioned above that in the conditions of availing concessional tax rate (i.e. New GST Tax Rate for Real Estate Project) of which is provided in Item No. (i) to (id) in Serial No. 3 of amended Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017 through Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019,, it is one condition that 80% 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.
Minimum value for the purpose is prescribed as 80% of the value of input & Input Services. However, value of input 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) are excluded for calculating 80% procurement limit.
It is further provided 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 18% on RCM basis and all the provisions of the CGST Act, 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. 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.
Further Notification No. 08/2019-Central Tax (Rate) dated 29th March, 2019 has been issued to specify the rate of tax to be paid by the developer of receipt of goods (other than capital goods and cement falling under chapter heading 2523 of the custom tariff act) from the unregistered dealers.
We know that through Notification No. 1/2017- Central Tax (Rate) dated 28.06.2017 the Central Government has already notified CGST rate of certain goods. A new serial number 452Q in Schedule III-9%, has been added through this Notification No. 08/2019-Central Tax (Rate) dated 29th March, 2019.
“Supply of any goods other than capital goods and cement falling under chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975), by an unregistered person to a promoter for construction of the project on which tax is payable by the promoter as recipient of goods under sub- section 4 of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), as prescribed in Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019, published in Gazette of India vide G.S.R. No. _, dated 29th March, 2019.”
Accordingly, GST rate was fixed 18% (9% CGST +9% SGST) on supply of any goods by an unregistered person to a promoter for construction of the project. This rate is not applicable to capital goods and cement falling under chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975).
2. For Purchase of Cement:
Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019 prescribes that-
“Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975).”
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# substituted by Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019, w.e.f. 01.10.2019. Prior to substitution, it read as under:
#“Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017, at items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended”
It is pertinent to mention that this Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019 was amended through Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019. by this amendment, RCM will be applicable on any amount of purchase of ‘Cement’ by the “promoter” from an unregistered supplier for the construction of project during the financial year, irrespective of the condition of 20/80%, as in case of input goods and services as mentioned above i.e. on any purchase from unregistered person.
As already mentioned above that in the conditions of availing concessional tax rate (i.e. New GST Tax Rate for Real Estate Project) of which is provided in Item No. (i) to (id) in Serial No. 3 of amended Notification No. 11/2017- Central Tax (Rate), dated 28-06-20177 through Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019,, it is provided that where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates (i.e. presently 28%) on RCM basis and all the provisions of the CGST Act, 2017, shall apply to him as if he is the person liable for paying the tax in relation to such supply of cement. [Please refer to the illustrations in Annexure III provided in Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019,. Further, tax on cement received from unregistered person shall be paid in the month in which cement is received.
3. For Purchase Capital goods:
Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019 prescribes that-
“Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in Notification No. 11/2017- Central Tax (Rate), dated 28-06-2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.”
As per Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019, “promoter” is liable to pay GST under RCM for purchase of any capital goods from any unregistered supplier for construction of project during the financial year.
For the purpose of this notification i.e. Notification No. 07/2019-Central Tax (Rate) dated 29th March, 2019, –
(i) the term “promoter” shall have the same meaning as assigned to it in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
(ii) “project” shall mean a Real Estate Project (REP) or a Residential Real Estate Project (RREP);
(iii) the term “Real Estate Project (REP)” shall have the same meaning as assigned to it in in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
(iv) “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.
(v) the term “floor space index (FSI)” shall mean the ratio of a building’s total floor area (gross floor area) to the size of the piece of land upon which it is built.
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