Reverse Charge Mechanism (RCM) for purchase of input goods and services used in Construction of Project from the Unregistered Person

[Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019 effective from 1st April, 2019].

After a long gap, the Central Government has used its power provided under amended Section 9(4) of the CGST Act, 2017 (through CGST (Amendment) Act, 2018). In exercise of the powers conferred by Section 9(4) of the CGST Act, 2017, the Central Government notified the registered person and goods and/or services which shall be covered under RCM if received from unregistered suppliers. In this regard, the Central Government has issued a Notification No. 07/2019- Central Tax (Rate) dated 29th March 2019 which has been effective from 01 April, 2019 and will be applicable on “Promoters” only for the ‘specified supplies.

Under the said Notification dated 29th March, 2019, three kinds of supplies have been specified for which ‘promoter’ shall be liable to pay tax under reverse charge.

I. 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 28th June, 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”

Also, 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, minimum *80% of input and input services or both required to be purchased from registered person and 20% can be purchase from unregistered person. Also, if this condition gets failed, promoted has to be pay RCM on the shortfall from 80% threshold.

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.

*The condition in Notification No. 3/2019 dated 29th March 2019 specifies that 80% of inputs and input services should be procured from registered person.

To understand: Suppose a promoter purchased 60% of input and input services used in the construction of project from registered supplier. Despite he also purchased 15% Cement & 25% other input & input services from unregistered person, during financial year 2019-20.

Promoter purchased input and input services used in the construction of project from registered supplier 60%
Promoter purchased Cement used in the construction of project from unregistered person. *[He is liable to pay under RCM for total purchase of Cement from unregistered person, irrespective of % total purchase (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019)] 15%
Other purchases from unregistered person 25%
Promoter is required to purchase minimum 80% of input and input services or both required to be purchased from registered person
Shortfall from the minimum value of goods or services or both required to be purchased by a promoter

[ Liable to pay under RCM on shortfall 80% – (60% + 15%)]

5%

*Please note that even if Promoter purchased input and input services used in the construction of project from registered supplier is 82% of total purchase, then promoter is still liable to pay on purchase of cement i.e. 15% under RCM (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019).

To more understand: Suppose a promoter purchased 60% of input and input services used in the construction of project from registered supplier. Despite he also purchased 15% Cement & 12% other input & input services from unregistered person, during financial year 2019-20. He has also purchased input services on which tax is paid under reverse charge under Section 9(3) of the CGST Act.

Promoter purchased input and input services used in the construction of project from registered supplier. 60%
Promoter purchased Cement used in the construction of project from unregistered person. [He is liable to pay under RCM for total purchase of Cement from unregistered person, irrespective of % total purchase (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019)]. 15%
Input services on which tax is paid under reverse charge under Section 9(3) of the CGST Act. 13%
Other purchases from unregistered person. 12%
Promoter is required to purchase minimum 80% of input and input services or both required to be purchased from registered person.
Shortfall from the minimum value of goods or services or both required to be purchased by a promoter

[ Liable to pay under RCM on shortfall 80% – ( 60% + 15%+13% )]

NIL

*Please also note that inputs and input services on which tax is paid by promoter under reverse charge under Section 9(3) of CGST Act shall be deemed to have been procured from registered person.

Please also note that input & input services from composition dealer shall be considered as purchase from registered person paying taxes under composition scheme.

Please also note that the calculations of shortfalls are to be done financial year-wise. The excess % of purchased from registered suppliers in a financial year cannot be adjusted in a next financial year.

Caution:

Inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating threshold of 80% – FAQ (Part II- issued by CBI&C vide Circular F No. 354/32/2019-Tax Research Unit dated 14-5-2019)

Expenditure such as salaries, wages etc should not be considered in calculating the 80% threshold of input and input services because these are not supplies under GST Schedule III. [ FAQ(II)-Real-estate-sector-1405]

GST Rate: The GST Rate is 18% even if the actual rate of GST in case of some of inputs or input services is lower than 18% – (Sr No. 452Q of Schedule III of Notification No. 08/2019-CT (R) dated 28-6-2017 as inserted w.e.f. 1-4-2019.)

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) 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 28th June, 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”

The Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019 has amended the category of Cement from Notification No. 07/2019- Central Tax (Rate).

“Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975).”

In simple terms: As per Notification No. 24/2019-Central Tax (Rate) dated 30 September, 2019 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 at point 1 above i.e. on any purchase from unregistered person, RCM is applicable. At present GST Rate of Tax for cement is 28%. This tax will be paid under RCM in the same month of purchase.

After considering payment of GST on cement under reverse charge (if any), at least 80% of the procurement of inputs and input services used in supplying the real estate project service shall be received from registered supplier only. In case requirement of procurement of 80% from registered suppliers is not achieved, and there is a shortfall in procurement from registered supplier, GST @18% is payable on value to the extent of shortfall.

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 28th June, 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), “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.

To understand: Suppose a promoter purchased 82% of input and input services used in the construction of project from registered supplier. Despite he also purchased 05% Cement & 03% other input & input services from unregistered person, during financial year 2019-20. He has also purchased 10% capital goods from unregistered person during financial year 2019-20.

Promoter purchased input and input services used in the construction of project from registered supplier. 82%
Promoter purchased Cement used in the construction of project from unregistered person. [He is liable to pay under RCM for total purchase of Cement from unregistered person, irrespective of % total purchase (see Notification No. 24/2019-Central Tax (Rate) dated 30.09.2019)]. 05%
Capital Good purchased from unregistered person. 10%
Other purchases from unregistered person. 03%
Promoter is required to purchase minimum 80% of input and input services or both required to be purchased from registered person.
Shortfall from the minimum value of goods or services or both required to be purchased by a promoter

[ Liable to pay under RCM on shortfall 80% – (82% + 05% +10%)]

[However, Promoter is liable to pay GST under RCM on purchase of Cement and Capital Goods in spite of his purchased from registered supplier exceeds from minimum value of 80%]

NIL

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.

Note: Please also refer to our Article on Reverse Charge Mechanism (‘RCM’) in case of purchase from unregistered supplier published on 28th July, 2020 at Taxguru.in at below link-

Reverse Charge Mechanism (‘RCM’) in case of purchase from unregistered supplier

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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