Real Estate and Under Construction Property in GST Regime

[A] UNDER CONSTRUCTION PROPERTY

In existing indirect tax structure the following taxes are involved for construction of flats, complex, building etc.:

INWARD / INPUT

Central Excise duty is payable on most of the construction material @12.5%.

VAT is payable on construction material ranging from @12.5% to 14.5%.

Service Tax @ 12%

OUTWARD / OUTPUT

Service Tax on Construction Activity @4.5% (After Abatement)

VAT on Construction of flats etc. @ 1% to 2% (Vary from state to state)

However, Input Tax Credit of the above taxes is nor currently allowed for payment of Service Tax nor VAT. Thus, there is cascading of input taxes on constructed property.

As a result, incidence of Central Excise duty and VAT on construction material is also currently borne by the developers, which they pass on to the customers as part of the price charged from them. This is not visible to the customer as it forms a part of the cost of the flat.

Under GST, though the rate of Construction activity is 12% as compared to the existing 4.5% (5.5% in case 1% VAT is added) but full input tax credit would be available under GST Law which not only eliminate the cascading effect but also reduce the cost of the constructed property.

This is the one part of the story. Now we’ll explain the second part i.e Post GST Issues. Broadly we have categorized the issues in the following three aspects which are likely to affect not only the home buyers but also the developers are worried about it:

1. Ongoing Projects
2. Completed Projects
3. Future Projects

1. ONGOING PROJECTS

BUYERS’ POINT

For home buyers, there are lots of questions and confusions are moving around. Like, Many people have booked under construction property and paid just a token money and in many cases 50% have been paid or even more. Whether, after GST, the price of the property they have booked or the balance amount/installments to be paid for such property will remain same or will it increase with the increase of rate of tax.

In my opinion, all the above issues are nothing but a transitional error i.e problems arising due to shifting from existing tax regime to GST Era. It seems very difficult to answer all these questions at this stage. These issues will continue until and unless the Government has come out with some specific mechanism and clarification to short out the things.

One clarity has been issued by the CBEC on 15.06.2017 with the subject “Reduced Liability of Tax on complex, building, flat etc. under GST” and said that the overall incidence will remain unchanged as input tax credit will accrue to the developers, a copy of same is enclosed herewith. But the people are expecting some more specific clarity on the subject.

DEVELOPERS’ POINT:

Any invoice issued by the developers on or after 1^st July, 2017 will contain 12% tax rate without availment of input tax credit of excise duty and VAT which they have already paid on all construction materials which was bought and used in the projects pre GST. However, post GST, if they purchase materials for rest of the projects and pay tax on such materials then they will be entitle to claim full input tax credit and adjust the same with output tax liability.

2. COMPLETED PROJECTS

If completion certificate has been received for a completed Projects then neither Service Tax nor GST will be levied. In any other cases there shall be levy of 12% GST if properties are booked after GST implementation. The developers will charge 12% tax instead of existing 5.5% (4.5% Service Tax and 1%-2% VAT), and even they will not be eligible to claim input tax credit of all the taxes which they have paid for such projects. For sure this situation may lead to increase in the price of the property as one side developers are paying higher rate of tax and on another side they are not eligible to claim input tax credit. If the Government does not come out with any clarity, the developers may increase the price of such projects or they will wait for completion certificate.

3. FUTURE PROJECTS

For future projects which are going to launch post GST, it is expected that the position shall be much clear till that time. The GST Rate shall be 12% with full benefits of input tax credit availment in the hands of developers.

The Tax rate on Construction Materials i.e on Cement is 28%, on Steel – 18%, On Input Service Tax (works contract etc.) is 18% and so on, but the output tax libility is only 12% for construction activity. It shows that there shall be huge input tax credit in the electronic ledger of a developer but unfortunately he is not entitle to get refund of overflow of input tax credit.

Further, as the stamp duty has not been subsumed in GST and it is still going to levy parallely with the GST on Construction property.

[B] OTHER REAL ESTATE ACTIVITIES WITH 18% LEVY

There shall be levy of 18% of Tax on the following services connected with Real Estate industries:

(a) any lease, tenancy, easement, licence to occupy land

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly.

(c) renting of immovable property;

(d) renting of rooms where charges are Rs 1000/- or more per day;

(e) renting of premises, community halls, kalyanmandapam or open area, etc where charges are Rs 10,000/- or more per day;

(f) renting of shops or other spaces for business or commerce where charges are Rs 10,000/-or more per month.

However, Sale of land and sale of building will neither be treated as a supply of goods nor a supply of services and will be out of the ambit of GST.

Further, the exemption for the projects approved under ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India, Pradhan Mantri Awas Yojana (PMAY) etc. shall continue under GST Regime as it is in the existing tax structure.