Real Estate & Joint Development Agreement under GST

This Article contains provisions in regard of Real Estate and Joint Development Agreement which are applicable from 01-04-2019. It is presumed that all constructions and agreements are effected after 01-04-2019 and there is no case of ongoing project.

Index for this Article:

A. Definitions

B. Supply under Real Estate Business

C. Valuation of Supply under Real Estate.

D. Rate of Tax under Real Estate and payment of GST

E. Input Tax Credit on Real Estate

F. RCM under section 9 (4) and under section 9 (3) of CGST Act wherein the Recipient is Promoter – Notification 07/2019 and Notification 05/2019

G. Joint Development Agreement

H. Important Notifications effected from 01-04-2019

A. Definitions

To understand this article we should have knowledge about following terms being used in GST.

Affordable Residential Apartment – According to Notification 11/2017 Central(Rate)

“a residential apartment in a project which commences on or after 1st April, 2019, having carpet area not exceeding 60 square meter in metropolitan cities or 90 square meter in cities or towns other than metropolitan cities and for which the gross amount charged is not more than forty five lakhs rupees.

For the purpose of this clause,—

(i) Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their respective geographical limits prescribed by an order issued by the Central or State Government in this regard;

(ii) Gross amount shall be the sum total of:—

A. Consideration charged for the services specified at items (i) and (ic) in column (3) against Sl. No. 3 in the Table;

B. Amount charged for the transfer of land or undivided share of land, as the case may be, including by way of lease or sub- lease; and

C. Any other amount charged by the promoter from the buyer of the apartment including preferential location charges, development charges, parking charges, common facility charges, etc.

Floor Space Index (FSI) – According to Notification 06/2019 Central (Rate) 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.

Promoter: According to Notification 06/2019 Central (Rate) the term “promoter” shall have the same meaning as assigned to it in in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016). In nut-shell Promoter is a person who constructs the building or apartment for sale in general public.

Real Estate: There is no any definition of “ Real Estate” available in GST as well as in RERA. But in common parlance and dictionary meaning Real Estate means the business of selling houses or land for building.

Real Estate Project (REP): According to Notification 06/2019 Central (Rate) 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).

Section 2 (zn) – “real estate project” means the development of a building or a building consisting of apartments, or converting an existing building or a part thereof into apartments, or the development of land into plots or apartment, as the case may be, for the purpose of selling all or some of the said apartments or plots or building, as the case may be, and includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto;

Residential Real Estate Project (RREP):   According to Notification 06/2019 Central (Rate) 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.

B. Supply under Real Estate Business

Supply under Real Estate Business is construction services. The CGST Act ( as per para 5 (b) of Schedule II ) the following activities in regard of construction shall be treated as services:

“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.

Explanation.—For the purposes of this clause—

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:—

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972) ; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure”

C. Valuation of Supply under Real Estate. 

According to paragraph 2 of Notification 11/2017 Central(Rate)

” In case of supply of service involving transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.

Explanation.—For the purposes of this paragraph and paragraph 2A below, “total amount” means the sum total of,—

(a) consideration charged for aforesaid service; and

(b) amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sub-lease.

D. Rate of Tax under Real Estate and payment of GST

Sl.No.	Description of Service	Rate (percent)	Condition
1	Construction of affordable residential apartments by a promoter in a Residential Real Estate Project (herein- after referred to as RREP) which commences on or after 1st April, 2019	0.75	ITC not available
2	Construction of residential apartments other than affordable residential apartments by a promoter in an RREP which commences on or after 1st April, 2019	3.75	ITC not available
3	Construction of commercial apartments (shops, offices, godowns, etc.) by a promoter in an RREP which commences on or after 1st April, 2019	3.75	ITC not available
4	Construction of affordable residential apartments by a promoter in a Real Estate Project (hereinafter referred to as REP) other than RREP, which commences on or after 1st April, 2019	0.75	ITC not available
5	Construction of residential apartments other than affordable residential apartments by a promoter in a REP other than a RREP which commences on or after 1st April, 2019	3.75	ITC not available
6	Commercial apartments (shops, offices, godowns, etc.) by a promoter in a REP other than RREP;	9	ITC available
Valuation in respect to the aforesaid services shall be determined as per paragraph 2 of Notification 11/2017. The same is stated in para C as above.

New Rate in Real Estate in common parlance is generally said as under:

1. Affordable Project    –           1%

2. Non-Affordable Project –    5%

But in the table of Notification 11/2017 the rate is 1.5% for Affordable Project and Non-Affordable Project it is 3.5%.

To arrive at rate 1% and rate 5% the following example will be helpful:

Total Consideration Charged for Affordable House – 24 lakh
Net Value after deducting value of Land by 1/3^rd of total value – 16 lakh
Tax on Rs.16 lakh @ 1.5% – 24000.00
Tax rate stand on total value Rs.24 lakh – 1% ( 24000/2400000*100 )

Total Consideration Charged for Affordable House – 72 lakh
Net Value after deducting value of Land by 1/3^rd of total value – 48 lakh
Tax on Rs.48 lakh @ 7.5% – 360000.00
Tax rate stand on total value Rs.72 lakh – 5% ( 360000/7200000*100 )

Thus GST rate in common parlance is spoken on gst charged on total value which includes land value also.

Payment of GST –

Tax shall be paid in cash only on such supply on which applicable new rates are 1% or 5%.

E. Input Tax Credit on Real Estate

Input Tax Credit is not allowed on which new rates are applicable :

1. Affordable REP residential projects on which rate is 1%

2. Affordable RREP residential projects on which rate is 1%

3. Non-Affordable REP residential projects on which rate is 5%

4. Non-Affordable RREP residential projects on which rate is 5%

5. RREP commercial projects on which rate is 5%

Other Conditions in regard of Input Tax Credit

1. 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.

2. The amount in account of Reverse Charge shall be deemed to have purchase from registered person.

3. Inward supplies of exempted goods/services shall be included in value of unregistered persons while calculating 80% threshold.

4. Tax on short-fall in account of 80% shall be paid by the Promoter @ 18% on such short value.

5. Such short value does not include value of cement if the same had been purchased from unregistered person. The promoter shall pay @ 28% on cement as reverse charge. Thereafter such cement value shall be added to value to be determined for the purpose of 80% threshold.

6. 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.

7. Notwithstanding anything contained in Explanation 5 above, tax on cement received from unregistered person shall be paid in the month in which cement is received. The rate of tax on cement is 28%.

8. 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)].

Illustrations as notified in Annexure III to Notification 11/2017 are as under:

Illustration 1:

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

In this example, the promoter has procured 80 per cent of goods and 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 GST registered person. However, he has procured cement from an unregistered supplier. Hence at the end of financial year, the promoter has to pay GST on cement at the applicable rates on reverse charge basis.

Illustration 2:

A promoter has procured following goods and 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], 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	20	Y
4	Bricks	15	Y
5	Flooring tiles	10	Y
6	Paints	5	N
7	Architect/designing/CAD drawing etc.	10	Y
8	Aluminium windows, Ply, commercial wood	15	N

In this example, the promoter has procured 80 per cent of goods and services including cement from a GST registered person. However, he has procured paints, aluminium windows, ply and commercial wood, etc., from an unregistered supplier. Hence at the end of financial year, the promoter is not required to pay GST on inputs on reverse charge basis.

Illustration 3:

A promoter has procured following goods and 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], 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 procured from registered supplier? (Y/N)
1	Sand	10	N
2	Cement	15	N
3	Steel	15	Y
4	Bricks	10	Y
5	Flooring tiles	10	Y
6	Paints	5	Y
7	Architect/designing/CAD drawing etc.	10	Y
8	Aluminium windows	15	N
9	Ply, commercial wood	10	N

In this example, the promoter has procured 50 per cent of goods and services from a GST registered person. However, he has procured sand, cement and aluminium windows, ply and commercial wood, etc., from an unregistered supplier. Thus, value of goods and services procured from registered suppliers during a financial year falls short of threshold limit of 80 per cent. To fulfil his tax liability on the shortfall of 30 per cent from mandatory purchase, the promoter has to pay GST on cement at the applicable rate on reverse charge basis. After payment of GST on cement, on the remaining shortfall of 15 per cent, the promoter shall pay tax @ [ 18 (9 + 9) ] per cent under RCM.

F. RCM under section 9 (4) and under section 9 (3) of CGST Act wherein the Recipient is Promoter – Notification 07/2019 and Notification 05/2019

S.No.	Category of Supply of goods and services	Applicable Section
1	Short Fall of goods and services in account of 80% as to be procured from registered suppliers in a financial year or part of financial year till the date of issuance of completion certificate or first occupation whichever is earlier.* For example the value of 80% stand at Rs.50000.00 but the promoter has only procured such supply of Rs.40000.00. On balance of Rs.10000.00 tax shall be paid @ rate of 18% i.e. 1800.00.	Section 9 (4)
2	Cement falling in chapter heading 2523 in the first schedule to Custom Tarrif Act, 1975.*	Section 9 (4)
3	Capital Goods*	Section 9 (4)
*	Please note above supply of goods and services should be in relation to construction services on which rates has been reduced w.e.f.01-04-2019 as stated in items ( i ), ( ia ), ( ib ), ( ic ) and ( id ) against serial number 3 in the table of Notification 11/2017.
4	Services supplied by any person by way of Transfer of Development Rights or Floor Space Index (FSI) (including additional FSI) for construction of a project.	Section 9 (3)
5	Long Term lease of land (30 years or more) by any person against consideration in the form of upfront amount (called as premium, salami, cost price, development charges or by any other name) and/or periodic rent for construction of a project	Section 9 (3)

G. Joint Development Agreement

There is mainly two persons involved:

(1) – Land Owner

(2) – Promoter or Builder

Following Supplies involved:

(1) – Transfer of Development Rights (TDR) or FSI etc. from Land Owner to the Promoter.

(2) – Construction Services by the Promoter for:

(i) Land Owner

(ii) End Consumer

(3) – Construction Services by the Land Owner for End Consumer

GST Tax Liability for following Supply

(1) – On Development Rights of the Promoter under RCM

(2) – For construction services by the Promoter and Land Owner towards their respective supplies.

NIL rate of tax on Development Rights if construction services is for Residential Apartments.

Tax Payable on Development Rights –  If constructions services is for commercial apartments.

And Tax payable on such proportion of value of Development Rights as is attributable to the residential apartments, which remain un-booked on the date of issuance of completion certificate, or first occupation of the project, as the case may be.

The tax payable on such un-booked apartments shall be calculated on proportionate basis. Such payable tax should not be exceed to tax @ 1% for affordable apartments or tax @ 5% for non-affordable apartments.

Time of Supply for the above transactions shall be on the date of issue of completion certificate or first occupation of the project, as the case may be.

For Example –

There is an agreement dated 01-06-2019 between the Land Owner and the Promoter for constructing non-affordable 10 residence flats. Out of ten Flats the Land Owner share is for 5 flats and the Promoter Share is for 5 flats.

The Promoter books the first flat on 01-07-2019 for Rs. 2 crore.

Now Developmet Rights value will be Rs.10 crore ( 5 X 2 crore )

Since the Agreement is for construction of residence flats, the Promoter is not required to pay GST on RCM basis on value of Development Rights.

But on the date of issuance of completion certificate there is two un-booked flat out of share of the Promoter

Now the liability to pay GST upon the Promoter arise for Development Rights for un-booked flat.

Value for Development Rights for un-booked flat shall be 4 crore. It is supposed that value of booked flat near to date of completion certificate was still Rs.2 crore.

Total Tax payable @ rate 18% on total value Rs.10 crore of Development Rights shall be Rs.1,80,00,000.00.

Tax Payable on un-booked flats in account of Development Rights shall be Rs.72,00,000.00.

Tax Payable on un-booked flats @ 5% shall be Rs.20,00,000.00.

Tax Payable amount does not exceed from rate of GST on affordable flat therefore the Promoter shall pay Rs.20,00,000.00 in account of un-booked flats.

Input Tax Credit is available to the Land Owner. The Land Owner is entitled to ITC in respect of tax charged to him by the Promoter on construction of apartments. However, the Land Owner shall not be entitled to avail ITC on any other services or goods used by him.

Valuation of Development Rights – Notification 04/2019 – Value of supply of service by way of transfer of development rights or FSI by a person to the promoter against consideration in the form of residential or commercial apartments shall be deemed to be equal to the value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.

Value of portion of residential or commercial apartments remaining un-booked on the date of issuance of completion certificate or first occupation, as the case may be, shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be

H. Important Notifications effected from 01-04-2019

1. Notification 3/2019 Central (Rate) – GST New Rates and other termsincluding input tax credit

2. Notification 4/2019 Central (Rate) – Rate of Tax for TDR etc. Nil with conditions

3. Notification 5/2019 Central (Rate) – RCM under section 9(3)

4. Notification 6/2019 Central (Rate) – Time of Supply for TDR etc.

5. Notification 7/2019 Central (Rate) – RCM under section 9(4)

6. Notification 8/2019 Central (Rate) – GST Rate

7. FAQ dated 07-05-2019

8. FAQ dated 14-05-2019

9. RDO order No.04/2019-Central Tax dated 29-03-2019

To reach to me for any suggestions, rectifications, amendments and/or further clarifications in regard of this article my email address is pkmgstupdate@gmail.com.

(PARVEEN KUMAR MAHAJAN)
Advocate