The GST council in its 34th meeting held on 19.03.2018 has made some recommendations with regards to the long awaited demands of the real estate industry. The industry is struggling with the low demand and cumbersome compliances imposed by the legislations since the introduction of GST, RERA etc. While we can say that such changes are made in the statutes are the need of the hour so as to regulate the real estate industry to save the common people’s interest but at the same time it posed some big challenges against the real estate industry particularly in terms of cash flows, blockage of funds and many more. We must know that the real estate industry contributes 6 to 8% to the GDP of India and it is the second most employment generator after the IT industry.
The GST Council has taken many decisions particularly in relation to the real estate industry. However how far it can solve the major issues which the industry is demanding since long , is a matter of time. In this article I have tried to analyze the changes made by the GST Council and the challenges posed to the real estate industry due to such changes . Further in this article we have analysed the impacts on new projects which are started on or after 01.04.2019 only.
New Tax Rate Scheme :
This is in one way a welcome step taken by the council which came as a big relief to the industry which are confronted with the higher costing due the introduction of the GST. Now the as per the provisions of the notification No. 03/2019 , C.T. (Rate) dated 29th March 2019 , the projects are categorized in two types of the projects . One is the Residential Real Estate (hereinafter called RERP) and other is Real Estate Project (hereinafter called REP). Both the projects are defined at the end of this article .
As per the notification No. 03/2019, dated 29.03.2019 the tax rate is 1% without input credit on construction of the affordable houses (As prescribed) and 5% on construction of other than affordable houses subject to certain conditions . It is also pertinent to mention here that the rate as mentioned supra is an effective rate after giving 33% deemed deduction for the value of the land. The new tax rate after 31st March 2019 are as follows:
| Particulars | Tax Rate (in %) | Deemed Deduction (in %) | Effective Tax Rate (in %) | Availability of ITC |
| Affordable residential apartments | 1.5 | 33 | 1
|
NIL |
| Other than affordable residential apartments | 7.50 | 33 | 5
|
NIL |
One more thing is clear that all other types (which do not fulfill the 15% of the total carpet area condition of the RERP ) of the constructions including the commercial apartments will be taxed @12% after the deduction of deemed value of the land.
Issue and challenges in Conditions imposed for availment of lower tax rate :
> In my opinion the government must have considered the fact which the whole real estate / construction industry is facing that the value of the land something that have a great impact on the costing in any real estate / construction projects . In metro cities , sometimes the value of the land exceeds the value of the construction . In all such scenario only 1/3 deemed deduction is really unjustifiable. The government must come out with a mechanism so that the fair valuation of the land can be made.
> One should bear in the mind that the real impact of 1% or the 5% will be more than that due to many factors like non availability of ITC etc. Further more the real estate industry is currently facing two type of taxes , one is GST and the other is stamp duty . This enhances the cost of inventory of the real estate industry and in turn results in the low demand .
> The one of the condition of the lower rate availment is that the input credit is not available. The non availability of the ITC on hand may have negative effect on costing which in turn increases the prices to the actual customers , on another hand creates the problem credit/fund blockage to the developers.
> The condition that the 80% of the inputs and input services shall be (other than capital goods, TDR/ JDA, FSI, long term lease (premiums)) purchased from registered persons. Any shortfall of above referred 80% limit will attract GST @18% on RCM basis except cement upon which GST will be charged on RCM basis @28% . While calculating the limit of 80% the value of services by ways of input and input services by way of grant of development right , long term lease of the land , floor space index, or motor spirit and natural gas used in the construction of residential apartments in a project shall be excluded. The condition as mentioned above regarding the 80% purchases from the registered person , will be calculated and paid by not later than the 30th June of the following financial year and the developer is required to maintain project wise proper and separate record for registered and unregistered purchases . However reverse charge on the cement must be paid in the month in which it is received.
Now if we analyze conditions as mentioned supra, we will draw the interpretation that if any item of our purchase list viz. morang, sand, gitti etc. which otherwise are liable to 5% of GST will be charged @18% if purchased from unregistered person. Likewise in input services to the industry same position will happen in case of freight etc. This surely will push to the developer to do the business largely with the registered person. However it may pose some problems to the developers too since many of the persons engaged in petty works which are very much essential for the industry like patra , balli suppliers are unregistered .
> One more question arises in the mind that whether the non GST supply like interest will be excluded from the condition of 80%? From the bare reading of the notification 03/2019 , C.T. (Rate) dated 29.03.2019 , the same is not excluded this will also create big challenge among the developers which are required to be redressed by the government .
> Another problem which the developer may face that the in case of mixed projects (as defined as Real estate projects , in the Notification No. 03/2019) how the credit can be reversed for the residential area in which some inputs are common like common infrastructure used by both commercial as well as the residential buyers .
> Whether common facilities like corridors , lifts etc. will be included in the ceiling of 15% in case of RERP ?
> Also the developers has to prepare too many records viz for affordable housing, the property which attracts 12% tax and 5% tax etc. for the correct computation of output GST liability and the input tax credit . This will also increases the burden of the developer.
Another important point from the above discussion arises that one must do careful tax planning while making proposed cost sheet of the project since any item other than cement is not liable to higher taxation than the @18 on RCM basis . therefore on any possible case any item may reap benefit too the developer in the form lower tax rate@18% GST on RCM basis. However this might create litigations with the department.
Changes in the taxability of TDR, FSI, Long Term Lease (Premium):
One more decision taken by the GST council in its 34th meeting is that the ,If the flat is sold after the issuance of completion certificate than exemption of TDR, FSI, long term lease (premium) is withdrawn in case flat is sold after the issue of completion certificate and the GST will be payable subject to a maximum 1% of value in case of affordable houses and 5% of value in case of other than affordable houses. The formula is prescribed by the Notification No. 04/2019 C.T.(Rate), dated 29th March 2019 to calculate the liability in this case.
The GST on TDR or FSI or Long term lease of land used for the construction will be taxable @18% on RCM basis. This surely will increase the compliance task of the developer . Further the time of supply to pay the tax in all the above referred three cases are as under :
| Sl. No. | Particulars | Time of supply to Pay GST, in case of Commercial Apartments | Time of supply to Pay GST, in case of Residential Apartments |
| 1. | TDR | On the date of the completion or first occupation of the project. | On the date of the completion or first occupation of the project. |
| 2. | FSI (including additional FSI) | Incase consideration is in the form of construction of commercial or residential apartment than on the date of issuance of completion certificate
In case of monetary consideration than Immediately . |
On the date of issuance of completion certificate |
| 3. | Long term Lease | Immediately | On the date of issuance of completion certificate. |
There are so many other issues which can not be discussed in one article . So to conclude the topic we can say that the government should take immediate and necessary steps so that much needed push up can be made to the industry which are struggling a lot over the past so many years. This will be beneficial for whole of the economy and in turn to the buyer.
This article is an endeavor to share some learnings obtained. The views expressed are of the author and are intended solely for informational purpose only. Though due care is taken while preparing the document, possibility of errors cannot be ruled out. Expert guidance, where required and reference to the original act, notification, circular, rules etc is highly recommended.
Some Important terms defined :
Residential Real Estate Project (RERP) : the term ‘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”
Real Estate Project (REP): “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;
Affordable Residential Apartment : A residential apartment in a project 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.
FSI or FAR : The FSI stands for Floor Space Index also known as Floor Area Ratio(FAR). ‘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.’..
TDR: Transfer of Development Rights (TDR) means making available certain amount of additional built up area in lieu of the area relinquished or surrendered by the owner of the land, so that he can use extra built up area either himself or transfer it to another in need of the extra built up area for an agreed sum of money.
(About the author – The author is a member of ICAI and can be reached at Email: [email protected] , Mobile: 09936424523 )
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very useful information on gst and various tax schemes.