Development under GST for Real Estate and Construction Industry
The demand in the real-estate sector has seen a dip in the past few years, primarily owing to the impact of demonetization and the regulations introduced through the Real Estate (Regulation and Development) Act, 2016 (RERA). In light of the above, it is important to study the sweeping changes introduced by the government to ease the pressure on both, the industry and the consumers.
Draft guidelines on profit attribution to permanent establishments, issued by Central Board of Direct Taxes (CBDT), is a welcome move and step in the right direction to have certainty on profit attribution.
Reforms under GST
GST implications up to 31 March 2019
- Construction services are taxable at an effective rate of 12% after allowing a one-third deduction for the deemed value of the land.
- Projects under affordable housing scheme are taxable at an effective rate of 8%.
- Unlike the pre-GST regime, the benefit of Input Tax Credit (ITC) was available to builders more seamlessly.
- Under both pre and post-GST regime, GST is not chargeable in case the entire consideration is received by the builder after the issuance of completion certificate
Revised taxation effective from 1 April 2019
The GST Council in its 33rd meeting announced major changes to the taxability of real-estate sector under GST, effective 1 April 2019.
Under construction properties
The taxability of under-construction properties underwent the following changes:
| Particulars | Description of property | Old Rate (Effective) |
Revised effective rate (with effect from 1 April 2019) | |
|---|---|---|---|---|
| Max. carpet area | Max. price | |||
| Residential Real Estate Project (RREP) in affordable housing segment | 90 sq. meters in non-metro cities | INR 4.5 million | 12% (ITC) | 1% (without ITC) |
| 60 sq. meters in metro cities | INR 4.5 million | 8%1(with ITC) | 1% (without ITC) | |
| RREP outside affordable housing segment | Does not meet any one or both of the above criteria | 12% (with ITC) | 5% (without ITC) | |
| Commercial apartments, etc. (except as covered under Note 2 below) | Shops, offices, godowns, etc. in a real estate project other than RREP | 12% (with ITC) | ||
- Earlier, the effective GST rate of 8% was applicable to residential houses having an area of up to 60 sq. meters, irrespective of the price of such a residential house, provided the housing project was approved by a competent authority under ‘Scheme of Affordable Housing in Partnership’.
- The term ‘Residential Real Estate Project (RREP)’ shall mean a real estate project in which the carpet area of the commercial apartments is not more than 15 percent of the total carpet area of all the apartments in such a project. Therefore, in such a scenario, even the commercial apartments should be taxable at the reduced rate applicable to residential apartments.
GST exemption on TDR
Procurement of Transferable Development Rights (TDR), Joint-Development Rights Agreement (JDA), lease premium, Floor Space Index (FSI) form a major cost component at the inception of a real estate project. The government with a view to reduce the tax burden on builders, especially now that the ITC is disallowed, has exempted intermediate GST on TDR, JDA, lease premium, and FSI for such a residential property on which GST is payable.
Thus, if there are any unsold apartments on the date of issuance of the completion certificate, then the builder would have to compute GST liability on proportionate exempt TDR, JDA, etc., procured by him and pay such GST under reverse charge mechanism. The time of supply in such a case should be deferred to the date of issuance of the completion certificate, thereby avoiding any interest liability on delayed payment of GST under reverse charge.
Issues under the revised taxability regime
The revised taxability of real estate sector has brought along with it new sets of challenges which are as follows:
- Builders are required to procure up to 80% of their inward supplies from registered dealers. Failure to meet this criterion will attract reverse charge provisions on procurements from unregistered dealers.
- Non-eligibility of claiming ITC can erode the benefits of the rate-cuts by increasing the tax costs for builders. This can result in a situation where the customers are expecting a dip in real estate prices whereas builders may have to maintain or even increase the current prices.
- In view of the rate cuts, builders may also face probes under the anti-profiteering provisions if they do not reduce the prices of the residential flats commensurate with the tax benefits.
- Cement which is a major input in the construction sector continues to be taxed at the highest GST rate of 28%. The high tax rate coupled with denial of ITC is a major worry for builders.
Other Aspects
GST on long-term lease premium
Taxability
The Bombay High Court in Writ Petition No. 12194 of 2017 has held that a long-term lease of 60 years would be covered under Entry 2(a) of Schedule II of the CGST Act, 2017, and hence such a transaction is to be considered as a supply of service chargeable to GST. It was further held that the fact such a long-term lease can be considered as a sale of immovable property under the Transfer of Property Act, 1882 should not have any bearing on the GST implications in view of the specific provisions under the GST law.
Applicability of the reverse charge mechanism
It should be noted that long term lease of land (lease of 30 years or more) against consideration in the form of the upfront amount and/or periodic rent for construction of a project has been subjected to the reverse charge mechanism with effect from 1 April 2019. [Notification No. 5/2019-Central Tax (Rate) dated 29 March 2019].
Exemption for development of financial business
The upfront amount payable in respect of service by way of granting of long term lease (of 30 years or more) of industrial plots or plots
for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or other government entity is exempted under GST. [Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017]
ITC in respect of the construction of immovable property let out
In Writ Petition No. 20463 of 2018, the Hon’ble High Court of Orissa has held that ITC in respect of inward supplies procured for construction of an immovable property, which is ultimately let out, should be allowed as set off against the outward tax liability in relation to rent received. The case is discussed in detail in the ‘From the judiciary’ section.
Option for builders in respect of ongoing projects
Builders were provided an option to decide whether they want to migrate to the revised GST rate structure, without ITC benefit (effective from 1 April 2019) for ongoing projects. The same was to be exercised by 20 May 2019.