GST On Real Estate: A Real Roller Coaster
The government’s intent is clearly visible, which is to tax each leg of real estate transactions, except sale of completed flats.
The Indian real estate sector has boomed in the last two decades or so with the rise in demand for office as well as residential space. This sector is expected to contribute 13 percent to the country’s gross domestic product by 2025.
However, demand in this sector has witnessed a considerable dip in the past two years. The post-demonetisation cash crunch is one reason. Implementation of RERA has imposed an additional burden on builders in terms of complying with project deadlines despite the existing stock of unsold inventory.
With the advent of the Goods and Services Tax from July 2017, there was a paradigm shift in the tax treatment of real estate. While the effective rate on construction services (after deducting land value) was fixed at 12 percent, full credit for GST paid on procurements was made available to builders, thereby eliminating cascading taxes embedded into the cost. Builders were expected to pass on these benefits to buyers, but instead the government received several complaints that people were being asked to bear a higher tax incidence for payments made after July 1, 2017.
Taking note of the problems faced by the stakeholders, the GST Council in January 2019 announced the formation of a seven-member Group of Ministers to look into various demands of the sector.
Consequently, with an aim to give impetus to the residential segment of real estate sector apropos the central government’s ‘Housing for All by 2022’ vision, the GST Council accepted the GoM recommendations and announced new rates applicable from April 1.
Effective GST rates of 5 percent (without input tax credit) for residential properties outside the affordable segment and 1 percent (without ITC) for affordable housing properties have been prescribed by the GST Council. Affordable houses are those which have a carpet area of 60 square metres in metros and 90 square metres in non-metros, and where the gross amount charged is up to Rs. 45 lakh. On the other hand, commercial properties would continue to be taxed at 12 percent with ITC.
It may also be noted that builders have been given an option to continue to pay tax at the old rates, with ITC, for ongoing projects which are not completed by Mar. 31, 2019. This option is required to be exercised by May 10, 2019; else the new rates will apply.
Transition Methodology
Along with the new rates, the government has also laid down the methodology for the transition of ITC with respect to construction services. While according to it, such transition would be on “pro-rata basis based on a simple formula such that credit in proportion to booking of the flat and invoicing done for the booked flat is available subject to a few safeguards”, a closer look at the fine print reveals that things may not be as “simple” as they are made out to be.
The objective of the prescribed methodology is to arrive at the quantum of ITC attributable to inputs and input services used in construction of residential properties on or after April 1, 2019, by deducting the credit attributable to:
- commercial real estate portion; and
- construction of residential properties before March 31, 2019, from the total ITC, availed (from July 1, 2017, to March 31, 2019, including transitional credit) by the builder.
Where the figure so derived is positive, the developer would require to reverse the credit; but in case of a negative figure, the developer can take credit of goods and services received after April 1 to the extent of the differential amount.
This exercise, in our view, must be undertaken project-wise and for all the projects by September 2019. Also, builders would need to do a thorough cost-benefit analysis before choosing the appropriate mechanism, which could prove a bit cumbersome.
Reverse Charge Liability
The second condition for claiming concessional GST rate is that 80 percent procurements (other than capital goods, transfer of development rights / joint development agreements, floor space index, long-term lease premiums) should be from registered persons. With the imposition of reverse charge liability on builder upon any shortfall thereto, the government seems to bring in a level of transparency in an otherwise cash-driven sector.
Another aspect which the government has addressed is the value to be adopted for reversal of ITC in respect of properties sold after the issuance of a completion certificate vis-à-vis under-construction properties. It has been explained that ITC attributable to construction services shall be determined based on the area of taxable and exempted construction.
An exemption has also been accorded to supply of TDR, FSI, long-term lease (premiums) by the landowner to a developer, thereby addressing the cash flow problem faced by the sector. This is subject to the condition that constructed flats are sold before issuance of completion certificate and tax is paid on construction. However, in case of sale of flats post-completion, the builder would pay tax under the reverse charge mechanism (at 1 percent or 5 percent) which, of course, shall be creditable.
To illustrate, say a co-operative housing society gives rights to a builder to re-develop a six-storey building, for which the builder gets an additional FSI that allows him to construct a 15-storey building with bigger carpet area. Six stories would be allotted to existing residents in return for the relinquished rights, while the remaining would be sold to independent buyers.
In such a case, the builder would require to discharge GST on construction services rendered to both the existing residents and independent buyers, but there would be no reverse charge liability in respect of acquired TDR/FSI.
However, it is only when a flat remains unsold post-completion that GST would become payable on reverse charge basis towards TDR/FSI.
The intention of the government is clearly visible, which is to tax each leg of the transaction in the real estate sector, except the sale of completed flats. While Maharashtra and Punjab had expressed fresh reservations towards the new structure, the revised GST rates, and ensuing ITC computation methodology seems to put the sector in a dilemma. The curtailment of vested ITC, as well as taxation of TDR/FSI (as they are considered as part and parcel of ‘land’, which is outside GST’s ambit), would certainly be discussed in courtrooms.
Until the final verdict on these aspects, we may witness an upward revision of real estate prices. Nonetheless, the prevailing market conditions which are currently limited by the home-buyers’ capacity would mean that the builders would need to rejig their pricing strategy to ensure that they pass on the benefit of reduced GST rate to end consumers. The builders are already wary of the “anti-profiteering brahmastra” under the law!
One would have to wait and watch how the market plays over the next couple of months, whether the new rate structure makes life easy for the real estate industry and home buyers at large.
Jigar Doshi is Executive Director and Aditya Nadkarni is Manager at SKP Business Consulting LLP. Views are personal.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.