Applicability of new rates under GST to completed residential projects

Introduction:

GST council, in its 34^th Meeting, has introduced new rates for real estate sector which are effective from 1^st Apr'19 vide notification no. 3/2019 - IGST (Rate) dated 29.03.2019 (similar notification issued in Central Tax as well).

Ongoing projects are provided with one-time option to choose existing rates or new rates, which needs to be exercised before 20^th May'19 (extended date). However, new rates are mandatory for project which commences on or after 1^st April, 2019. Hence, there is an ambiguity in respect of completed projects whether new rates are to be applied or to continue with existing rates, on the receipts from 1^st Apr'19 pertaining to units which are booked prior to OC.

In this article, an attempt is made to discuss the ambiguity and also the possible solutions.

Relevant summary of notification

The notification no. 3/2019 – Integrated Tax (Rate) is issued to notify the new rates for construction of projects i.e., 1%/5% for affordable and non-affordable residential projects respectively provided no input tax credit is availed. Construction of 100% commercial projects continue to be at existing effective rate of 12% (after 1/3^rd deduction towards land). The said new rates are applicable for the following residential projects:

1. Project which commences on or after 1^st April, 2019; and
2. Ongoing projects not opted for old rates: One-time option given to ongoing projects to opt for old or new rates, on or before 20^th May'19. If no option is exercised before the said date, new rates are applicable.

What is an ongoing project?

The term ‘ongoing project' as defined in clause (xx) of para 5 of said notification, means a project which meets all the following conditions:

1. Commencement certificate received on or before 31^st Mar'19;
2. Completion certificate/1^st occupation has not taken place on or before 31^st Mar'19;
3. Apartments have been partly or wholly booked.

Hence, a project which received OC on or before 31^st Mar'19, is not covered under the definition of ‘ongoing project'.

What does ‘Project which commences on or after 1^st April, 2019' mean?

In accordance with clause (xxviii) in para 5 of the said notification, the phrase “Project which commences on or after 1^st April, 2019” shall mean a project other than an ongoing project.

On application of the definition to the wordings in the entry where rate is prescribed, it can be said that the new rates are applicable for the following projects:

1. A project other than ongoing project
2. Ongoing project that opted for new rate

View 1:

From the above discussion, it can be said that a residential project which has received OC on or before 31^st Mar' 19, is given with no option and has to suffer new rates, not being an ongoing project. Further, ITC availed (GST) on entire project needs to be reversed proportionately as per the formula prescribed therein.

View 2:

It is illogical to categorize a completed project into a new project that commences on or after 1^st Apr'19, with the definition. It is hardship on assessee to collate the data for completed projects and reverse ITC.     

Impact if new rates are applied

1. ITC that needs to be reversed becomes cost to the assessee.
2. Collation of project wise details becomes difficult.
3. Blockage of funds as GST needs to be paid in cash only

Impact if old rates are applied

1. Department may demand the assessee to reverse the ITC proportionately though GST is paid @ 12% and also to pay interest if utilized.
2. Utilization of ITC for payment of GST may be objected.

Possible wayout

1. Representation can be made to GST council stating the difficulty faced by the trade and also for clarification on the same (recent FAQ's released in this regard do not give any clarification on this issue).
2. Compute the cost involved in paying GST at new rate and take a decision (old/new rate) considering the risk. 
3. Intimation can be given to department stating the GST rate paid and reasons for the same.

Conclusion

GST may have to be paid at 1%/5% even on completed projects i.e., projects that received OC on or before 1^st Apr'19 as per the above discussion. It is high time for the assessee to compute the cost involved and decide on GST rate to be paid on the said projects. Suggested to intimate the department the GST rate adopted stating the reasons.

This article is written on 12.05.2019 and views mentioned here are thoughts of author and may differ from author to author. He can also be reached at haritha.komma2@gmail.com