Currently, the Goods and Services Tax (GST) is levied at 12 per cent on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale.
The GST Council in its 33rd meeting held on 24th February 2019 has recommended for a new GST rate structure on the construction of residential projects. The decision was taken to address the industry concern on the slowdown in the sector and low off-take of under construction houses.
In the 34th meeting held on 19th March 2019, the GST Council has given the modus operandi of the new GST rate of 1%/5% on real estate sector.
New rate of tax:
Applicability: It is applicable to new projects or ongoing projects which have exercised the above option to pay tax in the new regime.
Rates:
1% without ITC
- Affordable Houses *1
- On going Afforable House Project under central and state housing schemes
5% without ITC
- all houses other than affordable houses in ongoing projects *2
- all houses other than affordable houses in new projects
- commercial apartments such as shops, offices etc. in a residential real estate project (RREP) *3
*1. Definition of affordable housing: A residential house/flat of carpet area of upto 90 sqm in non-metropolitan cities/towns and 60 sqm in metropolitan cities having value upto Rs. 45 lacs (both for metropolitan and non-metropolitan cities). Metropolitan Cities are Bengaluru, Chennai, Delhi NCR
2. In case of construction of houses other than the affordable house in ongoing projects, new rate shall be available on installments payable on or after 01.04.2019 in case of houses booked before 01.04.2019.
3. In case of commercial apartments such as shops, offices etc. in a residential real estate project (RREP), the new rate of 5% tax without ITC will be applicable only if the carpet area of all such commercial apartment in a RREP is not more than 15% of total carpet area of all apartments including residential apartments (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR).[O1]
Conditions for the new tax rates
The GST Council has laid down the following conditions on the new tax rates regime
- The Input Tax Credit shall not be available on the inward supplies.
- 80% of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease (premiums)) shall be purchased from registered persons.
In case of shortfall of purchases from 80%, tax shall be paid on the differential shortfall at 18% on RCM basis by the builder. However, Tax on cement purchased from the unregistered person shall be paid @ 28% under RCM, and on capital goods under RCM at applicable rates.
Is it Mandatory of the existing running/ongoing project?
The GST Council has provided for one time option to the promoters/builders to continue to pay the tax at the old rates of 8% or 12% with ITC on the ongoing projects.
The Ongoing Projects are the Projects/Buildings where construction and actual booking have started before 01/04/2019 and which have not been completed by 31.03.2019.
Therefore for the ongoing projects, the promoters have an option to opt for the new tax structure of 1%/5% without ITC or to continue with the old tax rates of 8%/12% with ITC.
ITC Transitional Provision for ongoing projects
The Ongoing projects where construction and booking both had started before 01.04.2019 and have not been completed by 31.03.2019 opting for new tax rates shall transition the ITC as per the prescribed method.
The transition formula approved by the GST Council, for residential projects extrapolates ITC taken for percentage completion of construction as on 01.04.2019 to arrive at ITC for the entire project. Then based on percentage booking of flats and percentage invoicing, ITC eligibility is determined. Thus, the transition would thus 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.
To arrive at the eligible ITC we can use the following steps and the formulae.
Step 1: As on 01.04.2019 arrive at the percentage completion of construction
Step 2: Based on step 1 arrive at the ITC of the entire Project.
Formula Derived =
ITC availed as on date * 100
Percentage Completed (Step 1)
Step 3: Determine the percentage booking of flats and percentage of invoicing made
Step 4: Determining the ITC eligible based on pro-rata basis in proportion to booking of the flat and invoicing done for the booked flat
Formula: ITC Eligible =
Invoicing of the Flat Booking made * Total ITC (Step 2)
Total Estimated sale of the projects
The para 4(ii) of the press release of 34th GST Council meeting envisages that new rate shall be available on installments payable on or after 01.04.2019. Therefore the ITC will be available only for the invoicing made for installments till 31.03.2019.
In case of a mixed project, the ITC shall be divided on pro rata basis between commercial portion and noncommercial portion in proportion to carpet area of the commercial portion in the ongoing projects (on which tax will be payable @ 12% with ITC even after 1.4.2019) to the total carpet area of the project.
Formula
Carpet area of the commercial portion in the ongoing project * Eligible ITC
Total carpet area of the project
Amendment of ITC Rules
The GST Council in its 34th meeting has provided that, the ITC rules will be amended to bring greater clarity on monthly and final determination of ITC and reversal thereof in real estate projects. The change would clearly provide procedure for availing input tax credit in relation to commercial units as such units would continue to be eligible for input tax credit in a mixed project.
Treatment of TDR/ FSI and Long term lease for projects commencing after 01.04.2019
The GST Council has to address the concerns of cash flow of the builders/developers has.
The GST Council has provided for the exemption on supply of TDR, FSI, long term (premium) of land by a landowner to a developer if the constructed flats are sold before issuance of completion certificate and applicable tax is paid on them. In case the flats are sold after issue of completion certificate, the exemption will be withdrawn, however such withdrawal shall be limited to 1% of value in case of affordable houses and 5% of value in case of other than affordable houses. This will achieve a fair degree of taxation parity between under construction and ready to move property.
The Builder/Developer would be liable to pay tax under RCM (Reverse Charge Mechanism) on TDR, FSI, long term lease (premium).
The date of liability to pay tax under RCM on TDR, FSI, long term lease (premium) of land shall be the date of issue of completion certificate in respect of flats sold after completion certificate.
The above points holds good in case of JDA for the share of land owner in the construction of houses. The Builder/developer would be liable to pay tax on the land owner share in the constructed apartments on date of completion i.e. at the time of obtaining occupancy certificate.
Pros and Cons of the new tax rate Structure
The new tax regime on real estate sector comes with the following pros
- The tax burden is reduced for the ultimate buyer.
- The buyer of house gets a fair price with GST @ 1%/5% instead of current 8%/12%.
- The issues like ITC benefit not being transferred to the buyer will not exist.
- Interest of the buyer/consumer gets protected.
- Cash flow problem for the sector is addressed by exemption of GST on development rights, long term lease (premium), FSI etc.
- Unutilized ITC, which used to become cost at the end of the project gets removed and should lead to better pricing.
- Tax structure and tax compliance become simpler for builders.
However apart from the above pros, it has certain following cons:
- The ITC becomes the cost to the builder, therefore the apartments prices may go up due to increase in the cost.
- The compliance on part of minimum 80% purchase from registered dealers would require regular tracking and reconciliation would be the tedious process.
- Transition of ITC in case of ongoing projects opting for new regime is complex and difficult task.
Conclusion:
The new tax regime is a welcome step in the GST era with the simple taxation in the Real Estate sector and reduced burden of tax compliance. The Real Estate has seen a sign of bear and hope to see the new tax regime comes with a hope of light in the real estate sector. The eyes are on the CBIC and GSTN on how the new regime is implement and given effect to.
The authors can also be reached at cakhetarampurohit@gmail.com and cavinikabhandari@gmail.com
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