PREFACE
The transactions in the real estate sector have their own peculiarities and thereby one has always felt the need for having a separate set of provisions that would be more specific to this sector rather than the general provisions that would be applicable to any other sector. This need was felt right from the sales tax ( later VAT) as well as in service tax regime.
However, with the series of changes that have been made effective from 1st April, 2019 it can be seen that the step in this direction has been taken although it may not be in line with the GST principles.
This book has attempted to analyse the various changes that have been made to the existing provisions and the new provisions that have been introduced along with the impact. Further, the discussion of the legal provisions has been summarised by way of illustrations followed by the open issues that require further deliberation and decision making. Also a model has been provided that can be used by the industry to costs involved in continuing with the existing scheme vis-a-vis the new scheme, in order to facilitate the decision making regarding the option to chose for the rate of tax in case of ongoing projects.
We have made an attempt to express our views on various issues based on our past indirect tax experience. The law is still in a nascent stage more clarity would emerge as our understanding deepens. Now that this booklet is placed in your hands, we request you to kindly give your valuable feedback, which would improve the quality of this booklet and make it more enriching to the readers in future editions. (Feedback can be sent to: [email protected], [email protected] or [email protected])
We acknowledge the dedicated efforts of CA Shilpi Jain, CA Radhika V, CA B Hemanth Kumar, CA Monika Motta, CA Manish Sachdeva, CA Mayank Jain and other staff of Hiregange & Associates in helping us for the timely completion of this booklet. Also a special thanks to CA Madhukar N Hiregange and CA Rajesh Kumar T R for vetting this booklet.
29th April, 2019
CA Sudhir V S
CA Roopa Nayak
CA Ashish Chaudhary
BRIEF PROFILE OF THE AUTHORS
CA Sudhir V.S. ([email protected], +91 99081 13787)
Qualified as a Charted Accountant in 2006, since then been a partner with CA Madhukar N Hiregange. Done his Entrepreneurship Development Program at Indian Institute of Management – Ahmedabad (IIM –A). He has contributed various articles for professional institutes like Institute of Charted Accountants of India (ICAI), Institute of Cost Accountants of India and Trade Journal, Service Tax Review & Manupatra. He has presented papers at various branches of ICAI, ICSI& ICWAI. Master trainer for the ICAI, New Delhi and faculty in National academy of Customs, Excise and Narcotics (NACEN), which trains the Departmental officers. He is also the joint author of couple of service tax books. He is a member and co-chairman of Indirect Taxes Committee of FTAPCCI for 2017, a member of the Regional Advisory Committee on GST, Govt. of Telangana and a past member of Regional Advisory Committee of Central Excise & Service Department, Hyderabad. and
Roopa Nayak: ([email protected], +91 93427 28247)
Qualified in 2008, she is a Chartered Accountant by profession, partner with Hiregange & Associates. She is into consulting and advisory wing of the Hiregange & Associates. Has advised client across all industries on various issues under Goods and Service Tax (GST) and in other indirect taxes+ providing GST retainer ship and implementation, and handholding support.
She has Co-authored several books like Central Excise Made Simple (e-book & KSCAA publication), the Background Materials of Certificate Course on Indirect Taxes and Two/Three Days Workshop on Enabling Service Tax Practice and First Cut Background Material on GST. She has also co-authored “Students Handbook on Indirect Taxes” and Handbook on CST.
Currently working on a sectoral GST book on real estate sector. She is an active contributor of articles online to ca club/linked in for 7 years and to various professional institutes such as to ICAI. She is an active speaker in seminars organised by branches and chapters of ICAI and study circles all over.
INDEX
Table of Contents
INDEX ................................................................................................................................................... 5
1. INTRODUCTION ............................................................................................................................ 7
1.1 BACKGROUND .............................................................................................................................. 7
1.2 Important Definitions ................................................................................................................. 11
1.3 Rate Table .................................................................................................................................. 21
2. DECISION MAKING FOR NEW SCHEME ............................................................................. 24
2.1 Commercial projects ................................................................................................................... 27
2.2 Mixed projects (commercial > 15%) ............................................................................................ 27
2.3 Only residential or residential with commercial <= 15% .............................................................. 29
3. ACTIONS TO CONTINUE WITH THE EXISTING SCHEME ........................................................................ 35
3.1 Actions for going with the existing scheme ................................................................................. 35
4. OPTING FOR NEW SCHEME ................................................................................................... 37
4.1 Project with commercial and residential apartments ................................................................. 37
4.2 Pure residential project............................................................................................................... 45
5. INPUT TAX CREDIT REVERSAL UNDER RULE 42 and 43 ...................................................................... 49
5.1 Pure commercial projects: .......................................................................................................... 52
5.2 Project with commercial and residential apartments .................................................................. 54
5.3 Pure residential projects and affordable housing ........................................................................ 56
6. IMPLICATIONS ON TRANSACTIONS BETWEEN LANDOWNER AND DEVELOPER
RELATING TO JDA .......................................................................................................................... 58
6.1 Joint development agreement (JDA) and supplementary agreementfor allocation (SA) entered
prior to 01.04.2019................................................................................................................................ 58
6.2 JDA prior to 01.04.2019 and supplementary agreement giving rights entered after 01.04.2019 .. 65
6.3 JDA and supplementary agreement (SA) entered after 01.04.2019 ............................................. 67
7. Frequently Asked Questions .................................................................................................... 70
7.1 Transition Provisions ................................................................................................................... 70
7.2 Levy, Tax Rates and Exemption ................................................................................................... 80
7.3 Valuation .................................................................................................................................... 81
1. INTRODUCTION
1.1 BACKGROUND
GST on real estate has been a contentious issue especially with real estate sector in India facing a challenging time over the last few years. Several representations were made to the Government for further simplification and reduction of rates, especially for residential real estate sector, in the hope that the same would bolster demand for that sector. The Government also has been contemplating revising the tax structure under GST for the real estate sector, more so for the residential sector, as the incidence of tax on the end customer is perceived to be very high coupled with the fact that it becomes very difficult in this industry to track compliance with the provisions of anti-profiteering. In that direction, a special tax structure and mechanism was proposed is formulated wherein it was stated that the said mechanism would address the slow-down in this sector and boost the residential segment.
In this regard the GST Council had made certain recommendations in its 33rd and 34th meeting, after which a series of notifications have been issued on 29.03.2019 which became effective from 01.04.2019.
In this chapter brief summary of the new scheme that is applicable from 01.04.2019 with the impact for the trade along with the definitions required to be understood are discussed. In the subsequent chapters further detailed discussions are carried out.
Brief summary of changes effective 1st April 2019
i. GST is applicable at the effective rate of:
a. 1% in case of apartments under affordable housing,
b. 5% for residential apartments, being non – affordable housing,
c. 5% for commercial apartments in projects with commercial area not more than 15%.
Affordable Residential Apartment is defined to mean residential apartments with carpet area not exceeding 60 sqm in metropolitan cities [covering Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata and Mumbai (whole MMR)]or 90 sqm in other places for which gross consideration does not exceeds Rs. 45 lakhs.
ii. With the new tax rates, Input Tax Credit shall not be eligible and any available ITC balance (accumulated net of reversal or from other business under the same registration) also cannot be used for payment of such GST liability. Further, the ITC on the purchases needs to be disclosed in Form GSTR- 3B as ineligible credit. iii. This scheme mandatory for all new projects commencing from 1st April, 2019. However for the ongoing projects, onetime option is given to continue with the existing tax structure and mechanism.
iv. In case the developer wishes to continue with the existing scheme, he has to opt for the same by filing the prescribed form on or before 10th May 2019. However the invoice that needs to be issued from 1st April 2019 onwards has to contain the rate as per the option exercised.
v. The option of going into new scheme or continue with the existing scheme is based on the project and the said project is as per the meaning given for Real Estate Project under Real Estate Regulation Act (RERA).
vi. For the purpose of this scheme projects has to be identified as Residential Real Estate Project (RREP) or others. REEP is a project in which carpet area of commercial premise is not more than 15%. Such project including the commercial portion shall be treated as a residential project and the concessional GST rate of 5% shall will be applicable even for commercial apartments also. vii. In projects which are not RREP, the benefit of concessional rate will be applicable only to residential apartments and not for commercial apartments.
viii. The promoter (as defined in RERA is adopted here as well) is entitled to pay the tax at the concessional rate as mentioned above.
ix. On the ongoing projects, wherein the promoter who opts to the concessional rate from April 2019, attributable input tax credit of GST including transitional credit to the extent of GST become payable before April 2019 has to be worked out notionally.
x. If the credit already availed is more than such credit worked out it has to be paid back immediately or on permission in 24 instalments along with interest. On the other hand if the credit already availed is less than credit notionally worked out, the difference amount can be availed out of future purchases. However such credit availed cannot be used for making payment of tax at concessional rate, it can be used for any other supplies on which GST is payable.
xi. In order to ensure compliance on suppliers (to promoters) front, additional condition is added as to procurements wherein it requires that 80% of the inputs and input services (except grant of development rights, long term lease of land or FSI, electricity, high speed diesel, motor spriit, natural gas) shall be procured from registered suppliers only (includes tax paid under reverse charge mechanism). xii. In case of failure by the promoters any shortfall GST needs to be paid at the rate of 18% under reverse charge by the builder by 30th June of the next financial year, for a particular financial year.
xiii. It would be important to note that all purchases of cement from unregistered persons shall be liable under reverse charge basis at the rate of 28%, which has to be paid monthly. Once such tax is paid it would be considered as procurement form registered person while computing 80%.
xiv. In case of all capital goods purchased from un-registered persons by promoters, it would be liable for GST under reverse charge at the applicable rate of tax on such capital goods.
xv. Project-wise account of inward supplies needs to be maintained for supplies procured from registered suppliers and unregistered suppliers. Such details are to be electronically submitted on the portal before 30th of June of subsequent year in the prescribed form. [For smaller builders with multiple projects this may again be a challenge]
xvi. With respect to JDA (relating to residential real estate projects i.e. including projects where the commercial area is less than 15% of the total project area) entered into on or after 1st April, 2019, the Developer needs to pay GST on the built-up area handed over to Landowner (value shall be equal to the flats sold [registered] by developer to their customer nearest to joint development agreement) at the rate of 7.5% with 1/3rd deduction (effective rate 5%) for apartments in case of non-affordable housing and 1.5% with 1/3rd deduction (effective rate 1%) for apartments in case of affordable housing, it has to be paid at the time of obtaining completion certificate.
xvii. The above liability would arise on the date of issuance of completion certificate or first occupation, whichever is earlier. GST so charged shall be eligible as ITC in the
hands of the Landowner in case the said flats are sold prior to issuance of completion certificate.
xviii. Further, the GST w.r.t. the transfer of development rights or FSI (including additional FSI) given to the Developer for such JDAs would be exempt to the extent of the units sold by the Developer from his share, prior to completion certificate or first occupation, whichever is earlier, and to the extent of the units remaining unsold as on such date, the Developer would be liable under reverse charge mechanism.
xix. The JDA (relating to other projects) entered on or after 1st April, 2019 would also be liable under reverse charge mechanism and such liability would arise on project completion only. Thereby, attempting to ease cash flows for this sector. xx. Further, the existing ITC provisions have been amended to ensure that the ongoing projects would be required to reverse credit availed during the project execution from 1st Jul ’17 or project commencement, whichever is later, to the extent of the units sold after completion certificate or first occupation, whichever is earlier.
Note: It is very important for invoicing from 1st April 2019 as per the option of either continuing under the earlier scheme or going for the new scheme, as decided. Once decided intimation to be given by 10th May 2019 is also very important in case of continuing with the existing scheme.
The below tables gives the comparison of the new scheme with the existing rates:
Sl.No Description Effective New Rate Effective
Old Rate
1. Construction of affordable Residential Apartment by a promoter 1% 8%
2. Construction of Other than affordable Residential
Apartment by a promoter 5% 12%
3. Construction of commercial apartment in RREP by a promoter 5% 12%
4. Construction of commercial apartment in REP by a promoter 12% 12%
1.2 Important Definitions
A very important aspect that needs to be noted is that the meaning of the various terms and words used in reference to the real estate sector is now more aligned to their meanings under RERA. Hence the general understanding until now, be it either as per the Sales Tax laws/VAT laws/Service Tax laws, has to be unlearned and the following would have to be noted to understand the provisions effective from 1st Apr ‘19:
a. Promoter as per explanation 4(xvii) of notification No. 3/2019 ibid, the definition would be as per section 2(zk) of the Real Estate (Regulation and Development) Act, 2016 (hereinafter referred to as ‘RERA’) which defines the term promoter as:
a. a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling all or some of the apartments to other persons and includes his assignees; or
b. a person who develops the land into a project, whether or not the person also constructs structures on any of the plots, for the purpose of selling to other persons all or some of the plots in the said project, whether with or without structures thereon; or
c. any development authority or any other public body in respect of allottees of—
• Buildings or apartments, as the case may be, constructed by such authority or body on lands owned by them or placed at their disposal by the Government; or
• Plots owned by such authority or body or placed at their disposal by the Government,
for the purpose of selling all or some of the apartments or plots; or
d. An apex State level co-operative housing finance society and a primary co-operative housing society which constructs apartments or buildings for its Members or in respect of the allottees of such apartments or buildings; or
e. Any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or by any other name or claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale; or
f. Such other person who constructs any building or apartment for sale to the general public.
Explanation—For the purposes of this clause, where the person who constructs or converts a building into apartments or develops a plot for sale and the persons who sell apartments or plots are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified, under this Act or the rules and regulations made thereunder;”
Comment: From the reading of the above provision, it is clear that the person who does the construction and also the person who causes the construction for the purpose of selling would be considered as promoter. Further the explanation also makes it clear that the person selling the apartment and the person constructing the apartments are both considered as promoter and hence the landowner who sells the apartment but would not do the construction, could also be considered as promoter for the purpose of RERA and also for this new scheme of taxation. From reading of the above definition, another question that arises is whether the contractor doing the construction for the developer can also be considered as promoter and thereby 7.5% tax can be paid instead of 18%. Going in the context and the words it can be considered that sole contractor who is not having any contract with the buyers are not going to get the concessional rate.
b. Apartment:- As per paragraph 4 (xiv) of notification No. 3/2019 ibid, “apartment” shall have the same meaning as assigned to it section 2(e) of RERA wherein it is defined as follows:-
“whether called block, chamber, dwelling unit, flat, office, showroom, shop, godown, premises, suit, tenement, unit or by any other name, means a separate and selfcontained part of any immovable property, including one or more rooms or enclosed spaces, located on one or more floors or any part thereof, in a building or on a plot of land, used or intended to be used for any residential or commercial use such as residence, office, shop, showroom or godown or for carrying on any business, occupation, profession or trade, or for any other type of use ancillary to the purpose specified”
Comment: As per above, any self-contained unit would be an apartment under the new taxation scheme and such self-contained unit could be flat or row houses or a villa. Further, even a commercial unit would be considered as an apartment, thereby the new scheme of taxation would apply even to commercial units such as office spaces, shopping malls, shops etc. in the RREP (less than 15% commercial apartments in real estate project).
c. Project as per paragraph 4 (xv) of notification No. 3/2019 ibid, “Project” shall mean a Real Estate Project (REP) or Residential Real Estate Project (RREP).
d. Real Estate Project (REP) as per explanation 4(xviii) of notification No. 3/2019 ibid, the definition would be as per section 2(zn) of the RERA which defines the term REP as:
• 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
• Also includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto.
Comment: Thereby all real estate projects including the development of plots would be considered as REP. However, on examination of the rates it can be seen that the new rates would be applicable only w.r.t. the construction of the apartments. Hence, the development of plots and other transaction in plots would not be covered by this new scheme and would continue to be governed by the rates as applicable prior to 01.04.2019 only.
e. Residential Real Estate Project (RREP) as per explanation 4(xix) of notification No. 3/2019 ibid, the definition would be a REP in which the carpet area of the commercial apartments in not more than 15% of the total carpet area of all the apartments in the REP.
Thereby, the following projects would be considered as RREP.
a. Projects with only residential apartments
b. Projects with residential apartments and commercial apartments where the carpet area of the commercial apartments is not more than 15% of the total carpet area of the project.
Comment: In case the carpet area of commercial apartments in the project is more than 15% of the total carpet area, then the project would not be a RREP and hence the new scheme of taxation for such commercial area would not apply to entire project. However the residential area of such project would be still be eligible for the new scheme of taxation.
f. Carpet area as per explanation 4(xxvi) of notification No. 3/2019 ibid, the definition would be as per section 2(k) of the RERA which defines the term carpet area as:
• The net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but
• Includes the area covered by the internal partition walls of the apartment.
Explanation.— For the purpose of this clause, the expression "exclusive balcony or verandah area" means the area of the balcony or verandah, as the case may be, which is appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee; and "exclusive open terrace area" means the area of open terrace which is appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee;
Comment: All the computations under the new scheme require ascertainment of the carpet area and the same is of utmost importance. Further, as per the definition above it can be seen the usable area of the apartment is being considered and any common areas, exclusive balcony, etc. are out of the purview of carpet area.
g. Affordable residential apartment has been defined to extend the scope to include apartments having carpet area of 60 sqm/90 sqm and where consideration does not exceed Rs. 45 lakhs. The definition is as per explanation 4(xvi) of notification No. 3/2019 ibid, shall mean:
a. A residential apartment in a project which commences on or after 01.04.2019, or in an ongoing project:
• In respect of which the promoter has not exercised the option to pay tax on construction of apartments at the rates as applicable on such services prior to 01.04.2019,
• 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 Rs.45 lakhs.
For the purpose of this clause, -
i. Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their respective geographical limits prescribed by an order issued by the Central or State Government in this regard;
ii. Gross amount shall be the sum total of; -
• Consideration charged for the services under affordable residential apartments by a promoter in RREP or in ongoing project @ the rate of 1.5%.
• Amount charged for the transfer of land or undivided share of land, as the case may be including by way of lease or sub lease; and
• Any other amount charged by the promoter from the buyer of the apartment including preferential location charges, development charges, parking charges, common facility charges etc.;
b. An apartment being constructed in an ongoing project, in respect of which the promoter has not exercised option to pay tax on construction of apartments at the rates applicable prior to 01.04.2019, under any of the schemes mentioned below (services as contained in certain entries in sub clause (iv), (v) and (vi) of S.
No. 3 of the rate notification No. 11/2017 – CGST Rate)
? Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana.
? “ln-situ redevelopment of existing slums using land as a resource, under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban).
? “Beneficiary led individual house construction / enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana.
? “Economically Weaker Section (EWS) houses” constructed under the Affordable Housing in partnership by State or Union Territory or local authority or urban development authority under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban).
? “Houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/ Lower Income Group (LIG)/ Middle Income Group-1 (MlG-1)/ Middle Income Group-2 (MlG-2)” under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban).
? A single residential unit otherwise than as a part of a residential complex;
? Low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the 'Scheme of Affordable Housing in Partnership' framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
? Low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under-
1) The “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;
2) Any housing scheme of a State Government;
? Low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March, 2017.
Works contract service provided to the Central Government, State Government, Union Territory, [a local authority, a Governmental Authority or a Government Entity] by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Act.
Comment: From the above it can be seen that the apartments having carpet area of 60 sqm/90 sqm would be considered as affordable houses if sold for not more than Rs. 45 lakhs. In addition to this the apartments sold, which are part of the schemes mentioned above, irrespective of their sale consideration and in some cases irrespective of the area involved, would also fall under the same category. In this regard, if the promoter opts for the:
a. New scheme for the project having such apartments, the effective rate of tax would be 1% for affordable housing apartments, or
b. Existing scheme for the projects as contained in S. No. 3 of notification No. 11/2017 ibid, then the effective tax liability would be @ 8% for such apartments.
h. Ongoing project:
Notification No.3/2019 ibid defines ongoing project as a project which meets all the following conditions, namely-
(a) commencement certificate in respect of the project, where required to be issued by the competent authority, has been issued before 01.04.2019, and it is certified by any of the following that construction of the project has started before 01.04.2019:
(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority.
(b) where commencement certificate in respect of the project, is not required to be issued by the competent authority, it is certified by any of the authorities specified in sub clause (a) above that construction of the project has started before 01.04.2019;
(c) completion certificate has not been issued or first occupation of the project has not taken place before 01.042019;
(d) apartments being constructed under the project have been, partly or wholly, booked on or before the 31st March, 2019.
Explanation- For the purpose of sub- clause (a) and (b) above, construction of a project shall be considered to have started before 01.04.2019, if the earthwork for site preparation for the project has been completed and excavation for foundation has started before the 01.04.2019.
Comment: All the above conditions need to be met to qualify as an ongoing project.
Hence, in case:
a. Construction has begun in the project but no booking has happened until 31st
Mar ’19, or
b. Projects where completion certificate or first occupation has happened by 31st Mar ’19,
Such projects would not be ongoing projects. Further in case of projects falling under a), no option would be available to pay tax at the rates applicable prior to 1st Apr ’19.
i. Apartment booked on or before the 31st March, 2019
Notification No.3/2019 ibid defines an apartment booked on or before the 31st March, 2019 as an apartment which meets all the following three conditions, namely-
(a) part of supply of construction of which has time of supply on or before the 31st March, 2019 and
(b) at least one instalment has been credited to the bank account of the registered person on or before the 31st March, 2019 and
(c) an allotment letter or sale agreement or any other similar document evidencing booking of the apartment has been issued on or before the 31st March, 2019; Comment: Receipt of money in the bank account is an important criterion. Further it is to be noted that each project under RERA would be required to have a separate bank account. Hence, the receipt of money in any bank account other than the RERA designated, might not be treated as a receipt in respect of the project under consideration.
j. Commencement certificate:- As per paragraph 4 (xxi) of notification No. 3/2019 ibid, means the commencement certificate or the building permit or the construction permit, by whatever name called issued by the competent authority to allow or permit the promoter to begin development works on an immovable property, as per the sanctioned plan.
Comment: In case there is no commencement certificate issued by the local authority the approval of plan would be considered as commencement certificate.
k. Development works: -As per paragraph 4 (xxii) of notification No. 3/2019 ibid, means the external development works and internal development works on immovable property.
l. External development works: -As per paragraph 4 (xxiii) of notification No. 3/2019 ibid, includes roads and road systems landscaping, water supply, sewerage and drainage systems, electricity supply transformer, sub-station, solid waste management and disposal or any other work which may have to be executed in the periphery of, or outside, a project for its benefit, as may be provided under the local laws.
m. Internal development works:-As per paragraph 4 (xxiv) of notification No. 3/2019 ibid, means roads, footpaths, water supply, sewers, drains, parks, tree planting, street lighting, provision for community buildings and for treatment and disposal of sewage and sullage water, solid waste management and disposal, water conservation, energy management, fire protection and fire safety requirements, social infrastructure such as educational health and other public amenities or any other work in a project for its benefit, as per sanctioned plans.
n. Competent authority:-As per paragraph 4 (xxv) of notification No. 3/2019 ibid, the term "competent authority” as mentioned in definition of “commencement certificate” and “residential apartment” , means the local authority or any authority created or established under any law for the time being in force by the Central Government or State Government or Union Territory Government, which exercises authority over land under its jurisdiction, and has powers to give permission for development of such immovable property.
o. Real estate regulatory authority: -:- As per paragraph 4 (xxviii) of notification No. 3/2019 ibid means the Authority established under sub- section (1) of section 20 (1) of the RERA, 2016 (No. 16 of 2016) by the Central Government or State Government.
p. Residential apartment:- As per paragraph 4 (xxix) of notification No. 3/2019 ibid, is defined as an apartment intended for residential use as declared to the Real Estate Regulatory Authority or to competent authority.
q. Commercial apartment: -As per paragraph 4 (xxx) of notification No. 3/2019 ibid, shall mean an apartment other than a residential apartment.
r. Floor Space Index:- :- As per paragraph 4 (xxxi) of notification No. 3/2019 ibid, 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.
1.3 Rate Table
Type of Project Effective rate of tax
1. Residential project - Other than affordable
i. Ongoing project (old scheme) 12%
ii. Ongoing project (new scheme) 5%
iii. Project commenced on or after 1.4.2019 5%
2. Residential project –Affordable
i. Ongoing project - Apartments under Central and/or State housing Scheme*(old scheme)
ii. Ongoing project - Apartments NOT under Central and/State housing scheme* and Carpet area <= 60/90 Sqm and
consideration <=Rs. 45 lakhs (old scheme) 12%
iii. Ongoing project - Apartments under Central and/or State housing Scheme* (new scheme) 1%
iv. Ongoing project - Apartments NOT under Central and/State housing scheme* and Carpet area <= 60/90 SQM and
consideration <=Rs. 45 lakhs (new scheme) 1%
v. New project - Apartments under Central and/or State housing Scheme*,Carpet area >60/90 SQM and/or consideration >Rs. 45 lakhs
Affordable- ongoing project (new scheme) 5%
vi. New project - Apartments whether or notunder Central and/or State housing scheme* and Carpet area <= 60/90 SQM and consideration <=Rs. 45 lakhs (new scheme) 1%
3. Commercial units in RREP
i. Ongoing project (old scheme) 12%
ii. Ongoing project (new scheme) 5%
iii. project commencing on or after 1.4.2019 5%
4. Commercial units in REP other than
RREP (in all cases) 12%
5. JDA – Construction service by Devel oper to Landowner – payable by
Developer
i. For residential and commercial apartm ents in RREP
a. JDA- before 01.04.2019
Supplementary agreement (SA)- before
01.04.2019 18%
(If value includes sale of land then
12%)
b. JDA- before 01.04.2019
SA- after 01.04.2019 (opting for old scheme) 12% (as value would include land component as well)
c. JDA- before 01.04.2019
SA- after 01.04.2019 (opting for new scheme)
5%
d. JDA- after 01.04.2019
SA- after 01.04.2019 5%
ii.
than RREP
18%
(If value includes sale of land then
12%)
6. JDA – Development rights provided commercial and residential apartments by Landowner to Developer w.r.t
i. JDA- before 01.04.2019
SA- before 01.04.2019
18%
(If value includes sale of land then
12%) (payable by the Landowner)
ii. JDA- before 01.04.2019
SA- after 01.04.2019 18%
(payable by the Developer under
RCM)
iii. JDA- after 01.04.2019
SA- after 01.04.2019
A. Commercial
B. Residential
18%
(payable by the Developer under RCM)
Initially exempt.
For units remaining unsold on CC - 18% (however restricted to 5% on the value of flat sold closer to the
CC date) (payable by the Developer under RCM)
7. Works contract service
i. For other than affordable housing project and for commercial project 18%
ii. For affordable housing project 12% (subject to conditions in the notification)
*Apartments under Central and/or State housing Scheme - an apartment being constructed under any of the schemes specified in sub-item (b), sub-item (c), sub-item (d), sub-item (da) and sub-item (db) of item (iv); sub-item (b), sub-item (c), sub-item (d) and sub-item (da) of item (v); and sub-item (c) of item (vi), against serial number 3 of the Table in notification No. 11/2017-CT(R) dated 28.06.2017.
2. DECISION MAKING FOR NEW SCHEME
Introduction
Prior to 1st Apr ‘19, GST on construction service relating to residential and commercial apartments is effectively at 12% (post deduction of 1/3rd towards the value of land). Further, a concessional GST rate of 8% (post deduction of 1/3rd towards the value of land), was applicable for affordable houses as defined during such period. Full benefit of credit was available to developers/builders.
W.e.f. 01.04.2019, GST would be liable at an effective rate of 5% (7.5% GST rate less 1/3rd towards land deduction) for apartments in constructed in “Residential Real Estate Project (RREP)” outside the affordable segment and effective GST rate of 1% (1.5% GST rate minus 1/3rd land deduction) for “affordable residential apartments” as defined in notification 3/2019 ibid. Though, construction of commercial apartments in an REP other than RREP would continue at the effective GST rate of 12%. However, benefit of input tax credit is unavailable going forward and also highly restricted credit benefit available for ongoing projects.
Further, it is to be noted that for a project that has commenced on or after 01.04.2019, the new scheme is mandatory, whereas for ongoing projects, the promoter has an option to choose either the new scheme or continue under the rates applicable prior to 01.04.2019.
Ongoing projects
Before analyzing which option would be beneficial for an ongoing project, it is important to understand the term ongoing project, which is a project which meets all the following conditions, namely-
? Commencement certificate issued - on/ before 31.03.2019
? Construction has started – on/before 31.03.2019
? Completion certificate not issued on / before 31.03.2019
? Booking* - on/ before 31.03.2019
The commencement certificate in respect of the project, where required to be issued by the competent authority, has been issued on or before 31st March, 2019, and it is certified by any of the following, that construction of the project has started on or before 31st March, 2019:-
? an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or
? a chartered engineer registered with the Institution of Engineers (India); or
? a licensed surveyor of the respective local body of the city or town or village or development or planning authority.
Thereby there is cumulative condition i.e. commencement certificate should be there plus the certificate as to the start of actual construction.
Where the commencement certificate in respect of the project, is not required to be issued by the competent authority, it is certified by any of the authorities specified in sub clause (a) above that construction of the project has started on or before the 31st March, 2019;
There are practical challenges which arises wherein there was a requirement of obtaining the commencement certificate as per law, whereas such commencement certificate was not so obtained then strictly as per the provisions, the benefit to continue with old scheme is ruled out.
There is an explanation explaining when the project is said to have been started and it reads as follows:
Explanation: - The construction of a project shall be considered to have started on or before the 31st March, 2019, if the earthwork for site preparation for the project has been completed and excavation for foundation has started on or before the 31st March, 2019
*Booking means an apartment booked – all the below conditions to be satisfied:
? At least a part of ToS falls prior to 1st Apr ‘19
? at least 1 installment has been credited to the bank account ? Document evidencing booking issued.
From all the above conditions if any project is not fulfilling all the conditions of an ongoing project, i.e. say:
a. No bookings have been made in the project though the construction has commenced, or
b. Booking / enquiry exists but no instalment is received or no documents is issued evidencing the booking, or
c. Booking has happened in the project but no commencement of construction, In all the above cases, it would be a new project, which will be liable at the rates effective from 1st Apr ‘19 i.e. 1% or 5%, mandatorily.
Further, it is to be noted that this new scheme of rates is applicable only in cases where construction services are provided along with transfer of land. For pure construction services, existing rate of 18% would apply.
Having ascertained the project is ongoing project, there are two options available i.e. opt for new scheme of concessional rate of tax or continue with the existing rate. We would proceed to understand the best option to the promoter. Further, this decision would have a large impact on the cost structure and future sales of promoter.
Therefore, before taking a decision, critical analysis of all factors shall be done.
Best option for promoter in case of ongoing projects:
As discussed in earlier sections, the promoter has two options for ongoing projects i.e. to continue with the existing scheme of 8% or 12% as the case may be else to opt for 1% or 5% as the case may be, without availing ITC.
The following shall be the impact if one opts for the 1%/5% scheme
• Promoter needs to reverse the credit pertaining to un-booked flat and installments not due, pertaining to booked flats as on 31st of March 2019 in terms of Annexure to notification No. 3/2019 ibid, which becomes a cost.
• Cash flow of such reversal of there is no sufficient credit in books.
• Promoter would be out of pocket in case the above cost cannot be collected from the customers by increasing the selling price.
The promoter of projects covered under RERA, may not be able to revise the price for the booked flats in view of the restriction laid therein.
• To the extent the promoter is unable to recover the inputs cost from the customer existing or prospective, it would be additional cost or decrease in profit for the promoter.
The following shall be the impact if one opts for the 8%/12% scheme
• No commercial impact in case the promoter would be able to collect 12% GST from customers.
• To compete with other promoters and to affect the same, the promoters would not be able to collected GST at 12% and any amount short collected shall become a cost. Say in case only 5% is collected instead of 12% then the 7% is decrease in profit to the developer.
• No RCM for short fall in 80% of purchase of input and input service by registered dealer and additional liability.
• The mix of affordable apartments will also be determinative since the credit of the same will be generally higher thereby benefit of ITC will be available for other payments.
We will discuss the impact of the new scheme on different types of ongoing projects in subsequent paragraphs.
2.1 Commercial projects
• The pure commercial projects would be liable at 12% (after 1/3rd deduction for the land) even after 31st Mar ’19 and would be eligible for full ITC. Since, there is no change in taxation structure with respect to such projects, there would be no decision making required in this regard.
2.2 Mixed projects (commercial > 15%)
• In general a mixed project would mean a project consisting of both commercial and residential units.
• Since this is an REP other than RREP (i.e. commercial > 15%), the effective rate applicable to the commercial apartments would be 12% as the new scheme is not applicable to such units. Hence no case of decision making for such commercial units.
• However, w.r.t. the residential units the promoter would have an option to go for the effective rate of either 8% / 12% (old rates) or 1% / 5% (new rates), for affordable residential apartments or other apartments, respectively.
• As there is change in rate of tax for the residential apartments, we need to analyze whether paying tax under existing scheme would be beneficial or opting for new scheme would be beneficial.
• The following are the steps to decide the above for the residential portion in the said project:
In case promoter opts to pay GST @ 12% (only w.r.t. residential apartments)
• In such case, for the bookings of residential apartments and amounts received, before 1st Apr ’19, the price quoted to the customer would be in such a way that the GST would be paid over and above the price quoted by the promoter, which would be collected and paid to the Government.
• However, in respect of the above apartments, there could be a possibility that the customers object to pay GST @ 12% for amounts paid on or after 1st Apr ’19 and agree to pay GST only @ 5%. In such case the difference tax i.e. @ 7% would become a cost to the promoter.
• Further, in case of residential apartments booked on or after 1st Apr ’19 also if the customer agrees to pay GST only @ 5% then the remaining 7% GST would have to be borne by the promoter, adding to the cost of the promoter for continuing under the existing scheme.
• In case, the customer agrees to pay GST @ the agreed rate in the agreement of sale for the residential apartments being @ 12% for the bookings done prior to and after 31st Apr ’19, there would be no additional cost to the promoter on account of continuing with the existing scheme of tax as he collects and pays tax.
• There would be no cost on account of ITC as the promoter would be eligible for the credit as he is continuing with the existing scheme.
Also, ITC reversal w.r.t. unsold units at the end of the project is not considered as a cost as the same would also be part of cost to promoter if he opts for the new scheme @ 5%.
Additional cost to promoter (E) = 12% on sale consideration (-) GST paid by the customer, w.r.t. residential apartments in the project.
• The major decision factor here is to do with customer acceptance and market conditions for sale of flats. Further also the reversal of credit to the extent of unsold flats would be additional cost.
In case promoter opts to pay GST @ 5% (only w.r.t. residential apartments)
• Due to opting for this scheme the promoter would be required to reverse ITC as per Annexure I to notification No. 3/2019 ibid.
• Also the promoter would be ineligible to any ITC w.r.t. procurements made from 1st Apr ’19 including RCM for Unregistered supplies relating to the residential apartments, which would add to the cost.
• The customers would agree to pay GST @ 5% for the residential apartments and hence there would be no additional cost on account of the tax payable on the outward supply.
Additional cost to promoter (N) = ITC reversal as per Annexure 1 to notification
3/2019 ibid (+) ITC which is ineligible w.r.t. procurements from 1st Apr ‘19
Thereby if E is higher than N then new scheme i.e. effective rate of 5%, would be beneficial. In case N is higher than E then the existing scheme i.e. effective rate of 12%, would be beneficial.
2.3 Only residential or residential with commercial <= 15%
• The existing effective rate of tax in case of affordable residential apartments is 8% and in case of other than affordable residential apartments it is 12%. Further, the effective rates as per the new scheme are 1% and 5%, respectively.
• The effective rate for commercial units in the existing scheme is 12% with ITC, and under the new scheme (where the carpet area of such commercial portion is < 15> As there is change in rate of tax, for the ongoing projects w.r.t. the commercial and residential apartments, we need to analyze whether paying tax under existing scheme would be beneficial or opting for new scheme would be beneficial.
• The following are the steps to decide the above:
In case promoter opts to pay GST @ 12%
• In such case, for the bookings of apartments and amounts received, before 1st Apr ’19, the price quoted to the customer would be in such a way that the GST would be paid over and above the price quoted by the promoter, which would be collected and paid to the Government.
• However, in respect of the above apartments, there could be a possibility that the customers object to pay GST @ 12% for amounts paid on or after 1st Apr ’19 and agree to pay GST only @ 5%. In such case the difference tax i.e. @ 7% would become a cost to the promoter.
• Further, in case of units booked on or after 1st Apr ’19 also if the customer agrees to pay GST only @ 5% then the remaining 7% GST would have to be borne by the promoter, adding to the cost of the promoter for continuing under the existing scheme.
• In case, the customer agrees to pay GST @ the agreed rate in the agreement of sale being @ 12% for the bookings done prior to and after 31st Apr ’19, there would be no additional cost to the promoter on account of continuing with the existing scheme of tax as he collects and pays tax.
• There would be no cost on account of ITC as the promoter would be eligible for the credit as he is continuing with the existing scheme.
• Also, ITC reversal w.r.t. unsold units at the end of the project is not considered as a cost as the same would also be part of cost to promoter if he opts for the new scheme @ 5%.
Additional cost to promoter (E) = 12% on sale consideration (-) GST paid by the customer, w.r.t. all apartments in the project.
In case promoter opts to pay GST @ 5%
• Due to opting for this scheme the promoter would be required to reverse ITC as per Annexure II to notification No. 3/2019 ibid.
Also the promoter would be ineligible to any ITC w.r.t. procurements made from 1st Apr ’19, which would add to the cost.
• The customers would agree to pay GST @ 5% and hence there would be no additional cost on account of the tax payable on the outward supply.
Additional cost to promoter (N) = ITC reversal as per Annexure 1 to notification
3/2019 ibid (+) ITC which is ineligible w.r.t. procurements from 1st Apr ‘19
Thereby if E is higher than N then new scheme i.e. effective rate of 5%, would be beneficial. In case N is higher than E then the existing scheme i.e. effective rate of 12%, would be beneficial.
Let us understand whether paying tax under existing scheme would be beneficial or under new scheme with the following example:
Illustration: X Ltd is constructing residential apartments in a project. Project comprises of 75,000 sq ft carpet area and the carpet are of each flat is 1500 sq. ft. The total flats in the project are 50.
• 90% of the project is completed up to 31.03.2019
• 30 flats were booked for Rs. 5000 per sq. ft up to 31.03.2019. Further, 90% invoicing was done up to such date and payment for the same (Rs. 20.25 crs) was also received from the customer. Tax on the such amount was paid (Rs. 2.43 cr).
• Remaining consideration to be received for the above = Rs. 2.25 crs. Tax @ 12% = Rs.0.27 crs
• It is assumed that the remaining units will be sold at Rs. 5000 per sft. Amount to be realised for the remaining 20 flats = Rs.15 crs and tax @ 12% = 1.80 crs • ITC availed by X Ltd. for the project including transitional credit claimed up to
31.03.2019 - Rs. 3.75 crore.
• Estimated tax on the future procurements – 0.25 crs
• Completion certificate is not received on or before 31.03.2019.
• Customers agreed to pay 5% on the consideration paid from 01.04.2019.
If X ltd is continuing with the existing scheme
Steps Action Amount
1. GST @12% on the total consideration received (A)
(50*1500*5000)*12% 4.5 Cr
2. GST paid by the customer, w.r.t. all apartments in the project (B)
(2.43 Cr) + (0.27/12*5) +(1.8/12*5) 3.2925 Cr
3. Total cost to Developer (E) = A-B 1.2075 Cr
Steps Action Amount
1. ITC reversal as per Annexure 1 to notification 3/2019 ibid
(refer working note-1) 1.50 Cr
2. Compute the estimated ITC to be paid on input, input service and capital goods till the end of the project (B1) 0.25 Cr
3. Arrive at cost under the new project(N) =A1+B1
1.75 Cr
4. Decide = If E < N> Here, 1.2075< 1> If X Ltd. opts for the new scheme:
Working Note -1: (Detailed discussion on manner to compute is given in Chapter 4 of this book)
ITC to be reversed (Tx) = T-Te
Tx= ITC attributable to construction where ToS is on or after 01.04.2019
T= Total ITC availed as on 31.03.2019
Te= ITC attributable to construction where ToS is on or before 31.03.2019
Te=T* (carpet area of booked/total carpet area)* (value of supply for ToS of booked/ total value for the apartments booked on or before 31.03.3019) * 1 / % of completion of construction as on 31.03.2019.
Te= 3.75 – (3.75 * 45000/75000*20.25/22.50*1/90%)
= 3.75 – 2.25 = 1.5 Cr
Complications in case 5% is opted for on-going projects (Developer):
1. ITC would be a cost to Developer as thus cost data is required to be re-worked which may lead to change in price per sq. ft. Customer may not agree to such increased price.
2. Project wise data w.r.t. inputs and input services shall be constructed or identified.
3. If customer does not agree to remit 7% GST, then the same would have to be shown as discounts in invoice and books.
4. ITC availment or reversal shall be calculated for each project.
5. Procurements from registered persons shall be computed and if they are less than 80% of total procurements, then GST under RCM has to be paid on shortfall. This may lead to blockage of working capital.
Pros of opting new scheme by Landowner:
1. As Landowner would be availing ITC of GST charged by the Developer, the computations of 80% of registered purchases and the applicability of RCM in case of shortfall would not apply to Landowner. As the 100% procurements would be from the registered person only.
Points to remember before decision making:
1. If in a JDA, Time of supply is 01.03.2019 but neither the Developer nor the Landowner has discharged the liability and, if they discharge after the introduction of new scheme, then Developer/Landowner would be eligible to claim ITC of GST charged by the other party but such ITC cannot be utilised against the output tax liability relating to sale of flats to customers, if both the Landowner/ Developer opt to pay GST @ 5% on the on-going projects. However, such ITC can be utilised to pay any other outward tax liabilities.
2. If the project is almost completed i.e. more than 80% or approx, then it would be suggested that the Developer could pay GST under existing scheme as majority of inputs or input services would have been procured and ITC on such procurements would have been availed in his electronic credit ledger. However, if the project is in initial stages of construction where major part of inputs or input services are not procured then, it would be recommended to opt for new scheme.
3. If the project cost is at premium places wherein the essential component is due to premium of land value and construction cost and corresponding input tax credit is not substantial it would be ideal to go for new scheme if substantial booking is still open and expected to be done before obtaining CC.
4. One more deciding factor which can make difference in decision making is the expected flats to be sold before CC. This is because in such cases even in the exiting scheme also the credit attributable to unsold flats has to be paid back.
5. For the Landowner, as the ITC would be mostly only the construction services provided by the Developer, opting for the new scheme would be beneficial.
3. ACTIONS TO CONTINUE WITH THE EXISTING SCHEME
In case of an ongoing project, the promoter would have the option to continue paying GST at the effective rates as applicable prior to 1st Apr ’19 i.e. 12% or 8%, as applicable (hereinafter referred to as the existing scheme) or opt to pay at the effective rate of 1% or 5%, as applicable (hereinafter referred to as the new scheme), w.r.t. the residential apartments in any project and commercial apartments in an RREP (i.e. project where area of commercial apartments is <= 15% of the total project area). Other apartments i.e. apartments in a pure commercial project and commercial apartments in an REP other than RREP (i.e. project where area of commercial apartments is > 15% of the total project area), the new scheme would not be applicable and would have to continue paying GST under the existing scheme.
Generally in case of projects where a major portion of the cost has been incurred and also substantial bookings have been done, it might be beneficial for the promoter to continue with for the reason that the contracts with customers cannot be modified to revise the prices to accommodate the increase in cost due to credit reversals that would be required in case of transition to the new scheme. However, this would have to be weighed against the possibility of collecting tax at the effective rate of 12% from the existing as well as the new customers. Below is a summary of the actions and implications for continuing with the existing scheme.
3.1 Actions for going with the existing scheme
For the different types of projects, i.e. pure commercial, mixed project and pure residential projects for which GST payment under the existing scheme is opted, the following points shall be noted:
• The effective rate of tax applicable for such ongoing projects would be 12% for the non-affordable segment and 8% for the apartments under the affordable segment (as per the earlier definition).
• In case of affordable housing, it is important to note that the apartments that were eligible for the reduced effective rate of 8% prior to 1st Apr ’19 (i.e. services falling under sub-item (b), (c), (d), (da) and (db) of S. No. 3(iv), subitem (b), (c), (d) and (da) of S. No. 3(v) and sub-item, (c) of S. No. 3(vi)) would only be able to continue to pay GST at such rate. Other apartments, even though satisfying the definition of ‘affordable residential apartment’ as defined under S. No. 2(xvi) w.e.f. 1st Apr ’19, would not be eligible for the effective rate of 8% and would have to pay at the effective rate of 12%. In other words the new definition of only based on carpet area and value being less than 45 lakhs is not applicable to continuing under old scheme.
• ITC on the future procurements would be eligible in terms of section 16 and 17 of the Act subject to rule 42 and 43 of the CGST Rules, 2017, where such credit would be considered as a common credit. Discussion on such rules has been made in detail in chapter 5 of this book.
• Further, ITC reversal would be required in terms of rule 42 and 43 of the CGST Rules, 2017, in respect of the units that are unsold on receipt of CC.
The reversal of such ITC is explained in detail in chapter 5 of this book.
• The option of paying under existing scheme has to be exercised by 10.05.2019 in the Form given in Annexure IV to notification No. 3/2019 ibid. If not opted within such time, the new scheme would be deemed to have been opted for.
• The invoices issued from 01.04.2019 up to the date of exercising such option shall be issued charging taxes at applicable rates and not at concessional rates.