The Indian real estate sector is one of the most prominent sectors – both in terms of value and employment generated. Notably, the real estate sector is the second-highest employment generating sector in India. It is anticipated that by 2040, the real estate market will grow to INR 65,000 crores and would contribute 13% to the country’s GDP by 2025.
With a significant contribution to the country’s economy, real estate certainly deserves special attention from the Government. Perhaps this has been the reason that real estate even during the erstwhile regime was subject to a separate set of valuation mechanisms and rules. Under GST also, the sector and its peculiarities have warranted different taxation mechanisms.
Impact of GST and industry-specific issues
In the erstwhile regime, the construction sector was subject to both service tax and VAT when the property was sold before the receipt of the completion certificate. Post completion certificate was received, sale of the property was not subject to VAT and service tax. Under GST, since both VAT and service tax was subsumed, only a single levy of GST was levied on the sale of a property. This is apart from the stamp duty and registration charges which continue under GST as well.
The sector witnessed three major reforms in a span of 2 years vi. Demonetisation, Real Estate (Regulation and Development) Act, 2016 (RERA) and GST. This had left the sector grappling with everyday changes in regulations and policies. Just as the industry was settling down and adapting to these changes, Covid-19 hit the sector hard. The last 14 months have been a nightmare for the builders in the country. The sales and demand are sluggish and do not seem to improve anytime soon as the country prepares for a third wave of Covid-19 by end of 2021. In this blog, we aim to cover the impact of GST and the issues that the industry faces on account of GST.
From GST perspective, the following are key issues that the industry reels from:
- Exclusion of land value: The GST law provides for a deduction in value for the sale of land of one-third of the total amount charged by the developer. This is because the sale of land has been kept out from the ambit of GST. Schedule III of the CGST Act, 2017 which covers activities or transactions which shall be treated neither as a supply of goods nor a supply of services cover ‘sale of land’ at entry no. 5. However, the notional value prescribed by the law which one-third may not hold in every case. This has resulted in instances where the relators have litigated on the grounds that the actual value of land certified by a valuer should be allowed as a deduction, instead of the notional value as land value differs across the country.
- Option to choose GST rate schema: As a result of various representations filed, the GST council finally announced two rates of GST for the sector. In April 2019, the industry was given a one-time option to projects where construction and bookings began before 1st April 2019 to continue with the old rates of 8% or 12% with ITC or to opt for new tax rates of 1% or 5% without ITC. The rate of 1% and 5% would be applicable depending on whether the project gets covered under affordable housing or not.
Moreover, for projects beginning after 1st April 2019, it was decided that GST shall be applicable @ 1% without ITC (for affordable housing) and 5% without ITC (other than affordable housing). Moreover, for commercial projects, it was decided by the GST Council that applicable rates shall be 5% (without ITC) or 12% (with ITC) on total consideration after deduction of the value of land or undivided share of land, on the construction of commercial apartments [shops, godowns, offices, etc.] by the promoter. Multiple rates with multiple conditions have made the rating schema confusing and ambiguous.
- Procurements from registered dealers: The Council also prescribed that to avail the reduced rate benefits, the relator would have to procure 80% of inputs and input services from registered suppliers only. In case, a relator is unable to follow through with this rule during a financial year, they shall be liable to pay tax on the shortfall under the reverse charge mechanism. There are certain exceptions to this rule; however, this rule has yet again imposed another compliance requirement on the saddled sector.
- Ineligibility of credit: ITC for construction is not allowed to companies who are not in the business of construction or supplying works contract services. Therefore, companies undertaking the construction of offices, factories, warehouses, etc. on their own account and capitalising the same in their books are not eligible for ITC. This creates a cascading effect which is not in line with the fundamental principle of seamless credit under GST.
- GST on TDR or FSI: TDR means Transfer of Development Rights and FSI means Floor Space Index. In today’s era, Joint Development Agreement (JDA) are a norm. Under a JDA, a landowner provides rights to a developer to enable him to build a new project on the landowner’s land. In such transactions transfer of TDR by a landowner to the developer becomes taxable in the hands of the developer on a reverse charge basis. The time of supply in such cases arises on the date of completion or first occupancy, whichever is earlier. Similarly, for FSI, the developer shall pay tax on the date of issuance of the completion certificate when the consideration is in the form of construction of units. If consideration is paid in money, then GST is payable on the date of issuance of completion certificate when residential complexes are constructed, or else if commercial units are constructed then GST is payable immediately. A school of thought exists according to which, a transfer of TDR or FSI is not ‘supply’ as they are directly in connection with land which remains outside the purview of GST.
- Valuation of property for stamp duty: Stamp duty which is a legacy levy is applicable on the sale/ purchase of a property. However, the valuation of buildings can be different for stamp duty and for GST purposes. Moreover, stamp duty is levied and collected by different state governments. Therefore, there are divergent practices followed in different states creating a state of confusion.
- GST on landowner’s share of flats: In JDAs, the developer gives the landowner his share of flats and levies GST on the same on the date when the completion certificate is issued. The landowner is eligible to avail such GST paid as ITC against his GST liability which arises on further sale of such flats to ultimate homeowners (before receipt of completion certificate). Due to the timing difference of output liability arising first and input credit being accrued later, the landowners were facing challenges in terms of availing ITC. This resulted in tax blockage and working capital issues for landowners. However, in the 43rd GST council meeting, the council provided relief by allowing the developer to pay GST before the receipt of the completion certificate.
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