Impact of GST on Real Estate Sector | Presentation

GST Impact on
Real Estate Sector
Speaker: Mr. V. S. Datey
11th July 2020

v
Real Estate Sector – GST Issues July 2020 | 1
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v
Over-supply and sluggishness in demand, investors disappearing
Difficult stipulations in RERA, Anti-Profiteering, Consumer Court,
Competition Commission
One sided contracts held invalid
Many big names are facing Insolvency Proceedings
Home buyers can file application for initiating corporate
insolvency resolution process - jointly by not less than 100 or not
less than 10% of home buyers, whichever is less
Whatever hope for recovery has been smashed by Corona –
Central Government and all State Governments are bankrupt
Real Estate
Sector in
great
difficulty

v
Renting and Leasing of Immovable Property
TDR/FSI/Long Term lease
Sale of Land and Developed Plots
Real Estate Projects under RERA
Works Contracts
Government related construction contracts
Issues under
Real Estate
Sector

v
Taxes on lands and buildings is a State subject – Entry 49 of List II
of Seventh Schedule – Article 246
However, Article 246A of Constitution confers concurrent powers
to Centre and State to make laws with respect to tax on goods
and services – these are overriding powers
Services means anything other than ‘goods’ – Article 366(26A) of
Constitution
Thus, ‘services’ can cover immovable property
Constitutional
Background

GST
Council
v
GST Council has powers only to recommend
There is no specific provision that recommendation (or non-
recommendation) of GST Council are binding on Centre or State
Each State and even Centre are sovereign authorities and can
refuse to accept recommendations of GST Council or can impose
tax without recommendation of GST Council, though not
expected to do so

Sale of
complex
before
completion
v
As per para 5(b) of Schedule II of CGST Act, construction of
complex, building, civil structure, except where entire
consideration for sale has been received after issuance of
completion certificate is to be treated as supply of services
[deeming provision]
As per para 6(a) of Schedule II of CGST Act, works contract shall
be treated as supply of service
Interestingly, as per Article 366(29A) of Constitution of India tax
on transfer of property in goods involved in execution of works
contract is deemed to be sale of goods

Transactions
out of GST-
neither goods
nor service s-
para 5 of
Schedule III of
CGST Act
v
Sale of land
Sale of building or apartment after its completion i.e. after
completion certificate has been obtained from competent
authorities
Issue of sale of Developed Plots – with common facilities like
gym, club house, temple, security office etc. – care required – no
separate charge should be made

Real Estate
Projects
v
Radical Changes made w.e.f. 1-4-2019 – ITC abolished – no option
to pay GST at higher rate and claim ITC
REP – Real Estate projects. [definition under RERA] – can cover
both residential and commercial apartments (shops, offices,
godowns) – Commercial apartment means other than residential
apartment
RREP – It means REP with commercial apartments not more than
15% of total carpet area [No parallel definition in RERA] – balance
residential apartments – common buildings are not ‘commercial
apartments’
Promoter – often termed as builder or developer

Some General
Observations
v
Project with more than eight apartments or more than 500 Sq M
require registration under RERA
Even if definitions under RERA have been made applicable, CGST
Act has no specific provision that project must be registered
under RERA, though general scheme of GST envisages
registration under RERA.
Technically, the GST provisions apply to any project with more
than one building/apartment
Provisions do not apply to works contract or construction of
single residential unit which is not part of complex

Separate
accounts for
each real
estate project
v
The scheme envisages separate accounts for each project
If project is big, advisable to have separate GST Registration for
each project – even more than one project within mega project
Redevelopment project is subject to GST
GST is payable on apartments given ‘free’ to original apartment
owners, housing society and also on apartments sold to buyers
GST payable on Slum Rehabilitation Programmes as consideration
is received from Government in form of TDR/FSI

Promoter
v
Person who constructs or causes to be constructed building
consists of apartment or develops land into plots, to sale plots
[Often termed as builder or developer]
Development authority or any other public authority in respect of
allottees of buildings or apartments or plots
Apex State level cooperative housing finance society
Person who constructs apartments or plots and person who sales
such plots or apartments – both will be ‘promoters’
Thus, if land owner sales apartments, he will be ‘promoter’

Liability of
contractor or
sub-
contractor
v
Contractor supplying service to promoter or other contractor is
liable to pay GST
GST rate @ 18% [CGST @ 9% and SGST @ 9%] in case of
commercial and residential apartments
GST rate @ 12% [CGST @ 6% and SGST @ 6%] in case of
construction of affordable apartments
If contractor/sub-contractor unregistered, promoter liable under
reverse charge as 80% of inputs and input services are to be from
registered persons
No ITC to promoter

Ongoing
Projects as on
31-3-2019
v
Commencement Certificate (if applicable) and certificate of
CA/Architect/Chartered Engineer/Licensed surveyor that
earthwork for site preparation is completed and excavation
should have started before 31-3-2019
Apartments partially or wholly booked on or before 31-3-2019
[both conditions must be satisfied]
Even if partial completion certificate obtained, it will still be
considered as ‘ongoing project’
Promoter has option to shift to new scheme or continue under
old scheme of taxation
If promoter shifts to new scheme, reversal of excess ITC availed or
credit if less availed – calculations based on carpet area

Concessional
rate on
ongoing
projects if
promoter
continues
under old
scheme with
ITC
v
Promoter has option to continue under old scheme with ITC in
case of ongoing projects as on 31-3-2019.
In that case, the earlier GST rate of 18% [effective 12% of gross
amount charged includes value of land
In some ongoing projects, GST rate is 12% [effective 8%] if gross
amount charged includes value of land, if promoter continues
under old scheme. These cover schemes under Pradhan Mantri
Awas Yojana, Rajiv Awas Yojana, Affordable Housing, low cost
houses etc.

Sale after first
occupation or
completion
certificate,
whichever is
earlier – no
GST
v
Completion Certificate or Occupancy Certificate
Partial completion certificate accepted
Occupation before completion certificate – is it sufficient ? –
Really it is illegal occupation
Delay in obtaining completion/occupancy certificate.
State authorities register documents even before building is
complete – legally incorrect – but can be argued that State
Government has accepted it as transaction in immovable
property

Purchaser
(customer)
selling or
surrendering
before
completion
certificate
v
Purchaser of apartment may sale before completion certificate –
In my view he is not liable to pay GST as he is not supplier of
construction service and he is not in business of sale of
apartment (though even casual transaction can be taxed) –
dispute possible
Promoter can adjust GST only if he refunds the amount with GST
If customer cancels booking, the promoter deducts certain
amount. On that amount, GST @ 18% applies as it is ‘tolerating
an act or situation’ – deemed service

Affordable
Residential
Apartments
v
Affordable Residential Apartment – carpet area not exceeding 60
Sq M in metropolitan cities and 90 Sq M in other cities and towns
– gross amount charged not exceeding Rs 45 lakhs
Rate – CGST – 0.5% plus SGST/UTGST – 0.5% [total 1%] (no ITC) -
if value involves transfer of land or undivided share of land
Rate – CGST – 0.75% plus SGST/UTGST – 0.75% [total 1.50%] (no
ITC) - if value does not involve transfer of land or undivided share
of land
No GST when sale after issuance of completion certificate
Ongoing projects as on 1-4-2019 also eligible – in that case
reversal of excess ITC availed or credit if less availed is required

Residential
apartments
(Other than
affordable
residential
apartments)
v
of land
(how to use that credit?)

Commercial
Apartments in
Residential
Real Estate
Project
v
of land

Commercial
Apartments in
Real Estate
Project (Other
than RREP)
v
Rate – CGST – 6% plus SGST/UTGST – 6% [total 12%] (no ITC) - if
value involves transfer of land or undivided share of land
Rate – CGST – 9% plus SGST/UTGST – 9% [total 18%] (no ITC) - if
value does not involve transfer of land or undivided share of land

Value for
GST
v
If total amount charged includes value of land, tax is payable on
total amount charged less value of land.
Value of land will be taken as one third of total amount charged
(deeming provision – no option)
Really, at least in large cities, value of land is much more that
33.33% of total amount. It can be even 60-70%.
Validity of deeming provision doubtful as by deeming provision,
value cannot exceed value as specified in section 15 of CGST Act –
if someone tries, final result uncertain

PLC, EDC,
Parking Space
Charges
v
Prime Location Chares, External Development Charges (EDC),
parking space charges etc.
These are ‘naturally bundled services’ and should form part of
‘total amount’ charged for purpose of GST
Club Membership deposit or fee is not ‘naturally bundled service’
and should be taxable at hands of club
Maintenance service provided by promoter till housing society or
Resident Welfare Association (RWA) is constituted – GST @ 18% -
exemption of Rs 7,500 per month not available

Value when
apartment
given free to
earlier owner
or slum
dweller
v
Open market value at the time of supply
[rule 27 (a) of CGST Rules]
Value of supply of similar of apartments of like kind or quality, if
open market value not available [rule 27 (c) of CGST Rules]
110% of cost of provision of service [rule 30 of CGST Rules]

Deposit taken
by promoter
to be handed
over to club
or society
when
constituted
v
Often promoter collects deposit which is later handed over to
club or society or welfare association when constituted.
This is not part of value of apartment and promoter not liable to
pay GST
However, the club or society will be liable when the amount is
handed over to them
If promoter collects maintenance charges till handed over to
society or welfare association, GST @ 18% - no exemption upto
Rs 7,500 per month

Reverse
charge under
section 9(3) of
CGST Act
v
Reverse chare is payable on GTA, Advocate, Arbitral Tribunal,
sponsorship, services of supply of security personnel, renting of
motor vehicles and director’s services
Dispute whether reverse charge applies in case of salary paid to
whole-time/executive directors – in my view not payable –
however, disputes possible
Reverse charge in case of services from Government like license
fees ROC fees, inspection, testing above Rs 5,000
Reverse charge on TDR or FSI or upfront amount for long term
lease of 30 years or more

Reverse
Charge if
procurement
from
unregistered
Person
v
All capital goods, and all cement must be purchased from
registered persons. Otherwise GST at applicable rate applies
(28% on cement)
80% of inputs (including all cement) and input services should be
procured from registered person. Otherwise GST payable @ 18%
(irrespective of actual GST rate on those goods or services)
Service of grant of development rights, FSI, electricity, HSD,
petrol, natural gas), land to be excluded for 80%
Inward supplies of exempted goods /services included for
calculating 80% [not salary – what about interest received?]
Where GST paid under reverse charge u/s 9(3), it will be treated
as procured from registered person

Liability of
Land Owner
v
Often promoter enters into agreement with land owner in respect
of Real Estate Project. Land owner transfers development rights to
promoter
In some cases, land owner has revenue sharing arrangement with
promoter. In that case, promoter is liable to pay GST on entire
supplies of apartment.
In some cases, land owner-promoter is allotted some apartments,
which he sales on his own account either before completion or
after completion.
Some times, Joint Development Agreement is executed and
separate joint venture company or AOP is constituted

Land owner
himself selling
apartments
before
completion
v
In some cases, the land owner himself sales apartments before
completion. In that case, he has to charge GST. He can take ITC of
GST charged to him by promoter
Both land owner promoter and developer promoter should opt
for identical option i.e. 1%/5% or 8%/12%
However, there is time mismatch – as liability of land owner is
immediate while liability of developer-promoter is when
completed apartment is handed over to land owner promoter.
Hence, ITC may be unusable. No provision for refund

TDR/FSI/Upfr
ont Amount
v
Transfer of Development Rights (by land owner or society or
tenant to promoter)
Transfer of Development Rights by Government (in case of slum
rehabilitation project)
Transferable Development Rights (transfer of FSI)
Upfront amount for granting long term lease of land for thirty
years or more
Service code - The service should fall under group 99721. The tax
rate is 18% [9% CGST plus 9% SGST/UTGST].

Exemptions
of GST on
TDR/FSI
v
Exemption available in case of residential apartments, where sale
is made before completion certificate after 1-4-2019, as GST
payable @ 1%/5% without ITC – mode of calculation clumsy
Upfront amount for long term lease of industrial plots of
development of infrastructure business provided by specified
Government agencies. If leased plot not used for intended
purpose, GST payable
Ancillary services relating to long term lease like transfer fee,
conversion fee taxable

Reverse
Charge on
TRD/FSI
v
The GST payable by promoter under reverse charge on TDR, FSI,
upfrount amount w.e.f. 1-4-2019
There is no reverse charge for transactions upto 31-3-2019
For transactions upto 31-3-2019, in case of land owner, liability
arises when apartments are handed over to land owner

Valuation of
transfer of
development
rights made
by land owner
v
In majority of the cases, the developer promoter allots some
apartments to land owner as consideration for transfer of
development rights
In such cases, valuation will be on basis of value of similar
apartments charged to other buyers less value of land which will
be one-third of total amount charged
Really, value of land is much higher than one third and cost of
construction is much less than two third
Thus, GST is payable on much higher amount i.e. beyond section
15 of CGST Act.

Leasing and
Renting of
Real Estate
v
Service falls under 99721 and GST rate 18%
Leasing for residential purposes exempt
Lease/renting to company for use as residence – whether exempt
– in my view yes
Renting by joint owners – separate exemption
Renting of precincts of religious place exempt
Reverse charge in case of renting of immovable property by
Government to registered person w.e.f. 25-1-2018

Works
Contract
v
“Works contract” means a contract for building, construction,
fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation,
alteration or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in some other
form) is involved in the execution of such contract – section
2(119) of CGST Act.
Works contract as defined in section 2(119) of CGST Act is a
composite supply and shall be treated as ‘supply of service’ – para
6(a) of Schedule II of CGST Act – heading 9954

Issues in
works
contract
v
Can works contract be vivisected – i.e. split into goods and
services?
Since defined as ‘service’, GST rate 18%
What about works contract of air-conditioning a building?
Works contract of service of renewable energy plant and
equipment – GST @ 5% on 70% value as goods and @ 18% on
30% as value of services
Earlier controversy – GST @ 18%

Concessional
rate of GST
on works
contract
v
Services relating to historical monuments, canals, pipeline for
water treatment, sewage treatment to Government– 12%
Road, bridges, pollution control plant, structure for funeral, burial
or cremation – 12%
Low cost housing was 8% upto 31-3-2019
Railways, single residential units – 12%
Services to Government for educational, clinical, original work
other than for business – 12%
Earth work to Government – GST rate 5%
Contractor and sub-contractor also eligible for concessional rate

Tolerating an
act or
situation
v
LD charges
Demurrage
Cancellation charges
Penalty for breach of contract
Non-compete fees
Forfeiture of deposit or advance as penalty
Surrender of tenancy rights
Tenant getting rent for alternate accommodation (tenat liable)
Cheque bouncing charges
Notice Pay

Exemption in
respect of
services
supplied to
Government
v
Pure labour services to Government in respect of functions
relating to Article 243W and 243G – labour contract, sweeping
service, consultancy, solid waste management, Architectural
service, re-sectioning of river
Security services to Government – not exempt
Composite supply of service with upto 25% goods exempt
Advocate and Arbitral Tribunal services to Government - exempt

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