Implication of GST on Real Estate

In recent times, we have seen a significant transformation in the Indian Real Estate Sector. Recently Real Estate (Regulation and Development) Act (Maha RERA in Maharashtra) has also issued to address the accountability of builders and real estate Agents/Brokers. Consequent to decisions taken in the 33rd and 34th GST council meeting, Government has brought out transformational changes in GST law and tax rates for real estate sector w.e.f  01.04.2019. As we already know, Under GST, Goods means any Movable property. That means the sale of the completed property is not a good nor the services hence, GST shall not be applicable in sale of completed property/ flats or ready to move property. This also mentioned in para 5 of schedule III.

Although GST is not charged on the sale of the completed property however Stamp duty and registrations are not included in those sale value. In simple words, GST shall be levied on registration charges and stamp duty value irrespective of whether the sold building is constructed or under constructed. Before going to the deep of the impact of GST on Real Estate, Let’s understand certain concepts relating to the real estate sector 

GST on Real Estate

Firstly, we will understand the tax rate applicable from 01st April 2019 on real estate for the purchase of the under-construction property.

S.No. Type of Service Before 01.04.2019 On or After 01.04.2019
Rates of Tax Whether Eligible for ITC Rates of Tax Whether Eligible for ITC
1 Construction of Normal Apartment 12% Yes 5% No
2 Construction of Affordable Apartment 8% Yes 1% No

If the builder provides the service of construction of commercial Property then GST shall be levied @ 12% and builder shall be eligible for ITC.

From the above, it can be easily understood that each tax structure has its own advantages and disadvantages. New tax structure, for instance, provides reduced tax rate where old tax structure allows the builder to avail ITC.

The facility to choose the old tax structure is still available to the builders for ongoing projects. However, if the projects have started on or after 01.04.2019, then the builder has to use new tax structure mandatorily.

If all the following 9 points have been fulfilled then it will be considered that the project is an ongoing project, otherwise it will be a new project and consequently, new rates will be applicable to them.

S.No. The activity has taken place on or before 31st March 2019
1 Commencement certificate/building permission has been granted
2 The same is certified by architect/chartered engineer /Licenced surveyor
3 Site preparation for construction was completed
4 Excavation for the foundation has started
5 At least a flat has been booked
6 A builder has entered into an agreement with the buyer
7 The builder has received some advance into his bank account
8 The builder has tax liability/ Time of supply
9 Completion Certificate has not yet been issued

Example: M/s. ABC Builders are constructing residential apartments in Maharashtra. They have received necessary Registration Under MAHA RERA from RERA authorities in Maharashtra before 31st March 2019 to construct the said Project. Earthwork has been completed and excavation has commenced before 31st March 2019. A flat was booked before 31st March 2019 in respect of which M/s. ABC Builders have entered into an agreement and the buyer has paid some advance to the bank account of the builder and thus, the builder has the tax liability before 31st March 2019. Since the construction has not yet completed, no completion certificate was issued by the competent authority. Since all the conditions have been met, the above project is an ongoing project.

Now let’s discuss the GST impact on Real Estate Sector:

GST impact on Developers / Builders / Contractors:

Before July 2017, Builders had to incur various tax payments like on goods builder had to pay Excise Duty, VAT/CST, Custom Duty, Entry Tax, etc. and service tax on various services like labor charges, legal fees, professional fees, etc. Also, in this structure, the input credit of goods can’t be used with the output liability of services. For Example: if the builder had ITC on VAT then such builder wouldn’t be able to set off with the output liability of service tax. At last, this affects the pricing of the property and the buyer had to suffer the burden for this. As the motive of the GST is to subsumed all indirect taxes and levy only one tax i.e. One Nation, One Tax.

Hence, After the introduction of GST, the cost of the construction has been reduced significantly due to the elimination of multiple taxes levied by the central government and state government and now assessee can offset the Output liability of services with the ITC on goods and vice versa.

Builder gets the benefit not only through the adjustment of taxes but also GST helps the following:

  • To eliminate the cascading effect
  • Easy Compliance
  • Create a Uniform Tax rate and structure

GST impact on Buyers:

Similar to the builders, Homebuyers had also incurred costs of various taxes.

Under the Real estate sector, generally, there are 3 expense costs, namely land, material, and labor or service costs. Before GST, VAT/CST is calculated on material cost, and service tax is calculated on labor and other service costs. Also. The VAT/ CST is a state-level tax due to which the price of the property is different from state to state. Also, due to a large number of taxes levied on the property, the entire tax calculation becomes too complex for the buyer to understand.

After the introduction of GST, A simple and transparent tax applied to the purchase price. GST makes the calculation much simpler since the buyer has to pay GST tax. All under-construction properties will be taxed at 12 percent (excluding stamp duty and registration charges). As discussed above, GST shall not be charged to completed and ready-to-move-in Property, as there are no indirect taxes applicable in the sale of such immovable properties.

Although, in the short term, the benefit may not be visible to buyers it will definitely have a positive impact for the long term when the ITC received by the developer shall be passed to the buyer.

GST impact on Real Estate Agents/ Brokers:

As per section 2(5) of CGST Act, 2017, an agent means a broker or commission agent or whatever the name called, who carries the business of supply or receives the goods or services on the behalf of others. In Simple words, in relation to real estate, the person who helps the buyer to choose the property as per his requirement and to the builder to provide more buyers is an agent. As per section 24 of CGST Act, these commission agents are compulsorily required to get registration under GST irrespective of their income.

Let’s understand this concept with an example: Mr. X (builder) hire Mr. Y to sell the flats as an agent. Now Mr. Y shall make the supply of services on the behalf of another person. In this case, Mr. Y is required to get compulsory registration under GST. GST rate in Commission is 18%, Although ITC is available to the agents against GST paid in such commission.

GST Impact on Co-promoters Land Owners:

There are cases where the land is acquired by some other person or persons and such landowner gives the development rights to the builders. Since as per section 7 read with Schedule III of CGST Act, 2017 sale of land is neither goods nor services, hence No GST shall be applicable to the sale of land by the landowners to the Builders. On or after 01.04.2019, if any landowner transferred the development rights to the builder for the construction of any project, then such landowners is relieved from the payment of tax on the transfer of such development rights because in this case, as per the notification Number 05/2019, the liability is on the builder under RCM basis. However, such supply shall be considered as exempted if the development rights have been transferred in respect of residential apartments.

GST Impact on Resale of Property

In the introduction part, we have already discussed that the GST is applicable to goods and services and Goods includes only moveable property. And when we talked about the resale of property that means ready to move property or apartments that means immovable property. In simple words, GST is not applicable in the resale of the property since it is an immovable property. We have also discussed that the GST on stamp duty is applicable in every type of sale of property whether under constructed or ready to move. The same is applicable in Resale of property, which means GST on stamp duty shall be levied on the resale of the property.

GST Impact on Redevelopment of Property:

Before understanding the impact of GST on the redevelopment of the property, let’s understand the

The concept with an example:

There is a 6-floor building owned by Mr. X and now Mr. X wants to make a new structure of that building. However, Mr. X does not have money to break such building and build the new structure of the building. Then, Mr. X meets Mr. Y (Builder). Now, Mr. X and Mr. Y have agreed with the following Joint development agreement. Mr. Y shall break the 6-floor old structure building Then, Mr. Y shall build a 10-floor structure building as per the requirement of Mr. X. Since Mr. X does not have money so for consideration, Mr. Y shall take the 3 floors of the building and shall be eligible to sale such 3 floors to other customers as per his discretion.

In the above example, we will see majorly 3 transactions:

  1. Transfer of Redevelopment rights by the landowners(Mr. X) to Builder(Mr. Y)
  2. Sale of 3 new Floor by the Builders (Mr. Y) to new customers.
  3. After construction, Transfer of rights by the builder (Mr. Y) to Landowners (Mr. X).

Now, let us discuss the impact of GST on each transaction:

  1. Transfer of redevelopment rights by the landowners or builders: As we already discussed above that the sale of land is neither the goods nor the services, hence no GST levied on the landowners. Although, the builder shall be liable to pay GST under RCM for the registration of redevelopment and permission from the local authority.
  2. Sale of new floors by the builders to new customers: If the builder has sold the flats before receiving its completion certificate then as per section 7 read with para 5(b) of Schedule II, it will be considered as a supply of service. However, if it would be sold after completion certificate then no GST shall be charged.
  3. After construction, Re-transfer of rights by the builder to landowners: Since the builder gives the ready to move flats to the landowners, hence GST shall not be charged as per our above discussion. However, if the builder gives transfer the rights of the flats over the period of construction then GST shall be applicable. Since, on this transaction, no monetary consideration was involved hence section 15 read with Rule 28 of CGST Rules shall be applicable. It states that if the consideration has been received in non-monetary terms then the value of supply shall be calculated in the following

Manner:

  1. a) Open Market value (OMV) of such supply
  2. b) If OMV is not available then goods or service of like kind or quality
  3. c) If that also not available then rule 30 and 31 shall apply which states

Rule 30: If the value is not determined with rule 28 then take 110% of the cost of production or cost of provision of service.

Rule 31: Best Judgement that means if all the above rule wouldn’t apply then the taxpayer should pay GST as per the best of his judgment.

[Note: If the builder receives any advance money from the customer in relation to under construction of property then also GST shall be applicable as the supply of service.]

GST Impact on Other Stakeholders:

As we already discussed above that in real estate, generally there are 3 costs i.e. Land, Material & Labor costs. Although there are other costs also have to be borne by the builder like professional fees, legal fees, Architect fees, etc. All these costs vary with the increase or decrease of Indirect tax Like GST. Since the GST has been subsumed all the indirect taxes, hence the costs of all those goods or services have been reduced. That means GST gives the benefit to the whole industry.

Till now, we have understood the impact of GST on the real estate sector. Now we will understand the procedure to be followed by the builders in GST.

  • Supply: As we already discussed above that as per para 5 of Schedule III GST is not to be charged on the sale of land or building as it was not a good nor the services However we shall charge GST on the under-construction property and as per schedule II, it shall be treated as supply of service.
  • Place of supply: As per section 7 of IGST Act, 2017, if the location of supplier and place of supply is under the same state, then it would be considered as Intrastate supply and CGST and SGST would be applicable however if the location of supplier and place of supply are in different state then it would be an interstate supply and consequently IGST shall be applicable.

As per section 12(3), if any service provided in respect of immovable property then the place of supply shall be the location where the immovable property is situated or intend to be situated.

Register your GST with Real Estate

For Example: If the builder (Supplier) is located in Delhi and he is making a building in Mumbai, then it will be an interstate supply and IGST shall be a levy, irrespective of the location of the recipient.

  • Exemptions: No Exemption
  • Computation: Value of supply * Rate of GST
  • Reverse Charge Mechanism:

If the builder has received any services which are mentioned U/s 9(3) or 9(4) read with Notification number 13/2017, then builder shall be liable to pay GST on such services.

Example: Legal services from any arbitral, or GTA services in which transporter has not charged GST on the invoice, etc.

  • Time of Supply: Since the under-construction property is considered as supply of service so here we defined the time of supply in case of services:

Under Normal Charge Mechanism (Section 13(2) of CGST Act, 2017):

If the invoice has issued within 45 days of completion of service

Invoice date

Or Whichever is Earlier

Payment date 

If the invoice has not issued within 45 days of completion of service

Completion of service

Or Whichever is Earlier

Payment date

Under Reverse Charge Mechanism (Section 13(3) of CGST Act, 2017):

Date of payment

Or     Whichever is Earlier

61st day from the day of issue of invoice

  • Input Tax Credit(ITC):  As per Section 16 of CGST Act, ITC of GST shall be available if such input or input services has been used for output supply or intended to be used in the course or furtherance of business.

Section 16 also specifies other certain conditions to avail the ITC which are as follows:

  • He has the invoice or debit note or credit note and in case he has received any supply from an unregistered dealer then he should have a self invoice.
  • He has received the goods/services.
  • The payment has been made within 180 days from the date of invoice.
  • He has filed a valid return etc.

Section 17(5), provides a list of block credit that means the assessee shall not be able to avail the ITC on certain supplies which includes

Works contract services for the construction of immovable property except when

  • It is input service for further supply of works contract service
  • Immovable property is a plant and machinery.

 

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