Impact of GST on Real Estate Sector in India
In this Article, we will discuss about the New Scheme under GST regime for Real estate promoters/ developers which was introduced by the GST council through NN. 03/2019 dated 29th March, 2019.
Highlights of Revised Scheme:
- The new scheme is compulsory for projects commenced on or after 01-04-2019.
- The revised scheme applies to residential apartments in Real Estate Project (REP) and Residential Real Estate Project (RREP) and commercial apartments in RREP which are covered under RERA [Real Estate (Regulation and Development) Act, 2016].
- ITC cannot be claimed. In case of on-going projects, developer has an option to stay in old regime or opt for new regime.
- GST rates can be summarised as under:
- The rates of old scheme is after considering the rebate given on part of land (1/3 portion). Hence, the rates are exclusive. Affordable projects mean a residential unit having carpet area of 60 sq metres for metro cities (90 sq metres in case the unit is located in non-metro city) and the gross amount charged is upto Rs. 45 lakhs.
- In case of new scheme, payment of tax is allowed only through Electronic Cash Ledger. Thus, ITC cannot be availed for payment of Output tax under new scheme.
- 80% of the inputs/ input services received by the promoter/ developer must be from a registered supplier. If this condition is not fulfilled, then the promoter/ developer must pay the balance deficiency under Reverse Charge Mechanism. Let us assume that the promoter availed 70% of inputs/ input services from Registered supplier, then on balance 10% inputs he is liable to pay GST under Reverse Charge.
- All cement for the project must be purchased from a registered supplier only. If not so received, the promoter is required to pay GST @ 28% under reverse charge (even if total value of supplies received from registered suppliers is more than 80%).
- In case of capital goods procured from unregistered person, the promoter is liable to pay GST at its respective rate under reverse charge.
- If a landowner transfers development right (TDR or Floor Space Index) to a developer/promoter against consideration whether wholly or partly, in the form of construction of apartments, the developer/ promoter shall pay tax on supply of construction of apartments to the landowner/promoter. The landowner can take credit of taxes charged from him by the developer promoter if the landowner-promoter further supplies such apartments to his buyers.
- In respect of ongoing projects, there is an option to avail for old scheme (The due date for opting was 20th May, 2019, which is already expired). If the promoter intends to shift to new scheme w.e.f. 1st April,2019, he is required to refund excess ITC availed as on 31st March,2019 or get credit of ITC less claimed as on 31st March,2019 as per prescribed Rules.
Some key issues arising:
- Reversal of ITC already claimed: Promoter/ Developer will have to reverse the proportionate ITC which is already lying in Electronic Credit Ledger.
- Time Limit of Credit Note: As per Sec 34 of the CGST Act, the registered person has to issue Credit Note on/ before September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier. As we all know any Real estate project takes at least 3-4 years’ time for completion. Now, in between if any customer cancels the booking after the time limit is expired (say after 2 years), then such customer has to bear the loss of GST paid on booking amount as the same cannot be refunded through normal procedure.
- Interest on Loan: There is a common practice in the industry that the promoter/ developer avail short-term or any unsecured loan from related party or any other UNREGISTERED individual. Now the Notification clearly says that the Developer must fulfil 80% condition of input/input services. So if the interest portion exceeds the limit of 20%, then the promoter/developer has to pay tax on RCM basis. The issue here is that Government has already exempted the service in Entry 27(a) of the Notification No. 12/2017 and Entry 28(a) of the Notification No. 09/2017 which relates to services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest. Which means if the promoter pays interest on such loan and such interest exceeds the limit of 20%, then he has to pay tax on such exempt service.
- The main purpose behind drafting the new scheme was to give benefit to the customer because the Government thought that the benefit of tax (ITC) is not being passed on to the end user by the Promoter. So the Government decided to introduce this scheme wherein the promoter is not allowed to avail ITC and at the same time, he has to procure inputs/input services from Registered Supplier only. This in turn will increase the cost of project and the burden will be ultimately shifted to the customers only. The very purpose behind drafting such notification has failed.