Real Estate GST Changes W.e.f 1st April, 2019 – Simplified Legal Analysis

Real Estate GST Changes W.e.f 1st April, 2019 – Simplified Legal Analysis by CA Ankit Gulgulia (Jain)

By CA Ankit Gulgulia (Jain)

After a long round of discussions, finally the real estate industry has got the notifications in regard to changes suggested by GSTN Council Meetings 33rd and 34th dated  24th Feb 2019 and Mar 19, 2019 respectively. As you would be aware that in these meetings majorly it was held that Real Estate Industry would be brought to subsidized rate of GST without allowing them an option to avail ITC.

Hence, the Key Changes that were decided by GSTN Meetings as indicated by Press notes to these meetings were :-

33rd GST Council Meeting dated 24th Feb, 2019

  1. GST Rate for affordable housing slashed to 1% without the benefit of the Input tax credit (ITC) as against the earlier rate of 8%
  2. GST rate for non-affordable housing reduced to 5% without ITC from the existing rate of 12%. Remember the changes apply only to residential projects and not to commercial projects.
  3. GST exemption proposed on Transfer Development Rights (TDR)/ Joint Development Agreement(JDA), long term lease (premium), FSI- Press release states that an Intermediate tax on development rights such as the above mentioned will be exempt from GST for such residential properties on which GST is payable.

34th GST Council Meeting dated 19th Mar, 2019

  1. GST Council has approved the transition plan for the implementation of the new tax structure for housing units.
  2. GST rates for new projects will be mandatory from April 1.
  3. Builders of existing housing projects that are completing construction by 31st March 2019 get to choose either of the two options:
    1. Option 1: Choose the old rate of 12% (8% for affordable housing) and charge this GST Rate in the invoices raised. Further, input tax credit benefit is available and can be passed on to the buyer.
    1. Option 2: Choose to bear GST tax at the rate of 5% (1% for affordable housing as defined by GST law). The benefit of the input tax credit(ITC) is not available to the builder for procurements used in construction.
  4. Those who choose the 2nd alternative must reverse the accumulated ITC on their closing stock of under-construction properties in a proportion laid down in rules (to be notified) within six months.
  5. The new rate of 5% (1% for affordable housing) will apply to those residential properties whose construction is going on even after 31st March 2019 or any new projects launched after 1st April 2019. Here, the benefit of ITC on procurements will not be available to the builders.
  6. 80% procurement of materials should be from the registered dealer.
  7. Up to 15% of commercial space to be treated as residential property for GST purpose.

Now, to give effect to the above decisions the following notifications have been issued by CBIC on 29th March, 2019.

S.No Notification No. Remarks
1 03/2019- Central Tax (Rate) Most Important of All Notification. Discusses the Rate, Conditions and Modalities of Both Options.
2 04/2019- Central Tax (Rate) For Transfer of Development Rights, FSI, Lease Premium – Conditions of Exemption
3 05/2019- Central Tax (Rate) For Transfer of Development Rights, FSI, Lease Premium – Conditions of Reverse Charge
4 06/2019- Central Tax (Rate) For Transfer of Development Rights, FSI, Lease Premium – Conditions of Time of Supply
5 07/2019- Central Tax (Rate) Treatment of Short purchases from decided limits of Registered Dealer Purchaser
6 08/2019- Central Tax (Rate)  Prescribing the Rate of GST on Unregistered Dealer Purchases
7 Notification No. 16/2019 – Central Tax Central Goods and Services Tax (Second Amendment) Rules, 2019 for ITC Computation in light to Real Estate Changes and Forms for Assessment DRC Forms

Before, we discuss in depth the Notification 03/2019 CTR and Notification 16/2019 – CT with sample calculations; let’s quickly understand what the other notifications prescribe and how law changes on builders/ real estate developers after 1st April, 2019..

Note :- The notification uses the term Promoter in all the cases. The same shall be referred to as per RERA provisions. For this article the term promoter / builder / developer has been used interchangeably for sake of better understanding.

Key Definitions of RERA that have been used in the above Notifications

Term Section of RERA Interpretation of Statute
Apartment Section 2(e) “apartment” whether called block, chamber, dwelling unit, flat, office, showroom, shop, godown, premises, suit, tenement, unit or by any other name, means a separate and self-contained 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
Promoter Section 2(zk) (zk) “promoter” means,— (i) 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

(ii) a person who develops 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

(iii) any development authority or any other public body in respect of allottees of—

(a) 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   (b) 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

(iv) 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

(v) 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 (vi) 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 sells 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;
Project   Either REP or RREP
Real Estate Project (REP) Section 2(zn) “real estate project” means 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 includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto;
Residential Real Estate Project (RREP)   REP in which the carpet area of the commercial apartments is not more than 15 per cent. of the total carpet area of all the apartments in the REP
Carpet area Section 2(k) “carpet area” means 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.
Floor space index (FSI)”   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.
An apartment booked on or before the date of issuance of completion certificate or first occupation of the project   ALL CONDITIONS MUST MEET (a) part of supply of construction of the apartment service has time of supply on or before the said date; and (b) consideration equal to at least one instalment has been credited to the bank account of the registered person on or before the said date; 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 said date.

Notification 04/2019 CTR

  • This notification basically exempts Transfer of Development Rights, FSI, Long term Upfront Lease premium of 30yrs or more etc in pursuance to Section 11(1) of CGST Act, 2017 where the tax is payable on final output of builder.
  • In cases where the entire consideration is received after OC/CC then exemption will not be available since output will be subject to tax.
    • So, on this part that is booked after OC, builder is liable to pay under reverse charge
    • GST Payable on TDR = Total GST on FSI/TDR x (Carpet area of unbooked apartment before OC / Total Carpet area of apartments in the project)
    • Tax payable above cannot exceed 1% / 5% of value of unbooked apartments
    • The liability to pay central tax on the said portion of the development rights or FSI, or both, calculated as above, shall arise on the date of completion or first occupation of the project, as the case may be, whichever is earlier.
  • GST Exempt = Total GST on TDR/FSI x  (Carpet area of Residential Appartments in the project / Total Carpet area of Residential and Commercial apartments in the project)
  • Value of supply of service by way of transfer of development rights or FSI by a person to the promoter against consideration in the form of residential or commercial apartments shall be deemed to be equal to the value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.
  • Value of portion of residential or commercial apartments remaining un-booked on the date of issuance of completion certificate or first occupation, as the case may be, shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be
Note: – In my personal view, the aspect of GST on TDR itself is a matter of litigation. Already it is litigated at different forums. Leaving that aside, in case of pure plotted projects, this tax on TDR shall constitute dead cost to builder as per provisions of GST.

Notification 05/2019 CTR

This notification simply casts the reverse charge mechanism on Builder / Developer in case of TDR / FSI / Upfront Long term lease premium of 30yrs or more in any case of service provider. So in all cases where the service provider is Individual , HUF or Body corporate the liability to pay tax is on the promoter / builder / developer.

 Notification No. 06/2019-Central Tax (Rate)

The Liability casted on the Builder Promoter to pay under reverse charge on TDR/FSI / Upfront Long Term lease premium has been made to arise on the date of issuance of completion certificate for the project, where required, by the competent authority or on its first occupation, whichever is earlier

In a nutshell, this notification prescribes Point of Taxation in these transactions.

Notification No. 07/2019-Central Tax (Rate)

Reverse Charge Compliance on the Developer Promoter shall be on Three of these Items in 1% / 5% regime:-

  1. Any Supply received from Unregistered Suppliers such that in a FY shortfall is below 80% would be Builder’s Liability to Pay under Reverse Charge.
  2. Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year
  3. Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) – This is worth Attention also, all the capital goods have been brought in reverse charge irrespective of ceiling or any prescribed limit.

Notification No. 08/2019-Central Tax (Rate)

This Notification has prescribed the rate of Reverse Charge @ 18% for all cases of Reverse charge liability except cement and capital Goods.

Notification No. 03/2019 – Central Tax (Rate)

As regard to this notification, this substitutes the earlier Entry No. 3 of Notification 11/2017 – Central Tax (Rate) to provide a completely new scheme of Tax Structure for Real Estate Construction Service. Broadly the Classification is as under:-

Note :- CLASS 1 shall be deemed to automatically choosed by the Builder if he fails to Exercise option in Annexure 4 by 10th May, 2019. So CLASS 2 as an option must be choosed.

Mandatory Conditions for CLASS 1 :-

  1. Output liability must be paid in Cash and not via Input tax credit
  2. No Input tax credit should be taken except as per calculations discussion below (Annexure 1 for REP & Annexure II for RREP)
  3. Amount computed as per Annexure1 / II shall be debited to ITC Ledger as on 1st April, 2019
  4. Where Landowner is Registered transfer TDR/FSI to Developer- Two Important things:-
    1. Developer will have to pay tax under Reverse Charge mechanism on services of TDR/FSI provided by Landowner.
    1. Construction services provided by developer to Registered Landowner would be available as ITC to Landowner if he further sells apartments and receives consideration prior to OC from prospective customers
  5. 80% of Input & Input services (other than FSI/TDR) in a financial year must be done from registered assesses. The restriction is not on purchase of capital goods. Any service / goods paid under reverse charge shall be deemed to be from registered supplier only.
  • Any shortfall from 80% – the promoter will be liable to pay tax on reverse charge @ 18%. Further cement is to be fully sourced from registered persons otherwise liable to reverse charge at the outset without considering 80% limit. tax on cement received from unregistered person shall be paid in the month in which cement is received.
  • The promoter shall maintain project wise account of inward supplies from registered and unregistered supplier and calculate tax payments on the shortfall at the end of the financial year and shall submit the same in the prescribed form electronically on the common portal by end of the quarter following the financial year. The tax liability on the shortfall of inward supplies from unregistered person so determined shall be added to his output tax liability in the month not later than the month of June following the end of the financial year.
  • Input Tax Credit not availed shall be reported every month by reporting the same as ineligible credit in GSTR-3B [Row No. 4 (D)(2)].

Mandatory Conditions for CLASS 2 :-

  1. Registered person shall exercise one time option in the Form at Annexure IV to pay central tax on construction of apartments in a project at the rates as specified for CLASS 2 by the 10th of May, 2019;
  • Where the option is not exercised in Form at annexure IV by the 10th of May, 2019, option to pay tax at the rates as applicable to item CLASS 1, as the case may be, shall be deemed to have been exercised;
  • Invoices for supply of the service can be issued during the period from 1st April 2019 to 10th May 2019 before exercising the option, but such invoices shall be in accordance with the option to be exercised.;
Clause Rate Nature of Activity
(i) 1% For Projects of Affordable Housing that commence on or after 1.4.2019 OR ongoing projects where no option of 8% / 12% chosen in RREP
(ia) 5% For Projects of Residential Real Estate (RREP) other than Affordable Housing that commence on or after 1.4.2019 OR ongoing projects where no option of 8% / 12% chosen.
(ib) 5% For Commercial within RREP other than Affordable Housing that commence on or after 1.4.2019 OR ongoing projects where no option of 8% / 12% chosen.
(ic) 1% For Projects of Affordable Housing that commence on or after 1.4.2019 OR ongoing projects where no option of 8% / 12% chosen in REP
(id) 5% For Projects of Real Estate (RREP) other than Affordable Housing that commence on or after 1.4.2019 OR ongoing projects where no option of 8% / 12% chosen.
(ie) 8% For Ongoing Affordable Housing Projects where you chose 8% with ITC Calculation as per Ann-1/2 and chose by 10th May, 2019
(if) 12% For Ongoing Residential Housing Projects where you chose 8% with ITC Calculation as per Ann-1/2 and chose by 10th May, 2019

*Note :- “An apartment booked on or before the 31st March, 2019 shall mean 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;”

** a residential apartment in a project which commences on or after 1st April, 2019, or in an ongoing project in respect of which the promoter has not exercised option in the prescribed form to pay central tax on construction of apartments at the rates as specified for item (ie) or (if) against serial number 3, as the case may be, 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 forty five lakhs rupees.

Calculation of ITC in Several Cases – Simplified Analysis

  1. Where project is REP i.e. Non RREP and it has commercial and builder is under 1%/5% for residential (To be Done before Sep’19)
    1. On 31.3.2019 % Completion > 0% { Tx = T-Te}
Tx à ITC to be reversed on 1.4.2019 T à Total ITC of Input and Input Services (not capital Goods) availed bw 1.7.2017 to 31.3.2019 including TRAN-1 Credit Teà Credit Pertaining to Commercial and Time of Supply of Residential prior to 1.4.2019 (ELIGIBLE ITC)
  • On 31.3.2019 % Completion is 0% but Invoice done and no Input service received { Te = Tc + Tr} 
Tr à  Eligible ITC on Residential for TOS <= 31.3.2019   Tc à Eligible ITC on Commercial   Te à Total Eligible Credit allowed to be carried forward
  • In case of RREP, in the effectively commercial to be treated as Residential

Note:- The Calculations of Tx, Te, Tr, Tc and others has to be on the basis of excel sheet computation based on multiple factors like % Completion PUCM, Carpet Area Sold Ratio, Demand (POS) Ratio to arrive at final Figure.

Further:- Though not required it is advisable to get the verification of these figures from Independent Chartered Accountants for ensuring correct figures and right treatment.

3 Exceptions to above rule :-

  1. If % Demand > % Completion by 25% then % Invoicing to be deemed % Completion + 25%
  2. Demand upto 31.3.2019 > Receipts by 25% then % Invoicing with Value = Receipts + 25%
  3. Value of Input/Input Service received > Actual Consumption by 25% – Commissioner to prescribe method with CA Certificate

Changes in ITC Rules – Quick Gaze

  1. All Monthly details of Builder Purchases to be reported in GSTR-3B  or FORM GST DRC-03 (provision made in Rules)
  2. Basis for Exempted Service identification is Carpet Area of Exempted Units
  3. Project Wise Measuring of ITC from 1.7.2017 to OC / CC (Sep Month of FY)
  4. Where any capital goods used for the project have their useful life remaining on the completion of the project, input tax credit attributable to the remaining life shall be availed in the project in which the capital goods is further used

Rate of Works Contract Reduced

Rate of Works Contract Reduced to 12% on Works Contractors supplying services to Builders on following conditions :-

  1. The Project must have atleast 50% carpet area of affordable residential apartments
  2. Value of the apartments shall be the value of similar apartments booked nearest to the date of signing of the contract for supply of the service and must be 45 Lacs or Less.
  3. If  during or after CC/OC condition (a) not met even if (b) met, promoter developer will be liable to pay differential tax under reverse charge.

Before Partying…

Any Builder / Developer who is nearing completion on 31.3.2019 would have more eligible ITC even under 5% regime and can go for 5% with substantial ITC carry forward if it has in its Cenvat Ledger.

Hence whether one choose 5% or 12% for Ongoing Project is to be done very logically as a lot of tax can either be saved or vice versa.

If you have any queries regarding computation or provisions, mail us at ankitgulgulia@gmail.com. Only Constructive comments, please.

CA Ankit Gulgulia (Jain)

CA Ankit Gulgulia (Jain) is Fellow Member of ICAI, Certified IFRS & Business Valuation from ACCA UK and is Practising Chartered Accountant with 8 Years plus of Rich Experience in Audit, GST, Income Tax, DGFT, Valuation, Strategic Advisory, Matters of FEMA, FDI, NCLT, RERA, ROC, SEBI, RBI, M&A, Fundraising, Startups etc as Founder of AGA, Chartered Accountants. AGA Works in wholesome business solutions right from scratch of Company Incorporation to Compliances all under One Roof. He also takes interest in being Virtual Chief Financial Officer (CFO) for Small and Medium Enterprises for Guiding them with All Business, Tax & Strategic Business Decision Making . To Know More, Learn here or contact us at ankitgulgulia@gmail.com

CA Ankit Gulgulia (Jain)
About CA Ankit Gulgulia (Jain) 1116 Articles
CA Ankit Gulgulia (Jain) is Fellow Member of ICAI, Certified IFRS & Business Valuation from ACCA UK and is Practising Chartered Accountant with 8 Years plus of Rich Experience in Audit, GST, Income Tax, DGFT, Valuation, Strategic Advisory, Matters of FEMA, FDI, NCLT, RERA, ROC, SEBI, RBI, M&A, Fundraising, Startups etc as Founder of AGA, Chartered Accountants. AGA Works in wholesome business solutions right from scratch of Company Incorporation to Compliances all under One Roof. He also takes interest in being Virtual Chief Financial Officer (CFO) for Small and Medium Enterprises for Guiding them with All Business, Tax & Strategic Business Decision Making . To Know More, Learn here or contact us at ankitgulgulia@gmail.com

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