Taxation of Real Estate Transaction under GST

Introduction

The Goods and Services Tax (GST), a comprehensive indirect tax system, has been a transformative step in streamlining India’s taxation structure. However, its application in the real estate sector has been a complex affair. The real estate sector, with its unique challenges and intricacies, has always been a tough nut to crack when it comes to taxation.

The introduction of GST aimed to bring transparency and eliminate the cascading effect of taxes, but it also brought along a new set of complexities. These complexities primarily arise due to the diverse nature of real estate transactions, which often involve multiple stages and various types of services and goods. The valuation of properties, the treatment of land rights, and the varied rates applicable to different types of properties further add to the complexity.

This article aims to delve into these complexities and provide a comprehensive understanding of how GST impacts real estate transactions in India. It will serve as a guide for taxpayers, practitioners, and stakeholders who are navigating the labyrinth of GST in the real estate sector.

What are the rates of GST applicable on construction of residential apartments?

What is an affordable residential apartment?

Affordable residential apartment is a residential apartment in a project which commences on or after 01-04-2019, or in an ongoing project in respect of which the promoter has opted for new rate of 1% (effective from 01-04-2019) having carpet area upto 60 square meter in metropolitan cities and 90 square meter in cities or towns other than metropolitan cities and the gross amount charged for which, by the builder is not more than forty five lakhs rupees. [Cities or towns in the notification shall include all areas other than metropolitan city as defined, such as villages.]

In an ongoing project in respect of which the promoter has opted for new rates, the term also includes apartments being constructed under the specified housing schemes of Central or State Governments.

[Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their geographical limits prescribed by Government.]

What is an on-going project?

Does a promoter or a builder has option to pay tax at old rates of 8% & 12% with ITC?

Yes, but such an option is available in the case of an ongoing project. In case of such a project, the promoter or builder has option to pay GST at old effective rate of 8% and 12% with ITC.

To continue with the old rates, the promoter/ builder has to exercise one time option in the prescribed form and submit the same manually to the jurisdictional Commissioner by the 10th of May, 2019.

However, in case where a promoter or builder does not exercise option in the prescribed form, it shall be deemed that he has opted for new rates in respect of ongoing projects and accordingly new rate of GST i.e. 5% / 1% shall be applicable and all the provisions of new scheme including transitional provisions shall be applied.

There is no such option available in case of projects which commence on or after 01.04.2019. Construction of residential apartments in projects commencing on or after 01.04.2019 shall compulsorily attract new rate of GST @ 1% or 5% without ITC.

What is the rate of GST applicable on construction of commercial apartments [shops, godowns, offices etc.] in a real estate project?

What is a Residential Real Estate Project?

A “Residential Real Estate Project” means a „Real Estate Project” 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 project.

What is the criteria to be used by an architect, a chartered engineer or a licensed surveyor for certifying that construction of the project has started by 31st March, 2019

Construction of a project shall be considered to have been started on or before 31st March, 2019, if the earthwork for site preparation for the project has been completed, and excavation for foundation has started on or before the 31st March, 2019.

Does a promoter/ builder have to purchase all goods and services from registered suppliers only?

A promoter shall purchase at least eighty percent of the value of input and input services, from registered suppliers. For calculating this threshold, the value of services by way of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartments in a project shall be excluded.

If value of purchases as prescribed above from registered supplier is less than 80%, what would be the applicable GST rate on such purchases?

Promoter has to pay GST @ 18% on Reverse charge basis on all such inward supplies (to the extent short of 80% of inward supplies from registered supplier) except cement on which tax has to be paid (by the promoter on Reverse charge basis) at the applicable rate, which at present is 28% (CGST 14% + SGST 14%)

In case of new rate of 5% / 1%, whether the conditions of payment of tax through Cash Ledger, payment of tax under RCM subject to 80% limit, non-availing of Input tax credit, reversal of credit, maintenance of project wise account, reporting of ITC not availed in corresponding GSTR-3B etc. are required to be complied mandatorily by the Developer ?

Yes. All the specified conditions against clause (i) to (id) of Sl. No 3 of Notification No. 11/2017-CTR are mandatory.

What is the rate of GST applicable on transfer of development rights, FSI and long term lease of land?

Supply of TDR or FSI or long term lease of land used for the construction of residential apartments in a project that are booked before issue of completion certificate or first occupation is exempt.

Supply of TDR or FSI or long term lease of land, on such value which is proportionate to construction of residential apartments that remain un-booked on the date of issue of completion certificate or first occupation, would attract GST at the rate of 18%, but the amount of tax shall be limited to 1% or 5% of value of apartment depending upon whether the residential apartments for which such TDR or FSI is used, in the affordable residential apartment category or in other than affordable residential apartment.

TDR or FSI or long term lease of landused for construction of commercial apartments shall attract GST of 18%.

The above shall be applicable to supply of TDR or FSI or long term lease of land used in the new projects where new rate of 1% or 5% is applicable.

Who is liable to pay GST on TDR and floor space index?

The promoter is liable to pay GST on TDR or floor space index supplied on or after 01-04-2019 on Reverse charge basis.

At what point of time, the promoter should discharge its tax liability on TDR.

The liability to pay GST on development rights shall arise on the date of completion or first occupation of the project, whichever is earlier. Therefore, promoter shall be liable to pay tax on Reverse charge basis, on supply of TDR on or after 01-04-2019, which is attributable to the residential apartments that remain un-booked on the date of issuance of completion certificate, or first occupation of the project.

At what point of time, the promoter should discharge its tax liability on FSI (including additional FSI).

At what point of time, the promoter should discharge its tax liability on supply of long term lease.

On long term lease received on or after 1.4.2019, the promoter should discharge his tax liability on long term lease as under:

In case of supply of long term lease of land for construction of commercial apartments, tax shall be paid by the promoter immediately. However, for construction of residential apartment, liability to pay tax on the upfront amount payable for long term lease shall arise on the date of issuance of Completion Certificate.

Conclusion

In conclusion, the complexities of GST in the real estate sector are a testament to the intricate nature of this industry. The diverse nature of real estate transactions, the valuation of properties, and the varied tax rates all contribute to the challenges faced by stakeholders. However, these complexities also present opportunities for further refinement and simplification of the tax system.

As we continue to grapple with these challenges, it is crucial to remember that the ultimate aim of GST is to create a more transparent, efficient, and equitable tax system. The journey may be fraught with complexities, but each challenge overcome brings us one step closer to this goal. The real estate sector, like all sectors, is on a Continuous journey of adaptation and growth in the face of GST. It is this journey that makes the study of GST in real estate not just necessary, but also immensely fascinating.