Last Updated on September 5, 2024 by Satish Mishra
The GST was implemented on 1 July 2017 and has transformed the Indian economy with its ‘One Nation, One Market, One Tax’ principle, therefore bringing uniformity in taxation across the country. While the GST regime has simplified taxation of various goods and services, it has continued to be a roadblock in the growth of Real estate sector. GST has not resulted in the reduction of complexities of Real Estate Sector.
Impact of GST on real estate and problems faced in the real estate sector
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Taxation of Transferrable development Rights
Transfer of Development Rights (TDR) allows landowners to sell development rights from their land to a developer who then can use these rights for construction on that property. Under Service Tax Regime , was exempt , but in GST entry no 5 of Schedule III to the Central Goods and Services Tax Act, 2017 provides that sale of land would be treated as neither supply of goods nor services. Thus, given the wide definition of the term “services” under the GST law, the transfer of development rights may be considered as taxable service. However the procurement of TDR for use in residential construction to the extent sold before issue of completion certificate/ 1st Occupancy is exempt. However issue continues in respect of transactions executed before 1stApril,2019 , commercial units and units sold post receipt of completion certificate.
Also Read- Gst Versus Service Tax for Delayed Possession
Adjustments for cancellation of bookings beyond time limit for claiming refund
Cancellation of units after 1-2 years is a common event in real estate sector. This leads to a situation where developer may not eligible to issue a credit note or apply for refund in respect of GST paid on such transaction will eventually making such amounts as cost in hands of buyer cancelling the unit.
Reversal of ITC proportionate to unsold units upon completion of project
Rule 42 of the CGST Act,2017 provides reversal mechanism with respect to ITC attributable to units remaining unsold at the time of receipt of completion certificate. However this amendment in Rule 42 was made effective from 1st April,2019. This has increased the cost of real estate sector.
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Other additional charges
The charges recovered by the developer in form of preferential location, carparking etc are part of a composite supply in which the principal supply is construction of complex. Developers also recover statutory development charges from the customers as they are mandatory to be collected and deposited to the Government. GST law provides for inclusion of taxes, duties, fees, charges levied under any law in the transaction value. However, this would result in a ‘tax on tax’ situation and would result in increase in costs.
Retention money
Retention Money is normally used in works contact. This is retained by the customer/ recipient from Supplier invoice to ensure quality of work /Performance of work and is released after certain period of time. GST Input Tax Credit is disallowed to customer as he doesn’t make payment to vendor within 180 days. The proportionate amount of Input Tax Credit needs to be reserved in GST returns and can be availed after payment of retention money. While potential solution such as creation separate milestone invoices are there but same may not be feasible in all cases.
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Liquidated damages
Developers may recover liquidated damages from their vendors i.e. subcontractors, etc. for delay in delivery, performance issues, etc. It is likely that the developer may have to bear the tax cost since the compensation/charges would always be inclusive of taxes which will increase tax cost
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Tax Rates
GST does not apply to sale of completed properties (where completion certificate has been issued) or to the resale of old properties. GST rates for real estate projects are
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Place of provision of supply The place of provision for services in relation to immovable property is the location of the immovable property. |
Increased tax rates and restriction of credits have increased the overall tax cost for some players as compared to tax cost in pre-GST regime. This is coupled with issues on account of RERA as well. As can be seen from above ,indirect tax related issues for real estate sector continues to increase even after more than two years of introduction of GST. It appears these issues will take time to settle down.
Also Read- GST RATE FOR REAL ESTATE IN PUNJAB HARYANA CHANDIGARH
For case specific advice, please call GST Lawyers Advocate in Chandigarh Panchkula Mohali Kharar Zirakpur Derabassi taking up real estate cases in RERA Punjab & Haryana RERA Panchkula Authority.
More on 7888-356908.
