Last Updated on February 17, 2020 by Legalseva.net
Real estate under the Outstretch of GST
GST stands for goods and services tax. It is a destination based tax regime wherein the tax liability shall be borne by consumer of good or service concerned. GST is applicable to any activity which is supply of any good or service.Thus, GST shall be collected upon any transaction which is made in pursuant to supply of good and service. Hence, GST is not applicable on transaction made on sale of ready to move in flats, sale of completed property (where completion certificate has been issued), resale of property, or sale/purchase of land. They shall be charged to taxes under the head capital gain inter alia Registration and stamp duty shall apply as it has been since. Ready to move in flats/apartments are regarded as immovable properties and GST doesn’t apply on them.
GST is applicable only to sale of under construction project/apartments. Before we move further, let’s discuss what is ITC (input tax credit) in GST. Input tax credit is the credit manufacturer’s received for paying input taxes towards inputs used in the manufacturer of products. Similarly, a dealer is entitled to input tax credit if he has purchased good for resale. All dealers are liable for GST on output sales done in the process of his business.
Illustration: Let’s suppose Mr. A manufacture X item for Rs 10,000 and add Rs 1000 as profit in total selling price. Now, let’s suppose someone Mr B, a wholesaler, Purchased from Mr A @ 11,000 rupees. Mr. A shall pay GST on Rs 11,000 at notified rate (for example 9%). Thus, selling price would be Rs. 11,990 [9/100 * 11,000(990) + 11,000]. Here Mr B has paid over and above cost of Rs 990 as GST. Now, let’s suppose Mr B resold those items to someone Mr. C, a retailer, after adding to it his own profit qua resale those items @11,000 + 1000= 12,000. Selling price after adding to it GST would be Rs 13,080 [9/100 * 12,000(1,080) + 12,000]. Now, B after paying GST on supply on his good to Mr C @ 13,000, can claim the GST he paid to Mr A as Input tax credit qua can claim refund of Rs 990 from state GST council.
Assuming, it’s vividly understood what is Input tax credit. It was observed that promoters or builders were reluctant to pass on the ITC benefits to consumers. Another term which we must acquaint ourselves is Residential real estate Project and what is affordable residential apartment?
Residential Real estate project means the real estate apartment in what commercial carpet area does not exceed 15% of total carpet area of the project. Affordable residential apartment is a residential apartment in a project which commences on or after 01-04-2019, or in an ongoing project 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.]
As per FAQ released by GST council on New guidelines 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.]
As of on the date of writing this article, there can two types of project which may have been underway one which has commenced before 1.04.2019, or otherwise afterwards. Of those which have commenced its work on project before 1st April 2019 were given option to choose either new rate or move ahead with old rate.
Rate of GST on projects before 31st march 2019 were 8% on affordable residential housing project and 12% on other than affordable residential housing supply of real estate before completion qua sale of under construction project. Provided 1/3rd abatement qua deduction towards the value of land.
Pursuant to 33rd and 34 GST council meeting recommendations, new rate are implemented which are;
- GST @ 1 % on consideration amount without ITC for affordable housing property
- GST @ 5 % on consideration amount without ITC for residential property other than housing segments
- GST @ 12% on consideration amount without ITC for commercial properties (other than specified one which will attract 5%).
As of now, for those project which commences it construction work after 1.04.2019, GST rate applicable upon construction of residential apartments is 1% of consideration amount without ITC if its affordable housing and 5% of consideration amount without ITC in case of other than affordable residential housing.
These rates applicable on every project which have commenced after 1st April 2019 however option to choose either new or old (which were 8% for affordable and 12% for other than affordable housing apartments) were given to the project which were already under construction during implementation of this new norms. The promoter can exercise this option either flat wise, floor wise, wing wise, building wise, phase wise, project wise or all India wise.
What’s Reverse charge Mechanism ?
Reverse charge mechanism was also introduced under new GST regime. A person who is registered under the GST would have to pay GST on all service and goods which that are procured from a person who is not registered under GST. As per new regime, the builder must purchase atleast 80% of material from a registered seller otherwise he may be required to pay GST on those purchased good without ITC qua reverse GST will be charged accordingly qua builder would pay GST@ 18% on reverse charge basis on all such inward supply to extent short of 80% of inward supplies from registered suppliers. Cement is an exception on which a promoter has to pay reverse charge base tax at applicable rate which is currently 28%.
It was seen despite constant asking by the government ignorant builders were reluctant to pass on the benefit of Input tax credit to buyer and along with that buyer were purchasing so much of material from unregistered seller at cheap cost but does not transfer that benefit to buyer either. Like these, there were several other benefits which were harnessed by builders underhanded. Recently brought about changes is expected to cure the deception deployed by these builder to obtain underhanded gains.
We must understand one more glaring aspect at the outset that most input goods and input services attract 18% GST rate except for cement which is 28% in present. Thus, the cost on part of builder/developer shall soar up which in turn may lead to steep rise in selling price of apartments. Thus, it’s safe to assume lot more development may come about at the behest of government as there are lots of unanswered questions permeating in this newly issued regulation.
For case specific advice related to GST Matters one may contact Top/Best/Expert Real Estate Lawyers Advocates in Chandigarh Panchkula Mohali practicing in District Consumer Forum and State Consumer Commission Punjab Haryana Chandigarh for real estate disputes.
This post is written by Priyatam Bhardwaj. For more info, dial 99888-17966.
