GST changes on Real Estate sector

Sanjay/ May 20, 2019/ GST

After a round of discussions, finally a notifications in regard to changes suggested by GSTN Council Meetings 33rd and 34th dated 24th Feb 2019 and Mar 19, 2019 respectively has been issued for the real estate sector.The GST Council, on March 19, 2019, approved a transition plan for the implementation of the new tax structure for housing units. As per the plan, builders will be allowed to choose between the old tax rates and the new ones for under-construction residential projects, to help resolve input tax credit (ITC) issues.In 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. The Key Changes as indicated by Press notes to these meetings are as follow :-

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

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.

Notification 04/2019 CTR

The above said notification basically exempts Transfer of Development Rights (TDR), FSI (including additional FSi),Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more etc in pursuance to Section 11(1) of CGST Act, 2017where the tax is payable on final output of builder.

Key Definitions of GST Composition Scheme: Procedure for Tax Payment & Return Filing RERA that have been used in the above Notifications

Notification 05/2019 CTR: Service to be taxed under RCM – Liabilty cast – on Promoter

This notification simply casts the reverse charge mechanism on Promoter (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 Any person (Individual , HUF or Body corporate) the liability to pay tax is on the Promoter.

Notification No. 06/2019-Central Tax (Rate):-Notify certain class of persons & prescribe Point of Taxation

he 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 as stated in brief below:

Notifies the following classes of registered persons, namely:-

Notification No. 07/2019-Central Tax (Rate) :- RCM Compliances If Services or Purchase Procure is shortfall or Less Then 80% from registered dealer For Those Who Opting Scheme of 1% / 5% GST Rate

This notification state about Reverse Charge Compliance on the Promoter ands have to pay tax on reverse charge basis as recipient of such goods or services or both if the porchase or service taken are less then 80% from Registered Dealer, namely:-

a) Any Supply of goods and service or both received from Unregistered Suppliers such that in a FY shortfall is below 80% would be Promoter Liability to Pay under ReverseCharge.

b) 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 bothrequired to be purchased by a promoter for construction of project, in a financialyear

c) 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 reversecharge irrespective of ceiling or any prescribedlimit.

Notification No. 08/2019-Central Tax (Rate): Rate Prescribe @ 18% as RCM on services or purchase from Unregistered Dealer

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

Calculation of ITC in Several Cases – Simplified Analysis

Where project is REP i.e. Non RREP and it has commercial and builder is under 1%/5% for residential (To be Done beforeSep’19)

a. On 31.3.2019 % Completion > 0% { Tx =T-Te}

Tx€@ITC to be reversed on 1.4.2019

T €Total ITC of Input and Input Services (not capital Goods) availed bw 1.7.2017 to 31.3.2019 including TRAN-1 Credit

Te€Credit Pertaining to Commercial and Time of Supply of Residential prior to 1.4.2019


b. On 31.3.2019 % Completion is 0% but Invoice done and no Input service received { Te = Tc + Tr}

Tr€Eligible ITC on Residential for TOS <= 31.3.2019

Tc€Eligible ITC on Commercial

Te €Total Eligible Credit allowed to be carried forward

B) 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.

3 Exceptions to above rule :-

a) If % Demand > % Completion by 25% then % Invoicing to be deemed % Completion +25%

b) Demand upto 31.3.2019 > Receipts by 25% then % Invoicing with Value = Receipts +25%

c) Value of Input/Input Service received > Actual Consumption by 25% – Commissioner toprescribe method with CACertificate

Rate of Works Contract Reduced

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

a) The Project must have atleast 50% carpet area of affordable residentialapartments.

b) 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.

c) 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.

Concluding remarks:

For Ongoing Projects:

Projects which are nearby on completion phase as on 31.3.2019 should workout before taking any decision relate to Opt with the Old regime or can go with the new scheme of 1% or 5%. As it 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 depending upon the Booking and completion percentage. 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.

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