Taxation of Real Estate Sector has always been a matter of concern since service tax and VAT days. Taxation of real estate sector has been a debatable area due to many factors like involvement of land in valuation, presence of FSI, multiple models of development, different possible combinations of payment from clients. These factors have been addressed in different sections of GST Act like section 16, 17 (5), 17 (3), rule 42/43, schedule III, section 9 (4) etc along with number of notifications and circulars. Let us try to understand the taxation of real estate sector in the simplest way possible.
Defination
Some important definitions for Real Estate taxation.
Apartment
The term “apartment” shall have the same meaning as assigned to it in clause (e) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
Project
The term “project” shall mean a Real Estate Project or a Residential Real Estate Project;
Affordable residential apartment :
The term “affordable residential apartment” shall mean, - (a) a residential apartment in a project 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.
For the purpose of this clause, -
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 respective geographical limits prescribed by an order issued by the Central or State Government in this regard;
Gross amount shall be the sum total of A. Consideration charged for the construction services B. Amount charged for the transfer of land or undivided share of land, as the case may be including by way of lease or sub lease; and C. Any other amount charged by the promoter from the buyer of the apartment including preferential location charges, development charges, parking charges, common facility charges etc.
Promoter:
The term “promoter” shall have the same meaning as assigned to it in in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
Real Estate Project
The term “Real Estate Project (REP)” shall have the same meaning as assigned to it in in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
Residential Real Estate Project
The term “Residential Real Estate Project (RREP)” shall mean a 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;
Ongoing Project
The term “ongoing project” shall mean a project which meets all the following conditions, namely-
(a) commencement certificate in respect of the project, where required to be issued by the competent authority, has been issued on or before 31st March, 2019, and it is certified by any of the following that construction of the project has started on or before 31st March, 2019:- (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority.
(b) where commencement certificate in respect of the project, is not required to be issued by the competent authority, it is certified by any of the authorities specified in subclause (a) above that construction of the project has started on or before the 31st March, 2019;
(c) completion certificate has not been issued or first occupation of the project has not taken place on or before the 31st March, 2019.
(d) apartments being constructed under the project have been, partly or wholly, booked on
or before the 31st March, 2019. Explanation.- For the purpose of sub- clause (a) and (b)
above , construction of a project shall be considered to have started on or before the 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.
Commencement certificate
"commencement certificate" means the commencement certificate or the building permit or the construction permit, by whatever name called issued by the competent authority to allow or permit the promoter to begin development works on an immovable property, as per the sanctioned plan;
Development works
means the external development works and internal development works on immovable property;
External development works
External development works includes roads and road systems landscaping, water supply, seweage and drainage systems, electricity supply transformer, sub-station, solid waste management and disposal or any other work which may have to be executed in the periphery of, or outside, a project for its benefit, as may be provided under the local laws;
Internal development
Internal developmentwork means roads, footpaths, water supply, sewers, drains, parks, tree planting, street lighting, provision for community buildings and for treatment and disposal of sewage and sullage water, solid waste management and disposal, water conservation, energy management, fire protection and fire safety requirements, social infrastructure such as educational health and other public amenities or any other work in a project for its benefit, as per sanctioned plans;
Competent Authority
The term "competent authority” as mentioned in definition of “commencement certificate” and “residential apartment” , means the local authority or any authority created or established under any law for the time being in force by the Central Government or State Government or Union Territory Government, which exercises authority over land under its jurisdiction, and has powers to give permission for development of such immovable property;
Carpet Area
The term “carpet area” shall have the same meaning assigned to it in in clause (k) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016); (xxvii) the term “Real Estate Regulatory Authority” shall mean the Authority established under sub- section (1) of section 20 (1) of the Real Estate (Regulation and Development) Act, 2016 (No. 16 of 2016) by the Central Government or State Government;
Residential apartment
“Residential apartment” shall mean an apartment intended for residential use as declared to the Real Estate Regulatory Authority or to competent authority;
Commercial apartment
“Commercial apartment” shall mean an apartment other than a residential apartment;
Floor Space Index
“floor space index (FSI)” shall mean 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.”
Commentary
There is a concept that land cannot be taxed under GST. However, construction of building on land is a taxable service. As per entry 5 of schedule III, sale of building or part thereof where the entire consideration has been received after issuance of completion certificate by competent authority is cannot be taxed under GST. This means that even if a single rupee of consideration is received before issuance of completion certificate then GST shall be applicable on entire consideration. In addition to other things taxation of real estate depends on two factors a. Whether the project has commenced before 31st march 2019 or after 31st march, 2019. b. Project is a residential project or a commercial project.
There has been a major shift from 1/4/2019 in taxation of real estate for residential projects. Before 1/4/2019, GST rate applicable to real estate was 8 % and 12 % (for affordable houses and others respectively when value of land is included in consideration). Supplier was eligible for input tax credit of all inputs and input services except those blocked under section 17 (5). However, from 1/4/2019 the rate of GST on residential real estate projects has been reduced to 1 % and 5 % (for affordable houses and others). Further ITC is also denied. In case of commercial projects, old mechanism of 12 % GST with ITC is continued. Those residential projects which were commenced before 31st march, 2019 but not completed on that date an option was given either to continue in old scheme or to switch over to new scheme where ITC required to be reversed.
Brief overview of the new scheme applicable from 1/4/2019 is as under
GST rates for residential apartments shall be 1 % in case of affordable residential apartments. Affordable Residential Apartment means apartment 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 Rs 45 lakhs. 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
GST rates for residential apartments other than affordable residential apartments as mentioned above shall be 5 %.
There are certain schemes where along with residential portion, there is some portion for commercial activities. For example, some shops are also being constructed in front portion of a residential building. Here if the carpet area occupied by the commercial construction does not exceed 15 % of total carpet area of the project then the project shall be considered as residential complex only.
Above rates of 1 % and 5 % shall be applicable when consideration includes value of land also.
For making payment of the 1 % or 5 % GST, ITC cannot be used. The GST has to be paid through electronic cash ledger.
It is provided that the promoter must purchase cement from registered person only. If he purchases cement from unregistered person then promoter is required to pay GST under RCM under section 9 (4) at 28 %. ( presently cement is taxable at 28 % )
There is also a condition regarding procurement of other inputs and input services from registered persons. It has been provided that a promoter shall purchase at least 80 % of value of inputs and input services from registered persons. 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. RCM paid on cement under 6 above shall be considered as fulfilment of condition of procurement from registered person. After this computation if there is a shortfall in fulfilment of this 80 % threshold then the promoter needs to pay GST at 18 % on the amount of shortfall.
Let us understand this with the help of following example. Mr A who is a builder has procured total inputs and input services worth Rs. 10,10,800/- during the month of June 2020. Out of this amount Rs. 10,800/- is procurement of high speed diesel. He has purchased cement of Rs. 300,000/- out of which Rs. 200,000 is from unregistered persons. Out of balance 700,000/- ( 10,10,800-10800-300,000) procurement of Rs. 400,000/- is from unregistered person. Let us compute how much Mr.A needs to pay under RCM.
First Mr. A needs to pay GST at 28 % on cement purchased from unregistered persons. Hence he needs to pay 200,000 * 28 %= 56000/- GST needs to be paid under RCM.
Calculation of GST to be paid on shortfall –
Total procurement 10,10,800/-
Less: High Speed Diesel 10,800/-
Net Amount as total procurement including cement 10,00,000/-
80 % of c 800,000/-
Procured from registered persons 300,000/- ( 700,000-400,000)
Total cement procured 300,000/-
Short fall (d-e-f) 200,000/-
18 % GST on shortfall 36000/-
Hence, Mr A is require to pay GST under RCM of Rs 56000/- on cement plus Rs . 36000/- on shortfall totalling to Rs . 92000/-.
There are lot of procurements by promoter/builder from persons covered under composition scheme. There is also a composition scheme for service providers who pays tax at 6 %. If promoter procures input/input services from a person covered under composition then it shall be considered as procurement from registered persons.
There is also a provision whereby promoter is require to pay GST under RCM on capital goods acquired from unregistered persons irrespective of fulfilment of the threshold of 80 % mentioned above. Hence, we can say that promoter must pay GST under RCM on cement and capital goods purchased from unregistered persons irrespective of the fulfilment of criteria of 80 %.
There can also be inward supplies of exempted goods and services. These exempted goods or services shall also be considered as supplies received from unregistered persons for computation of the threshold of 80 %.
Developer is required to maintain project wise accounts. Further, he needs to show ITC reversed and ITC not availed in respective place in GSTR 3B.
Developer may be receiving works contract services for construction of the project. Normally such works contract service is chargeable at 18 % GST rate. However, in case total carpet area of the apartments qualified as affordable residential apartments is not less than 50 % of total carpet area of the project then the input service of works contract shall be chargeable at 12 % instead of 18 %. Contractor will obtain declaration from the developer that the condition of affordable residential apartments being not less than 50 % of total carpet area of the project is fulfilled. On receipt of the declaration, contractor will charge only 12 % GST. Here, it is important to note that contractor’s duty is limited to obtaining declaration from the developer. He is not expected to verify actual fulfilment of the condition. It is the developer who is duty bound to verify fulfilment of the criteria of 50 %. If at the time of obtaining completion certificate, it is noticed that the condition of carpet area of the affordable residential apartments being not less than 50 % of total carpet area of the project, then the developer is required to pay balance GST of 6 % ( 18-12) on reverse charge basis on the input service of works contract received by him.
Taxation of FSI or TDR or long term lease payments under new scheme of GST taxation of real estate
There have been lot of debates and complications in case of taxation of FSI ( Floor Space Index) and TDR ( Transfer of Development Rights). Further, there are also upfront payment for long term lease contracts (30 years or more) taxation of which requires clarity. New taxation scheme for real estate sector has put some rest on the debate and has suggested taxation of FSI and TDR as under.
TDR or FSI or upfront payment for long term lease of land to be used for commercial projects shall attract 18 % GST. However, TDR or FSI or Long term lease of land to be used for construction of residential apartments shall be exempt from GST provided all apartments of the project are booked before issuance of completion certificate or first occupation.
As we are aware, if any apartment is booked by the buyer after issuance of completion certificate then there is no GST applicable on such booking. Hence, if any apartment is booked after issuance of completion certificate by the competent authority then there is no GST revenue to government hence exemption of tax on TDR/FDR/long term lease of land is also not available for proportionate carpet area of apartments booked after issuance of completion certificate. This amount of tax needs to be paid by the promoter under reverse charge under section 9 (4). This amount shall be computed as under
[GST payable on TDR or FSI (including additional FSI) or both for construction of the residential apartments in the project but for the exemption contained herein] x (carpet area of the residential apartments in the project which remain un- booked on the date of issuance of completion certificate or first occupation ÷ Total carpet area of the residential apartments in the project)
The amount payable under 2 above shall be limited to GST payable ( at 5 % or 1 % as the case may be ) on un-booked apartments on the date of issuance of completion certificate or the date of first occupation whichever is earlier.
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.
As we have understood that the TDR, FSI or long term lease payment for land is fully taxable under RCM in case of commercial projects whereas in case of residential projects it is taxable only for the proportionate carpet area of the apartments which remains un-booked at the time of issuance of completion certificate by the competent authority. Reader are well aware of the business model in such cases that sometimes for TDR or FSI transfer the transferor receives upfront monetary payment or in some cases he receives some apartments against transfer of TRD or FSI. Hence, consequential question arises as to when the liability of pay GST under RCM arises for the promoter.
In case of residential projects the liability shall arise only on the date of issuance of completion certificate whereas in case of commercial projects, liability shall arise on the date of issuance of completion certificate only if the consideration is to be paid in terms of share in apartments. If monetary payment is to be made for transfer of FSI/TDR in case of commercial projects then the liability to pay GST for promoter under RCM shall arise immediately on payment of monetary consideration.
In case of upfront premium for long term lease contracts (30 years or more) also same concept shall apply. i.e in case of commercial projects the liability shall arise immediately and in case of residential projects the liability shall arise on issuance of completion certificate. It is important to note these provisions are applicable only for upfront payments for long term lease (may be called premium or salami or development charges etc). However, periodic lease payments for long term (or short term) lease are chargeable as per normal provisions. i.e it is taxable at 18 % as and when booked or received as per time of supply.
Transition from old scheme of taxation in Real Estate to New scheme of taxation
As we have discussed earlier, the taxation mechanism for Real Estate Sector has been changed from 1st April, 2019. As far as the commercial projects are concerned, there is no change in GST mechanism however, there is a change for residential projects ( this includes projects in which not more than 15 % carpet area is occupied by commercial apartments). For residential projects commencing on or after 1/4/2019, there is no option to pay GST at 8 % or 12 %. They compulsorily need to pay GST at 1 % and 5 % as mentioned earlier and cannot take ITC. There remains a question regarding ongoing residential projects as on 31st march, 2019. They had the option to continue with old scheme or to switch over to new scheme. For switching over to new scheme they need to reverse proportionate ITC as per formula given in the notification and then charge only 1 % or 5 % as the case may be on the balance instalments from the buyers. This being one time option that expired in may 2019 has not been discussed in detail here. There may be a case where an ongoing project opts for new scheme and in that project apartments were not qualified as affordable apartments in earlier scheme but now as per new definition of affordable residential apartment they qualify for 1 %. In such a case GST shall be paid at 1 % only. Once new scheme is opted all definitions and provisions of new scheme shall be applied.