By Prashant Deshpande
The GST Council at its 34th meeting on 19 March 2019 laid down the roadmap for implementation of the recommendations made in the previous meeting, towards rate rationalisation for real estate. These recommendations attempt to address the apprehensions of the sector on multiple issues including loss of unutilised input credit, exemptions and rate applicability.
A one-time option has been proposed for on-going projects not completed by 31 March 2019, to continue to pay tax at the existing GST rates (effective rate of 8 percent for affordable housing and 12 percent for others). Ongoing projects have been referred to as buildings where both construction and actual booking started before 1 April 2019 and which have not been completed by 31 March 2019. The option has to be exercised once within prescribed time frame. It is quite interesting that this option has been allowed at a project level instead of at the individual residential unit level. Complexity arises in interpreting the term ‘ongoing project’, particularly in cases where the construction is undertaken in a phase-wise manner consisting of cluster of buildings in a large township project. Absence of clear definition of ‘ongoing project’ would leave room for interpretation and may invite unwarranted disputes.
As far as choice of option is concerned, from the viewpoint of home buyers, the existing higher GST rate may not be acceptable. From the developers’ standpoint, continuing with the existing rate structure may seem to be beneficial where input credits for the project would have been factored into the pricing of units, and also where benefits under anti-profiteering have already been passed on to customers. The process of selection of alternative would not only entail determination of benefit which could be derived by the developer, but may also have to be balanced with the part of such benefit which the home buyer would bargain to continue with the existing rate.
New projects for which the construction would start after 1 April 2019 shall attract the revised lower GST rate (1 percent for affordable residential units and 5 percent for other residential units). As far as mixed use projects are concerned, the GST Council has clarified that residential projects having commercial space such as shops, offices etc., up to 15 percent of total carpet area, shall also be eligible for lower GST rate of 5 percent.
These rates are coupled with conditions that input tax credit shall not be available and 80 percent of procurements, except procurements of capital goods, Transferable Development Rights (TDR) / development rights under Joint Development Arrangement, long term lease (premiums), are made from GST-registered persons. This would require developers’ to revisit budgeting and costing of their new projects to factor the potential tax cost towards non-creditable taxes. Also this requirement requires clarity in the enabling notification in terms of timing and manner of compliance.
Further, the compliance with the condition of 80 percent procurement from registered persons in case of ongoing projects opting to pay tax as per new rates, requires clarity as to whether it should be computed from 01 April 2019 onwards or even for the past period. This would also require re-visiting the existing procurements and selection of vendors given the fact that value chain in the sector comprises of unorganised suppliers. This would also entail applying internal controls as well as checks and balances by developers to avoid potential violation of this condition.
Considering the peculiar nature of the sector, to avert any possible complexity and controversy around determination of eligible credit, it has been proposed that the Credit Rules shall be amended to provide requisite procedure and guidelines for mixed use projects (residential and commercial use).
At present affordable housing has the benefit of concessional rate of GST at 8 percent for projects covered under the notified central or state housing schemes as well as projects which have ‘infrastructure status’ as per the notification issued by the Department of Economic Affairs.
The GST Council has recommended that the GST rate for affordable housing would be rationalised at 1 percent, subject to the ceiling on area for metros and non-metros as well as value cap of INR 45 lakhs, for ongoing projects under the existing central or state housing schemes. Presently these projects are eligible for concessional rate of GST. They are proposed to be eligible for rate of 1 percent without any condition of area ceiling or value cap. So it is likely that projects presently eligible for concessional rate of 8 percent will not be so eligible going forward. Further, benefit of lower GST rate of 1 percent should have also been extended to projects having infrastructure status, so as to maintain parity for all affordable housing projects which presently enjoyed the concessional rate.
Transition of unutilised input credit
Lack of clear guidelines and apprehension of possible controversy around transition of unutilised input tax credit as on 31 March 2019, has been a key issue for the sector. While there was apprehension that the entire credit balance could stand reversed, this fear has been allayed by the Council that has allowed developers to transition the credit as per the method to be prescribed. In essence, transition mechanics would consider credit taken for the percentage completion of construction as on 01 April 2019, to arrive at the credit for the entire project.
Such credit could then be further determined on the basis of percentage booking of flats and percentage invoicing. Thus transition would be on a pro-rata basis based on a simple formula such that credit in proportion to the booking of the flat and invoicing done for the booked flat is available. For mixed use projects, transition shall also allow credit in proportion to the carpet area of commercial portion to the total carpet area of the project.
TDR, FSI and long term lease for new projects
Supply of TDR, FSI and long term lease (premium) of a land by a land owner to a developer has been proposed to be exempted subject to the condition that constructed flats are sold before issuance of completion certificate and tax has been paid on them. Such exemption would be withdrawn in cases where the flats are sold after issuance of completion certificates and such withdrawal is limited to 1 percent of the value, in case of affordable houses, and 5 percent in case of others.
While it is intended that this proposal would achieve a parity of taxation between under construction and ready-to-move residential properties, it appears that ready-to-move properties could suffer tax burden of 1 percent or 5 percent as the case may be. It is unclear how the developer would recover this tax liability from a buyer of a ready flat, as the GST is not applicable on immovable property. As the person supplying TDR or FSI would not be in a position to envisage and comply with this condition, the liability to pay tax has been shifted to the developer.
The GST Council has attempted to carefully balance the apprehensions of developers for implementing the new rate structure, along with the interests of home buyers. Considering that the proposals are to be made effective from 1 April 2019, the sector has limited window period to implement and work towards documentation, ERP systems and processes as well as engaging with customers. Hopefully the enabling notifications also carry the intent of the recommendations and not leave any scope for interpretation.
The writer is Senior Partner, Deloitte India.