Prepared by CA. Jinesh Premji Gada, B.Com., A.C.A., ISA, M.B.A.- Head of Accounts & Taxation with HBS Realtors Pvt Ltd.

After announcement of rates Finance Minister Mr Arun Jaitley said that

“There is hardly anything where rates have been high, either the present levels have been maintained or brought down, besides being a more efficient tax is also going to be consumer friendly.”

But the said statement made by the Finance Minister is not true for Real Estate Industry which is explained in detail in this article. 

The fitment of rates of services was discussed on 19 May 2017 during the 14th GST Council meeting held at Srinagar, Jammu & Kashmir. The Council has broadly approved the GST rates for services at Nil, 5%, 12%, 18% and 28%, few which are related  to Real Estate Industry is listed below,

Sl. No.

DESCRIPTION OF SERVICES

GST  RATE

     
     

19.

Construction of a complex, building, civil structure or a part thereof, intended for
sale to a buyer, wholly or partly.
[The value of land is included in the amount charged from the service recipient]

12%
With Full ITC
but no refund of
overflow of ITC


27.

Composite supply of Works contract as defined in clause 119 of section 2 of CGST
Act

18%
With Full ITC

 

36.

All other services not specified elsewhere

18%
With Full ITC

 

At present under Service tax regime, Developers are paying Service tax on sale of under- construction of residence @ 30% of 15% i.e. 4.5% if value of land is included as per Notification No 9/2013 – Service Tax dated 08-05-2013 in metro cities as value of flats exceeds Rs 1 crores & @ 25%  of 15% i.e. 3.75% if value of flat does not exceed RS 1 Crore.

CENVAT Credit on Input services is allowed but Excise duty, MVAT/ CST on Inputs like cement, steel is not allowed.

In the said notification No 9/2013- Service Tax dated 08-05-2013, in the TABLE, for serial number 12 of Notification No. 26/2012- Service Tax dated 20-06-2012 and the entries relating thereto, the following serial number and the entries shall be substituted, namely:-

 “12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-

a. for a residential unit satisfying both the following conditions, namely:– (i) the carpet area of the unit is less than 2000 square feet; and (ii) the amount charged for the unit is less than rupees one crore;

25%

b. for other than the (a) above.

30 %

Conditions

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004; (ii) The value of land is included in the amount

Serial No. 12 of Notification No. 26/2012- Service Tax New Delhi, the 20th June, 2012 is also reproduced below for better understanding,

12.

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority

25

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.

(ii)The value of land is included in the amount charged from the service receiver.

At present MVAT @ 1% is also payable on registration of agreement under composition scheme & no set off of input is allowed.

So total maximum hit is 5.5% of MVAT (1%) & Service Tax (4.5%) after getting set off of CENVAT credit on input services & set off of Input is not allowed.

Now under GST serial no. 19

Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly.
[The value of land is included in the amount charged from the service recipient]

GST Rate

12% With Full ITC but no refund of overflow of ITC

Analysis of above changes as per my best estimate

1. Proposed Rate is higher than 6.5% (i.e. under GST 12% less at present 5.5% Service tax & MVAT) as compared to present scenario which is very high.

I have compared many rates in the GST wherein many items’ rates are higher by 1.5% to 2% but this difference of 6.5% is not acceptable. I can’t resist myself in saying that Jago (wake up) Real Estate Industry Jago & also Jago Grahak (consumer) Jago, otherwise it will be too late.

2. At present Developer also has to pay 5% Stamp duty apart from Service Tax & MVAT on Market value i.e. “Ready Reckoner” rate to pay stamp duty multiplied by square meter or agreement value whichever is higher is to be paid along with Registration of 1% of market value of agreement value or RS 30,000 whichever is less is to be paid.

3. So to reduce the gap of 6.5%, stamp duty should be merged with GST i.e. stamp duty is to be abolished so then difference will remain only 1.5% which is fine.

4. Under GST set off of GST paid on Inputs like cement, steel etc will also be allowed which is presently not allowed.

5. No refund of overflow of ITC will be given. This again is negative for the Industry.  Also Government’s claim that GST will eliminate full cascading effect of taxes will not be achieved. However practically such a scenario of getting overflow will not arise as developer will always have to pay difference because while paying GST of 12% on Supply, they have to pay on Sale Value of Flats which will be always higher as the same also includes value of land which is always significant.     

6. If government will not merge Stamp duty with GST then some abatement is to be given otherwise Government’s mission of housing for all by 2022 will be at task. The same is because if stamp duty is not merged under GST and also if no abatement is given then flat buyers have to pay 12% GST plus 5% Stamp duty plus Rs 30,000 registration which will increase the cost of residence further. So for example on 2BHK flat at Mulund (before completion certificate is received) is sold at Rs 2 crores then that flat will cost RS 2,34,30,000 which is explained as under,

Value of Flat

Rs 2,00,00,000

GST @ 12%

Rs 24,00,000

Stamp duty @  5%

Rs 10,00,000

Registration

Rs 30,000

Total cost of flat

RS 2,34,30,000

     Therefore flat buyers have to pay 17% extra plus RS 30,000 for Registration which is too much.   

1. Interpretational Issue in getting credit

Apportionment of credit & block credits

Section 17 of CGST Act & Section 17 of The Telangana SGST Act

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following,
namely:—

(c) works contract services when supplied for construction of an immovable
property (other than plant and machinery) except where it is an input service for further supply of works contract service;

Section 2 (119) of CGST Act defines works contract as

(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

Now suppose Developer is hiring a contractor which is a Pvt Ltd. company so at present they are charging 40% of 15% i.e. 6% Service tax under works contract category & 6% MVAT under composition scheme. Now Developers are getting set off of 6% Service tax & 6% MVAT is not allowed as a set off as they pay MVAT @1% on registration of sale agreement under composition scheme wherein set off of input is not allowed.

But now under GST contractor will charge GST @ 18% to the Developer (as GST rate is 18% for works contract)  i.e. if contractor is of Mumbai & giving works contract service at projects located in Mumbai so they will charge to Developer 9% CGST & 9% SGST under works contract. So prima facie Developer will get set off of entire 18% against 12% they will charge to the customers i.e. 9% Input CGST (works contract) set off against 6% Output CGST (construction of a complex service) & 9% Input SGST (works contract) set off against 6% Output SGST (construction of a complex service). (i.e.GST rate is divided equally between CGST & SGST in above example).

The said set off is prima facie allowed  because  “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

So only condition of getting Input service tax set off is, service should be used in the course or furtherance of business which is satisfied here.

But whether section 17 (5) (c) will restrict Input GST Credit of works contract against output  GST of construction service because in that section it is mentioned that works contract input GST is only allowed as set off only against further supply of output works contract service.

The said interpretation may not be the intention of the Government so necessary clarifications have to be issued by the Government /GST council on immediate basis.

Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly.
[The value of land is included in the amount charged from the service recipient]

GST Rate is 12%

GST rate of 12% is there for construction of a complex service (if sold before completion certificate is received) if intended for sale to a buyer and value of land is included. It means under redevelopment model Developer will pay 12% GST in case of free sales (i.e. out of free FSI against redevelopment) made to new buyers for a consideration & they may have to pay under GST @ 18% under works contract service against new flats given to existing tenants/landlords/members in case of redevelopment without consideration because it is not a sale to a buyer.

Under present scenario Department is insisting from the developer to pay service tax @ 6% even if no consideration is received by the developer on  new flats given to tenants/members/landlord by following Circular no 151/2/2012-ST dated 10-02-2012. That too department is insisting on payment of 6% on value of similar flats sold which is unfair as Developer is not getting any consideration from landlord/members/tenants so asking Service tax @ 6% on value of similar flats sold by the developer is too harsh. So at present much litigation is going on with the service tax department. Because many Developers are either not paying service tax as no considerations is received by them or few developers are paying 6% under works contract service on construction cost with or without their mark up by following Rule 3(b) SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006;

SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 is reproduced below for better understanding.

3. Manner of determination of value.– Subject to the provisions of section 67, the value of taxable service,1 where such value is not ascertainable, shall be determined by the service provider in the following manner:– (a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration; (b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.              

The same kind of dispute will also be prevailed under GST regime in this area of flats given by the developer to members/tenants/landlord without any consideration against Development rights given to the Developer unless some clarifications will be issued by the Government/GST council.

The same is explained below also because as per Determination of Value of Supply Rules under GST

  1. Value of supply of goods or services where the consideration is not wholly in money
    Where the supply of goods or services is for a consideration not wholly in money, the value of the supply
    shall,
    (a) be the open market value of such supply;

Explanation.- For the purposes of this Chapter,-
(a) “open market value” of a supply of goods or services or both means the full value in money,
excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a
person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.   

Here again Department will ask GST to be paid by the Developer on open market value of supply of similar flats supplied to new buyers at market value for supply of new flats given to landlord/members/tenants without consideration against development rights given to the Developer.

But Developers will be willing to pay GST by following Rule 4 of Determination of Value of Supply Rules of GST & will pay on 110% on cost of provision of such service under works contract service, at the GST Rate of 18% i.e. against supply of flats given to Landloard/members/tenants in case of redevelopment without consideration against development rights given to the Developer.

Rule 4 is reproduced below for better understanding.

Determination of Value of Supply Rules of GST

4. Value of supply of goods or services or both based on cost
Where the value of a supply of goods or services or both is not determinable by any of the
preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.

 

9) Under GST 12% With Full ITC but no refund of overflow of ITC rate is there for

Construction of a complex, building, civil structure or a part thereof, intended for
sale to a buyer, wholly or partly. [The value of land is included in the amount charged from the service recipient]

Building or civil structure is not defined it means it may be residential building or civil structure or commercial building or civil structure but GST rate will be same only i.e. 12% With Full ITC but no refund of overflow of ITC.  

10) Service Tax Exemptions to be continued in GST as decided by GST Council

Serial No.

Services

7.

Services by way of renting of residential dwelling for use as residence

67.

Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex;


a) Here again under GST also services by way of renting of residential dwelling for use as residence will be exempt & services by way of renting of commercial places for e.g. Renting of Shops/office places in MALLs etc will be taxable @ 18% under serial no 36.

36.

All other services not specified elsewhere

18% With Full ITC


But to avoid confusion it is better that GST council will specify GST rate of 18% with Full ITC in case of renting of commercial places separately.

b) Under GST regime Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex is exempt. So people who are constructing 2nd holiday homes at Lonavala, Deolali etc will be exempt.      

Conclusion:

Real Estate Industry should file their representation on points explained above otherwise Real Estate Industry which is fighting at present due to lack of demand, harsh RERA provisions, demonetization impact, higher interest cost due to slower project approvals will face further heat because of above higher GST rates from present & other interpretational issues due to GST provisions which is also explained above.

If Government/GST Council will rectify above defects pointed out above then it will help in reducing inflation & also help in achieving Government’s mission of creating employment, creating smart cities, good infrastructure & ‘Housing for All’ mission by 2022.

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article author

CA JINESH GADA

Tax Expert
Head of Accounts & Taxation, HBS Realtors Pvt Ltd



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    I hope by reading this article you got enlighten on ,Analysis of Goods & Service Tax (GST) on Real Estate IndustryTDS OF ASSESSSMENT YEAR 2017-18 ON PROFESSIONAL TAX IS NOT APPLICABLE, further to mention before taken any financial decision based on this content it is prefered to take an expert opinion as matter can be subjective.