| To: | XXXXXXXXXX |
| Re: | GST ON REAL ESTATE: TRANSITION SCHEME |
| Client: | XXXXXXXXXX |
| Client Representative: | MR. YYYYYY, DIRECTOR |
| Meeting date: | 05.06.2018 |
On the above mentioned date the mentioned person had raised his willingness to have legal validity and functioning opinion from us regarding the following issues on NEW SCHEME UNDER GST OF REAL ESTATE SECTOR WEF 1.04.2019:
1. Whether the current tax regime w.e.f 01.04.2019 is on reverse charge basis i.e either the applicable rate of 5% or 1% is to be collected from the customer or has to be paid by the assesse himself?
OPINION
FACT:
The tax has to be collected from the customer and deposited with the government as is being done in normal course of trade of commerce. The sale of flats, apartments, commercial space does not fall under reverse charge of CGST ACT. The rate of GST is as follows under new scheme for new projects as well as ongoing projects on which promoter has chosen to be in new scheme:
| S.NO | TYPE OF APARTMENT | PROJECT | EFFECTIVE RATE OF TAX |
| 1. | Affordable residential | RREP or REP | 1% |
| 2. | Residential other than above | RREP or REP | 5% |
| 3. | Commercial | RREP | 5% |
| 4. | Commercial | NON RREP | 12% |
If the assessee( promoter )has chosen to stay with the old scheme of taxation in case of ongoing projects, then the rates would be as follows:
| S.NO | TYPE OF APPARTMENT | PROJECT | EFFECTIVE RATE OF TAX |
| 1. | Affordable Residential | NA | 8% |
| 2. | Residential other than above | NA | 12% |
| 3. | Commercial | NA | 12% |
ANALYSIS:
A new scheme of taxation was introduced by Notification No. 03/2019, 04/2019, 05/2019, 06/2019 and 07/2019 and 08/2019 dated 29.03.2019. The Notification no 03/2019 – Central Tax (Rate) dated 29.03.2019 amended Notification no . 11/2017- Central tax ( rate) supra is a specific notification for “ Rate of GST on Intra State Supply of specific services with SAC”, for providing new rates of GST on construction and sale of apartment or commercial space by a promoter. The amendment does not specifically provides that the scheme would fall under Reverse charge mechanism. The Reverse charge mechanism of GST is Governed via Section 9(3) and 9(4) of the CGST Act and Notification No 13/2017 or order as per power conferred under Section 9(4) specifically provides for the supplies on which reverse charge mechanism would be applicable. The Construction service has not been brought under the said notification and that makes it very clear that the service is still under Normal charge and not under reverse charge.
2. What would be the GST implication on land owner share wef 01.04.2019?
FACT:
The Landowner is a person who causes construction and is well covered under the scheme as promoter. Therefore in the act it has been always stated as “ Landowner- Promoter” instead of “ Landowner”. The new rates or old rates in the scheme of taxation are very much applicable to the Landowner as is applicable to the Developer. If the landowner sells his share or receives advance in relation to his share of Apartment or space before First occupation or completion Certificate, then he would be liable to take care of all compliances under the ACT i.e he has to take registration, collect taxes, deposit taxes and file returns. He is also allowed to take benefits of Input tax credit for all the services availed. Though new scheme restricts the Input credit for utilizing for payment of Taxes collected.
ANALYSIS:
If we summarize the whole new scheme of taxation, it comes out that promoter has to mandatorily pay taxes as per new scheme of taxation. For ongoing projects, options are available for promoter to choose either the new scheme or continue as per the old scheme. Promoter has been defined as per Explanation 4(xvii) of notification no. 03.2019- Central tax ( Rate) that definition of the promoter would be as per section 2(zk) of the RERA ACT. It defines promoter as:
a.“a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, forth purpose of selling all or some of the apartments to other persons and includes his assignee; or
b. a person who develops the land into a project, whether or not the person also constructs structures on any of the plots, for the purpose of selling to other persons all or some of the plots in the said project, whether with or without structures thereon; or
c. any development authority or any other public body in respect of allottees of—
- Buildings or apartments, as the case may be, constructed by such authority or body on lands owned by them or placed at their disposal by the Government; or
- Plots owned by such authority or body or placed at their disposal by the Government, for the purpose of selling all or some of the apartments or plots; or
d. An apex State level co-operative housing finance society and a primary co-operative housing society which constructs apartments or buildings for its Members or in respect of the allottees of such apartments or buildings; or
e. Any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or by any other name or claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale; or
f. Such other person who constructs any building or apartment for sale to the general public.
Explanation:
For the purposes of this clause, where the person who constructs or converts a building into apartments or develops a plot for sale and the persons who sell apartments or plots are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified, under this Act or the rules and regulations made
thereunder;”
So if the definition is summarized keeping in view all the provisions of the law it is very clear that the landowner is to be considered as promoter as he causes the construction all though the construction is being done by Developer. It is also very clear that person selling the apartment and the person constructing the apartment are both considered as promoter and hence the landowner who sells the apartment though not engaged in construction shall be deemed as a normal supplier in terms of GST act. Landowner may be confused as of because of the frequency of transactions or it may arise that for the transactions of few months, he has to carry with all the provisions of the law. But the term supply under GST act has nothing to do with frequency, transactions or period of supply. The sale of apartments are very well covered under Supply and hence landowner needs to comply with all the provisions of the law.
3. “What would be the tax implication on sale of flats after completion:
i. From developer perspective
ii. From land owner perspective
FACT:
i. If the consideration has been received after issuance of completion certificate or after its first occupation in case of residential or commercial apartments, whichever is earlier, the same is exempted in hands of promoter irrespective of being landowner or developer.
ii. The developer has to pay tax on reverse charge basis on such portion of development rights that are attributable to the residential apartments which remain unsold on the date of issue of completion certificate.
iii. The tax on development rights attributable to commercial space or commercial complex has to be discharged on full value irrespective of completion on reverse charge basis.
ANALYSIS:
The Notification No 3/2017 Central Tax ( Rate) clearly states at serial no 3 for item (i), (ia), (ib), (ic), (id), (ie) and (if) for Affordable residential apartments, Residential Apartments other than affordable, Commercial Apartments and ongoing projects respectively that the promoter has to pay central tax at the rate specified in column no 4 on the sale of apartments except where the entire consideration has been received after issuance of completion certificate , where required, by the competent authority or after its first occupation, whichever is earlier. As both the landowner and developer has been considered as promoter, hence the sale of apartments after completion is exempt in the hands of both.
But the amendment in notification No 12/2017 dated 28.06.2017 (Exemption notification) via notification No. 04/2019 – Central Tax (Rate) , a newly inserted serial No 41a states that
“ Promoter shall be liable to pay tax at the rate applicable, on a reverse charge basis, on such proportion of the value of development Rights or FSI or both as is attributable to the residential apartments, which remain unbooked on the date of issuance of completion certificate or first occupation of the project as the case may be, in the following manner-
(GST PAYABLE ON TDR OR FSIOR BOTH FOR THE CONSTRUCTION OF RESIDENTIAL APARTMENT IN THE PROJECT)
X(MULTIPLIED BY)
(CARPET AREA OF THE RESIDENTIAL APARTMENT IN THE PROJECT WHICH REMAIN UNBOOKED ON THE DATE OF ISSUANCE OF COMPLETION CERTIFICATE OR FIRST OCCUPATION)
TOTAL CARPET AREA OF THE RESIDENTIAL APARTMENT IN THE PROJECT
Provided further that tax payable in terms of the first proviso herein above shall not exceed 0.5 percent of the value in case of affordable residential apartments and 2.5 percent of the value in case of residential apartments other than affordable residential apartments remaining unbooked on the date of issuance of completion certificate or first occupation.
The liability to pay central tax on the said portion of the development rights or FSI or both , calculated as above, shall arise on the date of completion or first occupation of the project, as the case may be, whichever is earlier” .
Further Entry no 5b has been inserted in the notification no 13/2017 – central tax (Rate) via Notification No 05/2019 Central tax (Rate) dated 2903.2019, which states that
“Entry No 5B : Services supplied by any person by way of transfer of development rights or FSI for construction of a project by a promoter
Tax is to be paid by Promoter on Reverse Charge basis irrespective of supplier being any person”
The analytical reading of the above extracts from the notification makes some of the points very apparent:
- Exemption regarding Development rights in context to booked portion is available only for Residential Portion and not for commercial portion. This fact will remain intact even in case of commercial portion available in RREP.
- GST on development rights has to be discharged by Developer Only irrespective of the fact that landowner is registered or unregistered.
- Plain reading projectsthat reversal of such proportionate exemption was done on the entire project i.e landowner + developer share. But logically the development rights is received only to the xtent of the developer share and hence it should be total carpet araea of the developer share and not on the landowner share.
4. What would be the tax structure for joint development agreement entered on 08.04.2018 i.e before 01.04.2019 ?
FACT:
i) Typically Joint Development Agreement there would be a barter of two transaction:
- Transfer of the Development right by the landowner to developer.
- Transfer of construction service/units by the developer to the land owner.
ii) For JDA Entered before 01.04.2019, Developer will have to pay GST on Reverse Charge Basis @ 18% on “ Transfer of Development Rights” depending upon the valuation opted by the assesse. Generally it’s the value of land transferred. Though invoice would be raised by the land owner.
iii) For construction Service/ units transferred by the developer to the land owner, the developer need to raise proper invoice and pay GST under new scheme i.e @ 1% or 5%. The GST shall be charged from the land owner
iii) Developer would be entitled for Input tax Credit regarding the GST paid under reverse charge for “Transfer of Development Charges”.
iv) Landowner would be entitled for input tax credit regarding GST charged by developer on “Construction Service”
v) Both landowner and developer cannot utilize the mentioned Input tax credit for payment of GST on sale of Residential apartments to the consumers. Though the Input tax credit could be utilized for any other activity being carried on by the promoter.
ANALYSIS:
Joint Development Agreement entered before 31.03.2019, for the development rights transferred by the landowner to developer, landowner would be liable to pay GST at the rate of 18%. For all Joint Development Agreement entered either before or after 01.04.2019 for transfer of the development rights in case of commercial projects by the landowner to developer, landowner needs to be pay GST at 18% on value as per sec 15. Joint Development Agreement before 31.03.2019, the value has to be determined in terms of Rule 27 of the Central Goods and Service Tax Rules, 2017 read with section 15 of the Central Goods and Service Tax Act, 2017, which needs to be determined in the following order
a. be the open market value of such development rights supply;
b. if the open market value is not available under clause (a), the value of land development right and the amount paid by developer to landowner (if any) needs to be considered, if such value is known at the time of supply;
c. if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality of the development rights provided by the landowner;
d. if the value is not determinable under clause (a) or clause (b) or clause (c), then 110% cost development rights needs to be adopted in terms of rule 30 of the said Rules.
Joint Development Agreements enter before 31.03.2019 shall be at the time when the said developer transfers possession or the right in the constructed complex by entering into a conveyance deed or similar instrument (for example allotment letter) (Notification No.04/2018 ibid) Notification 04/2018 refers to transfer of procession, which shall be on the completion of the project at the end, and also make reference to transfer of right in the constructed complex, which accrues to the landowner on the area allocation (which may be in Joint development agreement or supplementary agreement), thereby the confusion still exist as to whether the GST needs to be paid on the completion or on allocation, which is has no clarity, in my opinion, to err on the revenue it would be better to consider the allocation date rather than procession on completion of the project
TAXATION ON CONSTRUCTION SERVICE PROVIDED BY DEVELOPER TO LANDOWNER BEFORE 01.04.2019
Joint Development Agreement entered before 31.03.2019, for the construction service for the construction services provided by the Developer to the Landowner, the Developer would be liable to pay GST at the rate of
18% for any construction either affordable, or other project or commercial with 1/3rd deduction of value for the land in case the consideration includes land
Joint Development Agreement before 31.03.2019, the value has to be determined in terms of Rule 27 of the Central Goods and Service Tax Rules, 2017 read with section 15 of the Central Goods and Service Tax Act, 2017, which needs to be determined in the following order
a. be the open market value of such construction service supply;
b. if the open market value is not available under clause (a), the value of land and the amount paid by landowner to developer (if any) needs to be considered, if such value is known at the time of supply;
c. if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality of the construction provided by the developer;
d. if the value is not determinable under clause (a) or clause (b) or clause (c), then 110% of cost of construction needs to be adopted in terms of rule 30 of the said Rules.
Joint Development Agreements enter before 31.03.2019 shall be at the time when the said developer transfers possession or the right in the constructed complex by entering into a conveyance deed or similar instrument (for example allotment letter) (Notification No.04/2018 ibid)
5. What would be the tax structure for joint development agreement entered after 01.04.2019?
FACT:
i) Developer shall be liable to pay tax on reverse charge basis, on supply of “Development Rights” which is attributable to the residential apartments that remain unbooked on the date of issuance of completion certificate , or first occupation of the project
ii) The rate of tax shall be 18% but the tax amount shall be maximum up to the GST equivalent to the GST to be charged @ 1% or 5% on sale of unsold residential apartments.
Rest position shall remain same as in the case of Ques no 4
ANALYSIS:
Joint Development Agreement entered on or after 01.04.2019, for the development service provided by the landowner to developer would be exempted to the extent for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly,except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. Further promoter shall be liable to pay tax at the applicable rate, on reverse charge basis, on such proportion of value of development rights, as is attributable to the residential apartments, which remain un-booked on the date of issuance of completion certificate, or first occupation of the project, as the case may be at the rate of 1% in case of affordable housing and 5% in case of projects other than affordable housing.
Joint Development Agreement entered on or after 01.04.2019, the value of portion of residential 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 on which the GST needs to be paid by the developer under RCM
Joint Development Agreement entered on or after 01.04.2019, the time of supply i.e. the point of payment of tax would arise as on the date of obtaining the completion certificate or on the first occupation. (Notification No.06/2019 ibid)
TAXATION ON CONSTRUCTION SERVICE PROVIDED BY DEVELOPER TO LANDOWNER AFTER 01.04.2019
Joint Development Agreement entered on or after 01.04.2019, for the construction services provided by the Developer to the Landowner, the Developer would be liable to pay GST at the rate of
a. 1.5% w.r.t. construction relating to affordable residential apartments with 1/3rd deduction ofvalue for the land in case the consideration includes land.
b. 7.5% w.r.t. construction relating to other residential apartments with 1/3rd deduction of value for the land in case the consideration includes land.
c. 18% w.r.t. construction relating to commercial apartments with 1/3rd deduction of value for the land in case the consideration includes land.
Joint Development Agreement entered on or after 01.04.2019, the value of construction service in respect of such apartments shall be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers nearest to the date of Joint Development Agreement. However, since this value includes the value of land as well, 1/3rd deduction shall be eligible from such value of construction.
Joint Development Agreement entered on or after 01.04.2019, the time of supply i.e. the point of payment of tax would arise as on the date of obtaining the completion certificate or on the first occupation. (Notification No.06/2019 ibid)
The views represented are solely my personal views according to my interpretation of law. It may vary person to person and shall not be categorized or used for any legal reference for any proceeding or hearing. We have been asked by our Client to present with our opinion as stated in this letter.