The 34th GST Council meeting held on Tuesday has brought some positive news for the Real Estate industry, but these changes would have substantial impact on the sector .
According to Pratik Jain, Partner & Leader, Indirect Tax, PwC India, it is a welcome move by the GST Council to provide an option to ongoing projects (where construction has already started prior to 1 April 2019) to choose normal rate of 12% (with credit) or 5% (without credit) – in case of affordable housing such rate would be 8% (with credit) and 1% (without credit).
“Such option has to be exercised within a period which would be specified. Providing such option would be beneficial for those developers who had already factored the entire input credits of the project while arriving at the sale price and in many cases these benefits may already have been passed on to customers,” says Jain.
Jain adds that the new composition rates would be mandatory for all projects for which construction starts after 1 April 2019 and hence, such tax blockage would need to be factored at time of budgeting. “In such case, the Council has mentioned that the credit reversal would need to be done proportionate to area space, the details of which are awaited. The developers would need to work out the amount of input credit for various projects (where certain projects are covered under composition and certain under normal scheme or projects having both residential and commercial segments),” says Jain.
Mekhla Anand, Partner, Cyril Amarchand Mangaldas says that by making the new tax rates optional for residential projects under construction, the Council has effectively addressed apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits, pricing etc. that were bound to arise on account of the change. “Providing a reasonable time period for transition based on consultation with various States and the industry also signifies a GST regime which is evolving in its industry and consumer focus,” says Anand.
Jigar Doshi, Partner – Indirect Tax, SKP Business Consulting LLP says that by providing an option available between new rates without ITC and old rates with ITC, the council has sought to address the concerns of the industry on the tax scheme applicable to under-construction projects during the transition phase from 1 April. “Realtors can evaluate and choose the best scheme which minimises the tax cost on each building of the project. Those who opt for the reduced rates would invariably be required to reverse credits on proportionate basis the full impact of which will be known once the rules are notified,” says Doshi.
80%, 15% rules
The GST council has additionally imposed a condition that 80% procurement by developers should be from registered dealers to avail the composition scheme. “This would require increased vendor control and the fine print would need to be analyzed to determine whether the condition is only limited to vendor registration or also the vendor compliances like payment of tax and filing of returns,” says Jain.
According to Prashant Deshpande, Partner, Deloitte India, the option to pick new rates or stick to the old ones for under construction project may not help the sector. “While an option has been provided in respect of ongoing projects to continue to pay tax at old rates, it could however prove to be illusory as optically the new rates appear more attractive to a buyer and ability of the real estate players to take a call within the prescribed period about their ability to collect taxes at old rates appears uncertain,” says Deshpande.
MS Mani, Partner, Deloitte India says the ITC transition procedure, which considers percentage completion, percentage booking and invoicing will require significant computational challenges for builders. “It would be difficult to monitor the criteria of 80% purchase from registered dealers and also the shortfall that would require a payment on reverse charge basis. While much needed clarity has now been provided on supply of TDR /FSI /Premiums etc, the condition withdrawing the exemption if the apartments are sold after issue of completion certificate could warrant a reconsideration in future,” says Mani.
Another important aspect clarified by the Council is to treat projects with up-to 15% commercial space as residential property. “This is important in cases where buildings have commercial amenities such as clubs, restaurants etc as well as in case of residential-cum-commercial projects. However, in certain cases it may not be possible to determine the exact percentage of commercial area upfront or the ratio of residential and commercial area might undergo a change after the project has started. Tax treatment in such cases may need to be analyzed in detail,” says Jain.
Jain adds the changes would mean a lot of work for the sector and it would be important to undertake changes in IT systems, documentation and processes at earliest considering the 1 April 2019 cutoff date. “Timely engagement with the customers would also be important, as they would expect overall reduction in prices and may want to understand the basis of revised pricing. Industry would need to be cautious of anti-profiteering provisions as well and need to do a detailed analysis for the ongoing projects,” says Jain.