By Gokul Kishore
To implement the GST Council’s recent decisions on the realty sector, the Central Board of Indirect Taxes & Customs (CBIC) has issued six notifications on rates and exemptions and one notification amending the rules. The sub-regime carved out for residential real estate demands caution—the implications must be considered.
The reduced rate of 1% for affordable housing and 5% for other residential projects has been notified with effect from April 1, 2019 and input tax credit (ITC) has been barred. ITC is the basis on which GST is built, and keeping a sector out of the credit chain appears to be without sound rationale. This is because the new rates are mandatorily applicable for new projects commencing from April 1. For ongoing projects (commenced before April 1), promoters must decide by May 10 if they wish to continue to pay tax at the old rate. Otherwise, it will be deemed that they have opted to adopt the new rate. Compulsory prescription of lower rate without credit is at variance with the normal practice of retaining the tariff rate without conditions when reduced rate with conditions is provided. This would have ensured that those who wish to remain in the credit chain and do business with organised vendors, have the option to do so. The real effect of reducing the rate from 12% (after one-third abatement to land value) to 5% can only be known when the ITC loss is quantified and compared based on procurements to date. If the exercise is going to be price-neutral, then home buyers may feel disappointed. If margins come under pressure, then marginal price increase cannot be ruled out. As reduced rate is applicable without ITC, credit reversal must be quantified based on complex formula prescribed for various scenarios.
Several other conditions have been prescribed under the new regime for residential realty sector. Promoters are required to purchase from GST-registered suppliers. If such purchases fall below 80% of the value of inputs and input services, then GST needs to be paid on the shortfall by the promoter—as recipient under the reverse charge mechanism. Promoters must maintain project-wise account of inward supplies to quantify the shortfall. This is intended to compel the builder to procure goods and services from suppliers charging GST and vendors to issue tax invoice and charge GST to retain business. The builder will have additional compliance burden when tax is liable to be paid under reverse charge on some of the purchases. Another hassle for builders is the condition on payment of tax under reverse charge on cement purchased from unregistered suppliers even if the condition on ‘80% of purchases from registered vendors’ is met w.r.t. other goods. Cement attracts the highest GST rate of 28%, and any gap in procurement planning will be costly for promoters.
The new rates apply to projects registered under the Real Estate (Development and Regulation) Act, 2016. Those projects with commercial apartments up to 15% of total carpet area will also be considered as residential project for applying the new rate. As RERA registration is mandatory for projects where the area to be developed exceeds 500 m2 or there are more than eight units, smaller projects will continue to be subject to same rate as before. Industry must set up compliance mechanisms for project-type specific sub-regimes.
Transfer of development rights on or after April 1 by the landowner to the promoter has been exempted. However, such exemption is not available on part of the value of such rights attributable to units remaining unbooked after receipt of completion certificate. In these cases, GST will be payable on TDR on proportionate basis. Another burden on promoters is payment of such tax under reverse charge mechanism. In area-sharing model, landowner transfers development right and receives constructed apartments. While granting exemption to TDR may provide some relief, shifting the same to promoter for unsold units may add to compliance burden besides impacting pricing. Though the latest changes are intended to address residential realty, in respect of TDR, liability to pay tax under reverse charge is on the promoter even in case of commercial construction. Impact analysis for all the projects and fresh negotiations for possible revision in contract terms to reduce pressure on the books are needed.
The anti-profiteering provision of the GST law applies when tax rate is reduced. The present round of rate reduction for residential realty will be subject to scrutiny from this angle as well. Industry may cite loss of ITC to not reduce prices and not pass on rate-reduction gains. But, the National Anti-profiteering Authority may not accept this, relying on certain numbers to show benefit of rate reduction is more than credit loss. Industry must do its math diligently to avoid such surprises. Possible reduction in tax rate for cement from 28% to 18% should also be factored as pricing is based on procurements spanning over the entire duration of the project.
A major reason for extending rate cut was to provide relief to the realty sector burdened with unsold inventory. However, looking at the complex changes, including ITC loss and mandatory threshold for purchases from registered vendors, a surge in demand, in the short-run, seems unlikely. Industry has to analyse pros and cons of opting for old rate for on-going projects, pricing, procurement pattern, compliance with amended provisions and vendor network to keep the margin intact even while being fully compliant.
Advocate with Lakshmikumaran & Sridharan. Views are personal