Pratik Jain, Partner & Leader, Indirect Tax, PwC India
“The 34th GST Council meeting has brought some positive news for the Real Estate sector.
In a welcome move, the GST Council has provided 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). The reduced rate of 1% shall also apply on projects currently covered under 8% GST (e.g Pradhan Mantri Awaas Yojna). Such option has 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.
Further, 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).
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.
Additionally, a condition has also been imposed that 80% procurement by developers should be from registered dealers to avail the composition scheme. On the shortfall, GST has to be paid at 18% under reverse charge by the developers (except cement which will continue to attract 28% GST). This would required 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.
Transfer of development rights, which is generally exempt for residential projects, would become taxable under reverse charge to the extent the property is sold after obtaining the completion certificate, for which a separate valuation mechanism is proposed.
These changes would have substantial impact on Real Estate sector. Industry will have to work out which option works best and come up with the revised price structure quickly. It is important to undertake changes in IT systems, documentation and processes at earliest considering the 1 April 2019 cut off 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.”
