GST Update on Notification Issued for GST Rate on Real Estate Sector w.e.f. 01.04.2019 Part-1

The much awaited notifications with respect to GST Council’s decision as regards prescribing new GST rates for real estate sector being 1% without ITC for affordable residential housing and 5% without ITC for non-affordable residential housing have been released by the Government yesterday. The Government has issued around 14 notifications [CGST (Rate) and IGST (Rate)] making substantial changes in the GST rates applicable for real estate sector thereby giving “amendment bonanza” to the real estate sector on the beginning of new financial year. As we all know that the real estate sector is always surrounded by immense litigation and the substantial amendments made by the government increase their complexities thereby adding fuel to the fire of litigation that will be really difficult to extinguish. The present update seeks to highlight the key points of the new GST rates introduced by the government and the conditions stated therein.

  1. The notification removes the confusion as regards deduction of 1/3 rd value pertaining to portion of land as stated in paragraph no. 2 of the notification. It was pointed out in our earlier update that deduction in share of land is not being provided in the Press Release. However, the GST rates specified in the Notification No. 03/2019-Central Tax (Rate) dated 29.03.2019 and Notification No. 03/2019-IGST (Rate) dated 29.03.2019 specifically mentions that the deduction stated in paragraph no. 2 of the notification would be applicable.
  1. A new procedural compliance has been introduced wherein the developers referred in the notification as ‘developer-promoter’ is required to ensure that 80% of the value of input and input services (other than services by way of grant of development rights, FSI, electricity, high speed diesel, motor spirit, natural gas) used in supplying the services should be received by the registered supplier. Earlier, there was confusion that if the limit of 80% is not adhered to, whether reverse charge mechanism would be applicable for all inputs/input services or only for the shortfall. This notification states that the developer is required to pay GST at the rate of 18% on all inputs/input services except cement and capital goods under reverse charge mechanism on the shortfall in the purchases made from registered supplier. With respect to cement and capital goods, the GST rates as applicable to the said goods would be relevant. It is also prescribed that the developer is required to ensure on monthly basis that the shortfall is being paid under reverse charge mechanism with respect to purchases of cement. As regards other inputs/input services, the developer is required to make good the shortfall of 80% on annual basis, latest by 30 June of the quarter ending the financial year. The tax payments on the shortfall are required to be reported by the developer in the prescribed form electronically on the common portal thereby leading to increased compliance. Not only this, the input tax credit not availed shall be reported every month as ineligible credit in GSTR-3B [Row No. 4(D)(2)].
  1. The developer has one time option to pay GST at the old rates of 12%/18% by filing Form at Annexure IV by 10th May, 2019 for the ongoing projects.
  1. This notification also seeks to clear the confusion as regards valuation of flats given by the developer to the landowner in lieu of transfer of development rights. It is stated that the value of such flats shall be the total amount charged for similar apartments in the project from independent buyers nearest to the date on which such development right is transferred to the promoter less the value of transfer of land if any as prescribed in paragraph 2 of the notification. It is worth noting that the provision allows deduction of value of land even if flats are given to landowner.
  1. This notification also seeks to clear the dispute as regards inclusion of the value of other charges charged by the developer such as preferential location charges, development charges, parking charges, common facility charges etc. and states that these charges would form part of the gross amount of consideration. This has the effect that GST will be payable on the said charges at the GST rate applicable to constructed flats sold by the developer.
  1. The notification specifies that the credit of input tax charged on goods and services used in supplying the service should not been taken except to the extent as prescribed in Annexure I in case of Real Estate Project (REP) and in Annexure II in case of Residential Real Estate Project (RREP). The details of the Annexures will be discussed in our next update.

The content of this GST update is for educational purpose only and not intended for solicitation.

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