Explained: Why GST still vexes India's real estate developers and buyers

The press release after the 34th GST Council meeting has attempted to address many of ambiguities and apprehensions

Sudipta Bhattacharjee, partner (tax controversy management & contract documentation), Advaita Legal, explains why the tax still vexes the real estate sector: 

Several clarifications on real estate emerged from the 34th GST Council meeting. Why is there confusion over its applicability?

Several representations were filed following the radical recommendations of the 33rd meeting of GST Council, once the real estate players realised that there is not much to be cheerful about those recommendations and that various points need further clarity. 

The press release after the 34th GST Council meeting has attempted to address many of those ambiguities and apprehensions. However, we still need to wait for the formal notifications to conclude on final implications. It is likely that these notifications may get delayed.  Reportedly, Maharashtra and Punjab have expressed fresh reservations and the GST Council has asked the Group of Ministers (GoM) on real estate to look into these.

What are the key clarifications emerging from the 34th GST Council meeting?

(i) Concessional rate of 5 per cent GST shall apply for residential real estate projects with up to 15 per cent of total carpet area earmarked for ‘commercial’ purposes.

(ii) Developers given an option (to be exercised once, within a timeline yet to be specified) to continue to pay tax at the old rates (effective rate of 8 per cent or 12 per cent with Input Tax Credit) on ongoing projects (buildings where construction and actual booking have both started before April 1, 2019) which have not been completed by March 31, 2019.

(iii) Apart from restricting input GST credit, the new GST rates of 5 per cent/1 per cent will also be subject to the following condition: 80 per cent of inputs and input services [other than capital goods, TDR/ JDA, FSI, long term lease premiums] shall be purchased from registered persons. On shortfall, builder to pay GST @18 per cent on reverse charge basis except for cement and capital goods purchased from unregistered persons, on which GST shall be paid @28 per cent and/or at applicable rates, respectively (on reverse charge basis).

(iv) For ‘ongoing projects’, entire input credit will not be lost. Credit in proportion to the booking of the flat and invoicing done for the booked flat will be available subject to a few safeguards.

(v) The press release after the 33rd GST Council meeting spoke about input side exemption for joint development agreements (JDAs). That point is missing in the press release after the last meeting which merely mentions deferment of point of tax for JDAs.

So, what are the key unanswered questions? 

(i) The cap of Rs 45 lakh for qualification as ‘affordable housing’ — does it include the basic value of the flat only or does it include charges for common amenities too, especially in a mixed project?
 

(ii) While an option exists for ongoing projects to continue with old rates, developers will need to undertake a detailed cost-benefit analysis to decide whether to exercise that option. Also, given the market conditions, can developers practically opt for the old rates at all, despite pressure (and threats of cancellation) from customers?
 

(iii) Will the new rates lead to a new type of anti-profiteering complaints in real estate? It is instructive to remember that in the anti-profiteering order against Hardcastle Restaurants, profiteering was upheld since “base price was increased by 12.38 per cent which is more than the ratio of denial of ITC of 9.11 per cent.” Builders, who intend to increase prices to set off incremental costs on account of ITC denial, will need to calculate the extent of loss very carefully to avoid anti-profiteering complaints.
 

(iv) As regards credit reversals, it is a settled law that credit eligibility has to be evaluated at the time of receipt of inputs/input services. Can a subsequent change in law take away a vested right of input credit which has been validly availed? This issue may lead to writ petitions challenging the loss of credit as per the new transition formula.
 

(v) The press release mentions exemptions and deferments in point of tax on TDRs, FSI, JDAs etc. But:
 

(a) Can TDR’s be made liable to GST at all since they are included in ‘land’?
 

(b) JDAs may also be in the form of revenue sharing arr­ange­ments and thus qualify as ‘joint ventures’ with no ‘supply’

thereunder. Can there be GST on development rights obtained under such JDAs anyway?
 

(c) Development rights (whe­ther in the form of TDR, FSI, lease or JDA) may not always be a ‘supply’ — it may be ‘consideration’ for the supply of construction services by developers and thus not liable to GST per se. Can the new exemption/ deferred points of tax apply at all in such cases?