GST Impact on Real Estate · 2018-03-27 · GST –Impact on Real Estate Sector Real Estate –dictionary meaning Land and anything fixed, immovable, or permanently attached to it

GST Impact on Real Estate CMA Bhogavalli Mallikarjuna GuptaFounder : India-gst.in Director – Business Advisory Services, Procode Softech India Pvt Ltd SME, Speaker, Author & Advisor - Indian GST, GCC VAT & Malaysian GST

Agenda

GST – Impact on Real Estate Sector

• Introduction

• Key Concepts of GST

• Impact Areas

• Q & A

Introduction


Real Estate – dictionary meaning

Land and anything fixed, immovable, or permanently attached to it such asappurtenances, buildings, fences, fixtures, improvements, roads, shrubs andtrees (but not growing crops), sewers, structures, utility systems, and walls.Title to real estate normally includes title to air rights, mineral rights, andsurface rights which can be bought, leased, sold, or transferred together orseparately. Also called real property or realty.

In today’s discussion we will discuss only on residential and commercialprojects

Source : http://www.businessdictionary.com/definition/real-estate.html

GST – Impact on Real Estate Sector Till recently it is mostly in the organized sector

Contributes to nearly 30% of the employment after farm sector

Housing sector is expected to touch 5% - 6% GDP

Expected to grow at a CAGR of 11.2% for FY 2008 -2020

Expected to attract investments worth US$ 7 billion in 2017

FDI Inflows from FY 2000 – 2017 US $ 24.29 billion

SEBI has given approval for Real Estate Investment Trust

Real Estate (Regulation & Development) Act has been introduced

Source : https://www.ibef.org/industry/real-estate-india.aspx

Taxation Pre GST Era

Service Tax – centralized registration

VAT – differed from state to state

Central Excise – Not applicable

State Levies – Stamp Duties

Input Tax Credit – available only for Service Tax and VAT in few states

Key Concepts in GST


Works Contract : Section 2, Sub-section 119

“works contract” means a contract for building, construction, fabrication,completion, erection, installation, fitting out, improvement, modification,repair, maintenance, renovation, alteration or commissioning of anyimmovable property wherein transfer of property in goods (whether asgoods or in some other form) is involved in the execution of such contract;


Composite Supply : Section 2, Sub-section 30

“composite supply” means a supply made by a taxable person to a recipientconsisting of two or more taxable supplies of goods or services or both, orany combination thereof, which are naturally bundled and supplied inconjunction with each other in the ordinary course of business, one ofwhich is a principal supply;


Supply: Section 7, Sub-section 1, clause (a)

All forms of supply of goods or services or both such as

• sale,

• transfer,

• barter,

• exchange,

• licence,

• rental,

• lease or

• disposal made or agreed to be made for a consideration by a person in thecourse or furtherance of business;


Input Tax Credit Negative List : Section 17, Sub-section 5

(c) works contract services when supplied for construction of an immovableproperty (other than plant and machinery) except where it is an inputservice for further supply of works contract service;

(d) goods or services or both received by a taxable person for constructionof an immovable property (other than plant or machinery) on his ownaccount including when such goods or services or both are used in thecourse or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression“construction” includes re-construction, renovation, additions oralterations or repairs, to the extent of capitalisation, to the said immovableproperty;

Impact


Schedule II, Clause 2

Land and Building (a) any lease, tenancy, easement, licence to occupy landis a supply of services; (b) any lease or letting out of the building including acommercial, industrial or residential complex for business or commerce,either wholly or partly, is a supply of services.


Schedule II, Clause 5, Sub-clause (b)

construction of a complex, building, civil structure or a part thereof,including a complex or building intended for sale to a buyer, whollyor partly, except where the entire consideration has been receivedafter issuance of completion certificate, where required, by thecompetent authority or after its first occupation, whichever isearlier.

GST – Impact on Real Estate Sector Schedule II, Clause 5, Sub-clause (b)

Explanation.—For the purposes of this clause— (1) the expression"competent authority" means the Government or any authority authorisedto issue completion certificate under any law for the time being in force andin case of non-requirement of such certificate from such authority, from anyof the following, namely:—

(i) an architect registered with the Council of Architecture constitutedunder the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers(India); or

(iii)a licensed surveyor of the respective local body of the city or town orvillage or development or planning authority;

(2) the expression "construction" includes additions, alterations,replacements or remodelling of any existing civil structure


Schedule II, Clause 6, Sub-clause (a)

works contract as defined in clause (119) of section 2 is a compositesupply

GST Impact on Inputs

Item / Component Tax Rate

Iron & Steel 18%

Sanitary fittings 28%

Electrical Cables 18% or 28%

Sand 5%

Building Bricks 5%

Fly ash Bricks 12%

Ready Mix Concrete (RMC) 28%

Services 18%

Cement 28%

Input Tax Credit

Input tax credit is available to builder on GST on all inwardsupply of good or services or both if they are used for thefurtherance of business.

In case if the flats are sold and consideration is received afterreceipt of occupancy certificate, then Input Tax Credit availedhas to be reversed on pro rata basis.

Is Interest / Penalty applicable on reversal of ITC ?

ITC on equipment

Is ITC on the purchase of earth movingequipment or tower cranes available ?

Yes it is available as earth moving equipmentlike or tower crane.

Time of Supply

Time of Supply for Services – Section 13, Sub-section 1

Receipt of advance from the customers – date of accounting in thebooks of accounts or deposit in the bank account which ever isearlier.

This will have an impact on the cash flows if the payment terms arenot renegotiated.

Taxability on sale of residential houses / villas / flats Tax Rates – Notification No. 11/2017-Central Tax (Rate) , 28th June,2017

(i) Construction of a complex, building, civil structure or a partthereof, including a complex or building intended for sale to abuyer, wholly or partly, except where the entire consideration hasbeen received after issuance of completion certificate, whererequired, by the competent authority or after its first occupation,whichever is earlier. (Provisions of paragraph 2 of this notificationshall apply for valuation of this service)

(ii) composite supply of works contract as defined in clause 119 ofsection 2 of Central Goods and Services Tax Act, 2017.

(iii) construction services other than (i) and (ii) above.

Taxability on sale of residential houses / villas / flats Tax Rates – Notification No. 11/2017-Central Tax (Rate) , 28th June, 2017

2. In case of supply of service specified in column (3) of the entry at item (i)against serial no. 3 of the Table above, involving transfer of property in landor undivided share of land, as the case may be, the value of supply of serviceand goods portion in such supply shall be equivalent to the total amountcharged for such supply less the value of land or undivided share of land, asthe case may be, and the value of land or undivided share of land, as the casemay be, in such supply shall be deemed to be one third of the total amountcharged for such supply. Explanation .– For the purposes of paragraph 2,“total amount” means the sum total of,- (a) consideration charged foraforesaid service; and (b) amount charged for transfer of land or undividedshare of land, as the case may be.

This will have an impact in the areas where the prices of the land is high inprime localities. In such cases, the contract clauses have to be revisited.

Taxability on sale of residential houses / villas / flats after receipt of occupancy certificate Is GST Applicable ??????

NO

Why?

Schedule III of the CGST Act as it is neither a supply of goods orservices.

Will it have any implications ? Yes, as GST is not applicable, it means ITCis not available. Commercial implications should be explored.

Taxability on sale of land / plots

On sale of land GST is not applicable as per Schedule III,Clause 5 of the CGST Act as it is neither a supply of goods orservices.

What will be tax impact on the development charges for theplot?

Yes taxable under GST @ 18%

Valuation of development charges – simple thumb rule isconsideration received from the buyer minus value on whichthe stamp duty is paid. Can differ from case to case basis.

Alterations or changes to flat over and above sale agreement

GST is applicable on such alterations / changes asrequested by the customers.

It will be treated as works contract and applicabletax rate is 18%

Valuation – the actual value / consideration paid bythe buyer to the builder.

Is GST applicable on the following services charged

Item / Component Applicable Tax Rate

Customer Advances Yes 12% or 18%

Floor raise charges Yes 18%

Corner flats Yes 18%

Facing Charges Yes 18%

Extra Parking Space Yes 18%

Club house charges Yes 18%

Amenities Charges Yes 18%

Maintenance Charges Yes 18%

Cancellation Charges Yes 18%

Corpus Fund ???? ????

Is GST applicable on the following services charged

Free gifts such a car, consumer goods, or gifts givento buyers?

On such items also GST is applicable. It will be amixed supply.

Such schemes under GST have to revisited.

Stamp Duty

Stamp duty is levied by the State Governments and outside the GSTambit.

Is stamp duty collected by the builder is to be included in thetransaction value?

Yes & NoYes - If it is not shown on the tax invoice issued by the builder separately then it should beincluded in the transaction value.

No – if it shown on the tax invoice separately, then it can treated as services by thebuilder as pure agent and need not be included in the transaction value. Refer to Rule No– 33.

Implications of Notification # No. 15/2017-Central Tax (Rate)

Refund of unutilized Input Tax Credit is not available onaccount of inverted duty structure.

Separate accounts to be maintained by the works contractorfor each and every works contract. Refer to Rule 56, clause 14of the CGST Rules.

Development Agreement

The agreement between the developer and land owner liablefor GST?

Yes, as per definition of Supply given in sub-section 1 ofsection 7 of the CGST Act. As it says Supply includes “(a) allforms of supply of goods or services or both such as sale,transfer, barter, exchange, licence, rental, lease or disposalmade or agreed to be made for a consideration by a person inthe course or furtherance of business”.

The developer is receiving portion of land in lieu of theconstruction, it can be defined or treated as “barter” /“exchange” and both are covered under definition of supply.


Time of Supply in case Joint DevelopmentAgreement

Date on which the developer receives the rightfor construction.

On that date Receipt voucher has to be issued.

Valuation – open market value


If the developer agreement is in revenuesharing basis?

The developer have to collect the GST from thecustomers and pay the same.

Anti profiteering

Section 171 of the CGST Act clearly states that the input tax credit benefitderived should be passed on to the consumer.

The builders were not able to take input tax credit of Central Excise, as aresult the tax burden is passed on to the consumer but now under GST thesame is allowed, the price offered to the customers have to be reworked.

In transitional provisions also the builders can taken input tax credit on theclosing inventory or in semi finished status, this credit has to be passed on.

In case of VAT, the treatment is different from state to state, for few states itis under composition / TOT scheme and they were not able to take ITC, nowunder GST and for transitional credit is also available.

Books of Accounts

Chart of Accounts / Ledgers have to be analyzedcompletely.

Accounts have to be maintained separately project wise.

New ledger accounts / additions to chart of accountshave to be done to accommodate the reportingrequirements under GST.

On receipt of advance from customers, Receipt voucherhas to be issued.

Vendor Management

Most of the sub-contracts are from the un-organized sector.

All major sub-contracts should be advised to take registrationunder GST as for many of them the contract values are morethan Rs 20 Lacs per year.

Sub-contractors have to be trained on GST if not the returnfiling and matching will be a time consuming process.

If sub-contractors do not file returns on time, then matchingwill not happen and ITC availed has to reversed. This willhave an impact on the working capital and lower profitability.

Vendor Management

Is GST Applicable on material issued to sub-contractor ?Is GST Applicable on the usage of equipment /machinery by the sub-contractor?

Depends on the contract terms. If contract has aprovision that material will be issued to sub-contractor then GST is applicable on that.

Agreements have to be redrafted.

Miscellaneous

Impact of GST on goods lost or stolen ordestroyed at site?

ITC has to be reversed

ITC availed has to be reversed on RetentionMoney?

Yes – Sub-section 2 of section 16 of the CGSTAct

Miscellaneous

Can a developer take input tax credit, if theflats or commercial space given in lease orrent?

No, it is not allowed. Negative list of ITC –clause (c ) sub-section 5 of Section 17 of CGSTAct.

Miscellaneous

Is GST Applicable on Retention Moneywithheld at the time of payments ?

Yes

Is GST Applicable on Mobilization advance?

No

Points which need some brain storming…

What should be the treatment of developmentagreement done prior to GST and flats given afterrollout of GST?

Will there be any change on the percentage ofundivided land? As the cost of land is more in metrocities?

How to adjust pricing of flats on account of # No.15/2017-Central Tax (Rate) .

How to address working capital requirements.

CMA Bhogavalli Mallikarjuna Gupta

Mobile : + 91 99496 44633

Email : [email protected]

Website : india-gst.in

mailto:[email protected]

http://india-gst.in/

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GST Impact on Real Estate · 2018-03-27 · GST –Impact on Real Estate Sector Real Estate –dictionary meaning Land and anything fixed, immovable, or permanently attached to it