The GST Council had recommended the rate reduction in GST from 12 % to 5% and 8 % to 1% (affordable housing) on the sale of under construction housing units. While this was a welcome move, the flip side of the coin was that no input tax credit could be availed by the developers. This created a lot of confusion and uncertainty amongst the industry especially with regards to the modalities involved in the rate reduction.
Finally, on March 19, 2019 the 34th GST Council announced the modalities for implementation of this rate reduction. This has been a much-needed welcome relief to the industry and reflects the GST Council’s intent to harmonize the interests of both stakeholders, the developers and the home buyers. Yet, the road ahead may not be all that smooth and it would be prudent for developers to keep certain considerations in mind.
Option to continue with 12% GST with Input Tax Credit (ITC)
The biggest worry for every developer was the fate of the existing projects as they had already sold inventory in existing projects based on the current provisions of the GST Law i.e. 12% GST with full ITC. Under the recommended revised GST provisions, the output tax is reduced from 12% to 5% with no ITC. This denial on availment of credit in respect of taxes paid on the procurement of the goods and services will continue to remain as a cost in the transaction thus ultimately resulting in increase in project cost – this is difficult to justify to the customer who is in fact expecting a rate reduction due to the GST rate being lowered. The developer simultaneously will also have to be cognizant of complying with Anti-Profiteering guidelines. Consequently, various industry bodies expressed their concerns to the Government on these critical issues. The GST Council has appropriately addressed this matter by giving an option to the developer to continue with current provisions for an ongoing project (project where construction and booking has started before April 1 2019).
However, before opting for either of the option (exiting provision vis-à-vis new tax rate) the developer needs to be mindful of which option he would be more commercially viable for him. Key points to consider in the analysis would be a) stage of completion of project b) inventory sold / expected to be sold up to March 31, 2019 c) demand raised and collected from the customer especially in respect of units sold under subvention scheme d) comparable analysis of loss on account of denial of ITC vis-à-vis increase in agreement value of the unit.
Therefore, it will be the market sentiment and the commercial aspect which will play significant roles in deciding which option the developer should choose.
Further, the Press Release by the GST Council clarifies that only those projects where construction has started as well as booking has been done before April 1, 2019, will be considered as on-going projects. These projects will be eligible to continue under existing provisions. Considering the peculiar nature of the business, it is quite probable that a single project which has multiple towers will have construction being undertaken in a phased manner. Therefore, an important point to bear in mind here is the language of the notification as regards to the definition of ‘on-going project’.
Another important aspect which was giving sleepless nights to developers was the fate of the closing balance of ITC in the books on the transition date (April 1st, 2019). The GST Council’s recommendation of allowing carry forward of accumulated credit has finally put to rest all kind of speculation on this issue. The GST Council has recommended a mechanism for computation of eligible credit, allowed to be carried forward. This proposed mechanism appears to be fair since it takes into cognizance the fact that payment which has suffered higher tax cost gets the benefit of ITC whereas Customers / payments liable to the new tax rate will have to take hit of proportionate ITC loss. Needless, to say the recommendation to carry forward credit has been a huge sigh of relief to the industry.
Other important considerations
Any reduction is rate of tax should ideally result in decrease in cash outflow for the customer. This is being very actively monitored by the Anti-Profiteering Authorities (‘Authorities’). However, this principal may not hold true in the scenario where the cost escalation for the Developer on account of denial of ITC is more than reduction is rate of tax. If one does the math around this cost escalation vis-à-vis rate reduction, it can be observed that wherever the cost of the construction is more than 40% of the sale price of the unit, the benefit from rate reduction turns out to be negative. However, the approach of the Authorities is that irrespective of the ITC position, the benefit of lower rate should result in reduction in output cost of customer. Therefore, juxtaposing the factual reality with the approach of the Authorities is going to be one of the biggest challenges for the developers.
Right from the implementation of GST, tax on transactions related to development rights have been the most debated topic industrywide. This is more so for projects in tier I cities like Mumbai where land is scarce. With denial of ITC this has now become a survival issue for such projects. To address this, the GST Council exempted transactions related to Development Rights from being taxed. However, while announcing the recent modalities, the Government introduced payment of tax under Reverse Charge Mechanism (RCM ) by the Developer in respect of units sold post receipt of Occupation Certificate (OC). This results in levy of GST on sale of all units irrespective of the fact whether such units are sold pre-OC or post OC.
Further, in the Press Release, the language indicates that the transaction involving transfer of development rights from the land owner (such as JDA) is eligible for exemption. Practically, there are cases where the Development rights are transferred by a person other than land owner such as under the Slum Rehabilitation Scheme. In such scenarios, whether the transactions in development rights will continue to be exempt is still unclear. Further, the ambiguity around the valuation of the services still remains unaddressed- the notification will issue clarifications in this regard.
Overall, there is no doubt that the GST Council and the government have taken into account many of the major concerns of the developers. The notification by the Government will further give clarity to many issues. Hopefully the real estate sector is finally witnessing its silver lining.
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