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Critical Issues under GST for Real Estate Sector

The real estate sector is one of the most globally recognized sectors. Real estate sector comprises
four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well
complemented by the growth of the corporate environment and the demand for office space as well
as urban and semi-urban accommodations. Real estate industry contributes between 6-8% to India’s
Gross Domestic Product (GDP) and it stands second after IT industry in terms of employment
generation. The Government of India along with the governments of the respective states has taken
several initiatives to encourage the development of the sector. The Smart City Project, where there
is a plan to build 100 smart cities, is a prime opportunity for the real estate companies.

GDP contribution of Real Estate shows increasing trend in Indian Economy

With greater than ever regulations under RERA Act,2016 , implementation of GST in Real Estate
sector has become tough to accomplish.

Critical issues in GST for Real Estate Sector

These issues are regarding -

 Rigid Provisions and Rules


 Input Tax Credit
 Reverse Charge Mechanism
 Registration of Place of
Business and Burden of
Record Keeping
 GST Returns
 Negative Cash Flows
 Anti profiteering
In India, we have businessmen and not entrepreneurs. They are neither that much attentive of
the provisions of various acts and rules nor that much financially literate. That’s the base of all
other problems arising in GST and RERA implementation. Though government is making efforts
to spread awareness in this context, we can’t say that it is 100% successful in doing so. This gives
rise to issues regarding transitioning from previous tax regime to the new one, registration in
new tax regime, assessments, understanding applicability of various provisions and carrying
routine business operations.

Rigid provisions of CGST Act, 2017 are hard to understand by builders, contractors, agents
engaged in real estate business, which makes it hard for them to pass on the benefit to
recipients of supply, accepting supply from them. Various terms used in CGST Act, 2017 are
confusing which either people don’t understand or which makes wrong interpretation.

In new indirect tax regime, taxpayers need to follow harmonised system of nomenclature and it
needs to specify Unit of Measurement too (UOM) for both inward and outward supply. Persons
engaged in real estate business have numerous sites which includes job work sites too. All these
sites demand for inward supplies for labour and material on day to day basis. It is unfeasible for
these persons to keep detailed record of all these inward supplies for GST returns filing purpose.
There exists another question regarding embezzlement and pilferage of material, idle working
hours of labour supply.

For the purpose of new scheme, projects have to be identified as Residential Real Estate Project
(RREP) or others. RREP is a project in which carpet area of commercial premise is not more than
15%.Such project including the commercial portion shall be treated as a residential project and
the concessional GST rate of 5% shall be applicable even for commercial apartments also. In
projects which are not RREP, the benefit of concessional rate will be applicable only to
residential apartments and not to commercial apartments. The promoter (defined under RERA
Act) is entitled to pay the tax at the concessional rates.

Real estate business requires huge investment since initial stage as compared to other industrial
sectors. These initial expenses include investment in land, land acquisition costs, government
fees, registry fees, fees to architect, consultants, agents, intermediaries etc. All these expenses
have their own place in GST Regime, e.g. fees to legal consultants and goods transport agencies
are payable on reverse charge basis, GST payable on services supplied from/to government
exempt vide notification and many other provisions. It is practically hard to remember and pay
attention to all these provisions by businessmen especially when they are not alert.

Another crisis is with registering places where business is carried out. It’s necessary under GST
regime to inform about all principal places of business. In real estate business, persons would
need to add new sites undertaken and remove the sites with completed construction. Under
GST Regime, taxpayer needs to get individual registration for each stage, where there is place of
business. This creates requirement of huge quantity of compliances which is burdensome for
builders.

Most of the suppliers of labour and materials like sand etc. are unregistered and uneducated,
this makes it insufficient to match GSTR 2A with inward supplies. On the other hand, reverse
charge mechanism is applicable for purchases from unregistered taxpayers of value of supply
exceeding Rs 5000 in a single day. It is almost impossible for such giant investment businesses to
restrict supplies over Rs 5000 or to keep track of these kinds of supplies.
The new GST Rates are applicable to affordable housing only if suppliers doesn’t avail Input Tax
Credit. ITC on inputs is very huge for real estate industry and not availing this ITC might have
adverse impact on cost management.

These real estate businesses require a variety of machineries, sometimes which need to be
imported from out of India. On such imports, government levies custom duties as well as
integrated goods and service tax. Which ultimately increases cost of machinery, which when
apportioned increases cost of product or in this case a real estate asset. In addition to this, rules
for availing of Input Tax Credit on these Capital Goods are quite hard to understand for builders
and developers.

GST regime has negatively affected cash flows of real estate industry, because GST is applicable
only on under construction houses and not on ready to move houses / apartments. Thus,
customers choose ready to move properties instead of paying GST on booking under
construction properties. For the same reason, builders and developers are in shortage of funds
until they get ‘Certificate of Completion’ for their real estate properties. Lack of generation of
cash inflows also resists builders from getting help from financial institutions, who measures
credibility based on booking amounts received and sales.

For computation of anti-profiteering benefits, its pertinent to note that no specific guidance is
made available by the Government except few Press Releases (PR) issued in FY 1718 by Central
Board of Indirect Taxes and Customs (‘CBIC’).The challenge with these PR is that whilst they
highlight few benefits arising in GST regime, being just a one or two pager, they end up being
high level analysis than reliable documents. The inherent challenge is how to compute benefits
from GST rate reduction, if any i.e. whether the benefit should be computed at product level or
organization level.

From the buyers’ point of view, we’ve already seen that they will prefer ready to move in houses
in order to save GST Expenditure. Previously Service tax applicable on loan processing fees and
on all charges was 15% and now it has rise to 18%, this affects price sensitive buyers.

From the point of view of a chartered accountant providing services to real estate businesses
one might have problem in explaining the provisions of GST and rules there under. Furthermore,
he might convince them to hire their own accountant, who will account each and every
transaction and will manage book keeping too.

As an auditor, auditing a supplier engaged in business of real estate industry, the issues may
arise with respect to finding audit trail, finding sufficient and appropriate audit evidence with
respect to supplies from unregistered persons and checking compliance with intricate provisions
allied to RCM, ITC Reversal, apportionment, Credit Blocking, E-way Bill, Tax Invoices, etc. Stock
verification and calculation of percentage of completion of construction is always been tricky for
real estate industry. Verification of correct calculation of ITC provisions can be time consuming.

NEW SCHEME FOR REAL ESTATE INDUSTRY

Government introduced new scheme with a view to simplify the compliance of indirect taxes for real
estate industry.

In 33rd GST council meeting rescheduled on 24th February , chaired by finance minister Arun Jaitley,
focus was on Real Estate Sector. “Housing for All by 2022” envisions that every citizen would have a
house and the urban areas would be free of slums. There are reports of slowdown in the sector and
low off-take of under-construction houses which needs to be addressed. To boost the residential
segment of the real estate sector, following recommendations were made by the GST Council in its
33rd meeting which are effective since 1st April 2019:

GST Rates

i. GST shall be levied at effective GST rate of 5% without ITC on residential properties
outside affordable segment;

ii. GST shall be levied at effective GST of 1% without ITC on affordable housing properties.

What is affordable housing property?

A residential house/flat of carpet area of upto 90 sqm in non-metropolitan cities/towns and 60 sqm
in metropolitan cities having value upto Rs. 45 lacs (both for metropolitan and nonmetropolitan
cities).

Intermediate tax on development right, such as TDR, JDA, lease (premium), FSI shall be exempted
only for such residential property on which GST is payable.

This scheme is mandatory for all new projects commencing from 1st April 2019. However for the
ongoing projects, onetime option is given to continue with the existing tax structure and mechanism.
In case the developer wishes to continue with the existing scheme, he had to opt for the same by
filing the prescribed form on or before 10th May 2019. However the invoice that needs to be issued
from 1st April 2019 onwards has to contain the rate as per the option exercised.

Benefits of these recommendations

i. The buyer of house gets a fair price and affordable housing gets very attractive with GST
@ 1%.
ii. Interest of the buyer/consumer gets protected; ITC benefits not being passed to them
shall become a non-issue.
iii. Cash flow problem for the sector is addressed by exemption of GST on development
rights, long term lease (premium), FSI etc.
iv. Unutilized ITC, which used to become cost at the end of the project gets removed and
should lead to better pricing.
v. Tax structure and tax compliance becomes simpler for builders.

Some issues remain unsolved

Application of new scheme is one time option available and applicability of this scheme is complex
for undergoing projects. ITC cannot be availed under new scheme, this might affect the profitability.
The new scheme won’t solve question of RCM. The limit of Rs 45 lakhs can be hard to restrict in big
metro cities. If GST is already paid by the developer on TDR, on a project, which will be constructed
say after 1st April 2019 then will the credit of this GST be available (assuming GST is payable @ 5%
on this property). What will be the fate of TDR agreements entered into March 2019 but registered
after April 2019? From such un-answered questions, it’s apparent that levy of GST on TDR is going to
stir up a hornet’s nest. It’s apparent that supply of TDR, FSI, long term lease (premium) of land by a
landowner to a developer are expected to be exempted subject to the condition that the
constructed flats are sold before issuance of completion certificate
and tax is paid on them. Further, it appears that the exemption for
TDR / FSI or lease premium is only in respect of residential projects.
Procurement of TDR/FSI or lease premiums in case of commercial
projects may not be entitled to this exemption. Clarification needs
to be provided for applicability of new scheme to mixed projects.

GST on real estate has always been a contentious issue especially with real estate sector in India
facing a challenging time over the last few years. Several representations were made to the
Government for further simplification and reduction in tax rates, especially for residential real estate
sector, in the hope that the same would bolster demand for that sector. Though the real estate
sector is under stress for the last few years, this could be the beginning of a new growth story, said
Niranjan Hiranandani, president (national), National Real Estate Development Council (NAREDCO)
and chief managing director of Hiranandani Communities. The survival trick for developers and
investors is to adapt to the changing environment and government policies. Let’s hope for more
simple and beneficial decisions of government but till then we have to comply with provisions and
face these problems cleverly.