GST Council Allows Builders The Option To Choose Tax Rate
The Goods and Services Tax (GST) Council on March 19 allowed real estate developers an option to choose between the old tax rates and the new ones for under-construction residential projects to help resolve input tax credit (ITC) issues.
The council that laid out transition rules for the implementation of new tax rates for the real estate sector has decided that builders will get a one-time option to continue paying tax at the old rates (effective rate of 8 per cent or 12 per cent with ITC) on ongoing projects. “Ongoing projects” means projects where construction and actual booking started before April 1, 2019, but which will not be completed by March 31, 2019.
The new tax rate of one per cent for affordable houses and five per cent for others, without ITC, will apply on all new projects.
The move will help address apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits and pricing that were bound to arise on account of the change.
On the time-frame for transition, the council has agreed on providing “reasonable” time to developers which could be 15 days or one month.
The council also clarified that projects with up to 15 per cent commercial space would be treated as residential property. This will resolve issues faced in cases where buildings have commercial amenities such as clubs and restaurants as well as in case of residential-cum-commercial projects.
Additionally, a condition has also been imposed that 80 per cent procurement by developers should be from registered dealers to avail of the benefits under the composition scheme.
The new tax rates of one per cent (on the construction of affordable houses) and five per cent (on other than affordable houses) would be available without input tax credit. Also, 80 per cent of inputs and input services should be purchased from registered persons to apply for lower tax rate.
Developers who fail to follow the norms would have to pay tax at 18 per cent. Tax on cement purchased from an unregistered entity would attract a 28 per cent duty.
No GST on completed projects
Clarifying that units that have received a completion certificate do not attract any GST (goods and services tax), the finance ministry on December 8 asked real estate developers to pass on the benefits they get in the form of input tax credit to homebuyers.
"It is brought to the notice of buyers of constructed property that there is no GST on sale of complex/ building and ready to move in flats where sale takes place after issue of completion certificate by the competent authority," the ministry said in a statement.
In fact, the anti-profiteering body ordered Gurgaon-based developer Pyramid Infratech to compensate over Rs 8.22 crore to 2,476 flat owners, who had invested in the company’s two affordable housing projects, for not passing on the GST benefit. The builder was also served a show-cause notice by the watchdog, asking it why a penalty not be imposed on him. This was the first instance of a developer attracting a penalty for not passing on GST benefits.
Passing its order on 36 applications filed by 102 homebuyers, the National Anti-Profiteering Authority (NAPA) on September 18 said the builder was liable to pass on the benefit made under the new tax regime’s input tax credit (ITC) system, and it was not that the builder was paying anything from his own pocket. The watchdog gave the company three-month’s time to comply with its order and also directed the Haryana tax commissioner to ensure its order is carried out, and submit a report accordingly.
GST exemption for affordable housing
Earlier, with an aim to push demand, the government had decided to lower the applicable GST rate for home purchases under the Credit-Linked Subsidy Scheme (CLSS) of the Pradhan Mantri Awas Yojana (PMAY) to eight per cent in January this year. In a meeting held on January 18, the GST Council had to extend the concessional rate of GST on houses constructed/acquired under the CLSS for the economically weaker section (EWS), the lower-income group, the middle-income group-I (MIG-I) and the middle-income group-II (MIG-II). This concession has also been extended to apartments up to 60-square metre carpet area.
After that meeting, Finance Minister Arun Jaitley also announced that the council might consider bringing real estate under the purview of the new tax regime. Earlier also, Jaitley had made a strong case for bringing real estate under the purview of the GST.
"The one sector in India where the maximum amount of tax evasion and cash generation takes place is real estate and which is still outside the GST. Some of the states have been pressing for it. I personally believe that there is a strong case to bring real estate into the GST," Jaitley had said while talking about India's tax reforms at the Harvard University last year. Bringing real estate under the ambit of GST would result in consumers paying one final tax on the property, the FM said.
Good news for landlords, too
Those who are earning a rental income by letting out their properties for residential use will not be taxed under the GST. However, those who have given their premises on rent to be used for commercial or industrial purposes will have to pay an 18 per cent tax in case they are earning over Rs 20 lakh annually.
"Rental income received from a residential house is exempt. But, if you have given your unit to commercial enterprise, it is taxable if you are getting more than Rs 20 lakh as rent," said Revenue Secretary Hasmukh Adhia.
GST in India
The Rajya Sabha had on August 3 and the Lok Sabha on August 8 unanimously approved the Bill to enable the rollout of GST, arguably the biggest tax reform in India in recent times. The approvals have paved the way for implementing the indirect tax regime within the Union government's revised deadline of April 1, 2017.
The Goods and Services Tax (GST) Council on November 3 set the rates for the new tax regime. These rates would range from 5 to 28 percent, with 12 percent and 18 percent as standard rates. While things of mass consumption would be taxed at the rate of five per cent, luxury would be taxed at 28 percent.
Finance Minister Arun Jaitley had on August 3 tabled the Goods & Services Tax (GST) Constitutional Amendment Bill in the Rajya Sabha, and initiated a five-hour debate on the landmark tax reform. The proposed indirect tax regime, which is likely to subsume 17 indirect taxes upon implementation, will remove the disparity in the taxation structure across the country and bring one uniform tax rate.
How will GST impact real estate?
The real estate sector is estimated to account for about five per cent of India's gross domestic product (GDP) and is considered the second-largest employer in the country, according to an E&Y report from 2015.
However, the sector faces issues in terms of macroeconomic conditions and fiscal policy decisions. One such challenge is the management of the multiple indirect tax levies, such as VAT, service tax, excise, stamp duty and registration fees.
With the launch of GST 'how it works' might already be on your mind. Since the GST is to subsume multiple indirect taxes, it will simplify tax compliance and minimise the scope for double taxation. So, there is clear reason for home buyers to cheer, even if they have to pay slightly more in case the standard GST rate is high.
On how GST will impact the real estate sector, Ankur Dhawan, Chief Business Officer (Resale), PropTiger.com, says: "GST itself is expected to add about two per cent to India's gross domestic product (GDP). That is a substantial boost to the economy. If the economy does well, obviously, there will be more demand for real estate, and it will be a boost for the sector."
Why a slightly higher GST rate might be acceptable to buyers
Most buyers of under-construction properties take home loans to fund their purchase and the whole mathematics involved in the home loan process is quite baffling, too. In most cases, buyers do not carry out a detailed study of the various taxes that they have to additionally pay and they make their investment plans based only on the value of the property.
Also Read- GST: What's In Store For Real Estate Sector
In the case of VAT, for example, there is little clarity on what amount is paid at which level, and what part of it is passed on by the developer to the buyer. Often, for want of more clarity on the VAT rate in his state – if at all the state is imposing VAT on real estate – a buyer has to rely on the clauses mentioned in his sale agreement with the developer.
Unfortunately, no amount of research helps the buyer know the right rate? Lengthy government documents are mostly interpretative in nature and if you are not a professional chartered accountant, you might get lost in the study, and yet get a little success. On the other hand, if there is a clear uniform rate for one tax that includes everything that they need to pay in taxes to authorities, the whole payment process would become very convenient for the buyer. In such a case, even a higher rate would be more acceptable to him than a lack of clarity.
March 7, 2017:
The government clarified that property prices would not shoot up under the Goods and Services Tax (GST) regime. Addressing a two-day CREDAI conclave in New Delhi, Urban Development Minister M Venkaiah Naidu said property prices, especially of affordable housing, would not increase under the new tax regime."We have already exempted affordable housing from service tax, and my ministry is addressing the need to continue this exemption under the GST. We have recommended to the Ministry of Finance to tax the sector at a rate which is revenue neutral and not at a higher tax rate,” Naidu said.
January 17, 2017:
The Centre and states decided on sharing of powers for control over taxpayers under the Good and Services Tax (GST) regime. Under the consensus reached at the ninth meeting of the GST Council, states will be assessing and administering 90 per cent of the taxpayers falling under the Rs 1.5-crore annual turnover; the remaining would be controlled by the Centre. On the other hand, taxpayers with more than Rs 1.5 crore turnover will be administered by the Centre and states in a 50:50 ratio.
However, the new tax regime will now be rolled out from July 1. According to earlier plans, the Centre had to roll out the GST regime from April 1.
October 19, 2016:
In its third meeting on October 17, the Goods and Services Tax (GST) Council proposed a four-tier structure for the new tax regime. The proposed regime had a lower rate of six per cent, two standard rates of 12 per cent and 18 per cent, a higher rate of 26 per cent, and an additional cess on luxury and "demerit" products.
According to media reports, while the higher rate for services under the indirect tax regime is proposed to be 18 per cent, essential services could be taxed at six
per cent or 12 per cent. Around 70 per cent of the taxable base is proposed to be taxed at either 18 per cent, 12 per cent or six per cent, with more than 50 per cent of the items to be taxed at 12 per cent or 18 per cent," says a report by The Indian Express.
September 27 2016:
The draft Goods & Services Tax (GST) rules were on September 27 put up for discussion ahead of a meeting of the Centre and states on September 30 to discuss the GST regulations. The finance ministry has reportedly sought a feedback on the draft rules, which are related to registration, invoicing, procedures and guidelines, by September 28.
“The draft rules for registration, payments, invoice, etc, for GST are uploaded on CBEC website. Business community may view them and give quick comments, if any, by 28th night on email@example.com. We intend to have these rules approved by GST council in its meeting on 30th September. So that business systems can be modified by all," said Revenue secretary Hasmukh Adhia in a series of posts on microblogging site Twitter.
Earlier, the Constitution Bill for the introduction of the Goods and Services Tax (GST) in India, which was approved by President Pranab Mukherjee on September 8, had been notified as the Constitution (101st Amendment) Act, 2016, on September 10. According to Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A from September 12.
According to Article 279A of the amended Constitution, the GST Council will be a joint forum of the Centre and states and shall consist of the following members:
- Chairperson: Union finance minister
- Member: The Union Minister of State for finance (in charge of revenue)
- Members: The ministers in charge of finance or taxation or any other minister nominated by each state government
The Council will make recommendations to the Union and states governments on important issues related to GST, such as the goods and services that might be subjected or exempted from GST, model GST laws, principles that govern place of supply, threshold limits, GST rates, including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc.
(With inputs from Srinibas Rout)