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REAL ESTATE AND GST

Real estate and Indian economy

Real estate plays a significant role and is an essential contributor in Indian economic development. Real estate and building business is the second largest employer after agriculture. It is one of the fastest growing sectors of the Indian economy. This sector is divided into four sub-sectors – housing, retail, hospitality and commercial. The housing sub-sector contributes 5-6% to the country’s GDP. Retail, hospitality and commercial real estate are also growing significantly catering to growth of Indian infrastructure.

GST and real estate

The Goods and Services Tax (GST) is beyond doubt the most revolutionary tax-related reform in India in several decades, since it will eliminate the conflicting and cascading taxation structures which have confounded several industries over the past few decades. It will most certainly have a profound effect on India's economic prospects. 

GST has brought all indirect taxes (service tax, excise duty and value added tax which apply to the procurement of goods and services during construction) under one unified tax structure; leading to a scenario where there will only remain the direct taxes (capital gains tax and wealth tax), stamp duty and GST for all property-related transactions.

Under revised order from the government, under-construction properties will be taxed at 18% which includes 9% SGST plus 9% CGST. The government has also allowed deduction of land value equivalent to one-third of the total amount charged by a developer. It will not apply to completed and ready-to-move-in projects, as there are no indirect taxes applicable in the sale of such properties. 

Any real estate product comprises of three expense components, namely land, material and labour or service costs. VAT is calculated on material cost, and service tax is calculated on labour and service cost. It is very difficult for buyers to ascertain what components were included for calculation of VAT and service tax. The implementation of GST makes the calculation much simpler, since the buyer has to pay only a single Goods and Services Tax. Also, the builder must pass on the benefit of the price reduction he enjoys due to input tax credit to the buyer.

Understanding the GST rules and law

Concept of supply in real estate

Under the GST regime the only taxable event is “supply” of goods and services. This is very much different from the earlier regime where the taxable event was manufacture in case of excise, sale in case of VAT or CST and supply of services for service tax.

For the the purposes of the GST Laws, the expression “supply” includes 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 the course or furtherance of business.

Transactions which shall be treated as supply in relation to real estate

  • Any lease, tenancy, easement, licence to occupy land is a supply of services
  • Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
  • Any construction* of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, (where required, by the competent authority) or after its first occupation, whichever is earlier.

             * Note: “Construction" includes additions, alterations, replacements or remodelling of

                any existing civil structure.

  • The following composite supplies shall be treated as a supply of services, namely:—  works contract as defined in clause (119) of section 2.

Section 2(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

 

Transactions which shall be treated neither as a supply of goods nor a supply of services in case of real estate

  • Sale of land
  • Sale of a building where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

 

Input Tax Credit in real estate

The biggest game-changer under GST is the introduction of Input Tax Credit, whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. This makes GST fundamentally a tax only on the value addition at each stage. This means that the end-consumer will only bear the GST charged by the last dealer in the supply chain, with set-off benefits at all the earlier stages.

If the developers pass on the credits completely and bring down the base prices, then, home buyers may marginally benefit under the GST regime.

Blocked credits for real estate sector

  • Where the goods/services are used by the registered person for effecting exempted supplies like sale of land and sale of second hand building, then input tax credit shall not be allowed for such supplies.
  • Input tax credit shall not be allowed for works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.
  • Input tax credit shall not be allowed for goods and/or services received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods and/or services are used in the course or furtherance of business.

Explanation: The expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.

 

Time of supply in case of real estate sector

  • Time of supply shall be EARLIER OF
  1. date of receipt of payment or
  2. issue of invoice/due date for issue of invoice.
  • Timing for invoices for continuous supply of services:
  • Where payment due date ascertainable from contract: Such date else Before/ at the time of receipt of payment
  • Where payment is linked to the completion of an event: Such date

Note: Period of 30 days post completion of service as is applicable to other services, not available in case of continuous supplies.

Place of supply in case of real estate sector

The place of supply of services, directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work shall be the location at which the immovable property, is located or intended to be located

GST rate on Real Estate

  • Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly (the value of land is deemed to be one-third of the total amount charged for such supplies) – Tax rate – 12% with no refund of accumulated ITC.

Cancellation of bookings of properties in real estate sector

  • Where a tax invoice has been issued for a supply and where the goods supplied are returned by the recipient, then a credit note will be issued by the supplier to the recipient.
  • Credit note is also issued when the taxable value/ tax charged exceeds the taxable value/ tax payable in respect of such supply or where goods and/or services supplied are found to be deficient.
  • Supplier allowed to reduce his tax liability on issue of credit note only if the recipient of the credit note has reduced his ITC corresponding to such reduction of tax liability.
  • Clause does not address cases where no ITC availed by recipient.
  • Declare the details in the monthly return but not later than September of year following year in which such supply was made.
  • Where the SUPPLY OF SERVICES CEASES under a contract before completion of supply, an invoice shall be issued at the time of cessation to the extent of the supply made before such cessation.

Conclusion

GST is expected to be a sentiment booster for the industry and will seek to revive buyer and investor interest by bringing more transparency in taxation. As the perception of the sector is said to have improved, the prices are likely to drop around one to three per cent if it all they do, according to a report by Edelweiss Securities.

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