Liability of Real Estate Developers ; Works Contractors under GST
Developers
1. The real estate developers are ordinarily known as builders for residential or commercial use or both and the said construction is undertaken for sale of units to individual buyers along ordinarily with land underneath the structure without retaining any right, at the end of the project,in respect of land and buildings. After entering into agreements for sale before the project is completed ( before Occupation Certificate is received [OC]) or after the project is completed (after Occupation Certificate is received) attracts different liabilities under GST law. Ordinarily, when full consideration for transfer of unit is received after obtaining OC, GST is not attracted but if the part of consideration is received before obtaining OC, GST at applicable rate is payable by developer. When the OC is received, the possession is handed over to buyers, after receiving full consideration agreed upon. For the purpose of undertaking a project there are broadly various modules adopted by developers as follows:
i) The developer purchases open land from land owner and pays consideration of land. Thereafter, construction activity is carried out on the said plot of land.
ii) The developer obtains leasehold land from a development authority and starts construction where lump sum lease premium for a particular period is paid to Development Authority.
iii) A land lord (including housing societies) owns land with or without a construction thereon, but the potential of development that is development rights are transferred with available basic FSI and right to load TDR wherever it is permissible by planning authority, for a consideration which can be lump sum monetary consideration as also handing over on ownership basis part of units constructed with same area or additional area or members of housing society, free of monetary cost, and/or corpus fund, rent for temporary alternate accommodation, shifting charges with right to sale balance area in open market.
iv) Where a developer is landlord or has become land lord and agrees with tenants for permanent alternative accommodation of same area or more with benefits of corpus fund, rent for temporary alternate accommodation, shifting charges with right to sale balance area in open market.
v) The construction can be residential, commercial or residential cum commercial.
2. The liability of developers for GST is deemed by the CGST Act to be liability for providing services. Schedule II 5(b).
3. Before 1.4.2019, liability was governed by Notification 11/2017 dt 28.06.2017 Item No 3(i). The Scheme was simple. The Developers has to pay GST at 18 % (9% CGST and 9% SGST) on the consideration agreed upon with the buyer on the value of agreement reduced by 1/3 rd amount of consideration towards cost of land sough to be transferred along with the unit ( as per paragraph 2 of the Notification.) Hence effective rate was 6 % + 6% = 12 %. This was when part of consideration was received prior to OC or first occupancy of building. Only when entire consideration is received after OC or first occupancy, no GST was payable. The developers has to pay the GST as and when installments are received or billed as per time of supply provided in section 13 of CGST Act. The developers was entitled to full input tax credit on goods and services received for implanting the project.
4. The Notification 11/2017 dt 28.06.2017 has been amended with effect from 1.4.2019 for projects which are ongoing or will start after 1.4.2019. The amended provisions have a condition, inter alia, that no ITC shall be available and liability shall be paid in cash. However, any ongoing project as on 1.4.2019 can continue to follow this earlier scheme of paying effective 12 % with availing ITC, if option to opt for that scheme with full ITC is exercised before 20.5.2019. In cases where construction activities are conducted by a subcontractor with materials and /or labour, the GST charged on such supply of services is not available for ITC in hands.
5. Any project ongoing as on 1.4.2019 does not opt for the earlier module, the rate of tax has been given for different buildings per classification in Notification No. 3 of 2019 dt 29.3.2019. The developer who comes under the new scheme has to pay GST as per rates provided in the Notification No 3 of 2019 dt 29.3.2019 on the value of consideration received after deducting 1/3 rd towards land cost. Any ITC claimed on the stock of goods or semi finished goods on 31.3.2019 will have to be reversed on 1.4.2019. Two major conditions are prescribed. Firstly, the GST shall be paid in cash and no ITC will has been taken. It is not clear that ITC, if not taken for availing rate provided in Notification No. 3 of 2019 dt 29.3.2019 lapses or can be taken for other outward supplies. Secondly, the developer shall pay GST on the value of constructed units given to landlord as a consideration for transfer of FSI or TDR or development rights. Thirdly, 80 % of the purchases of goods and services for the project must be from Registered Supplier. Any short fall there of below 80 %, the developer shall be liable to pay 18 %,on RCM [ Notification No. 07/2019- Central Tax (Rate) Dt 29th March, 2019] before the date of filing return for the first quarter after the end of the financial year, except supply of gods or services by way of :
(i) grant of development rights,
(ii) long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI),
(iii) electricity, high speed diesel, motor spirit, natural gas.
However, cement shall be liable to GST at the rate (28%) applicable for Cement on RCM
However, inputs and input services on which tax is paid on reverse charge mechanism (RCM) shall be deemed to have been purchased from registered person;
The capital goods are also included in the short fall portion..The records for different projects shall be maintained separately project wise.
Though ITC is not available, the same should be shown in Return 3B as ineligible ITC.
6. Rates of tax are as follows. These rates are applicable unless the developer has opted to go for the earlier scheme of taxes before 20thMay 2019.
7. In affordable residential apartments with commercial portion is not more than 15 % that is Residential Real Estate Project (RREP) in metro cities where the carpet area of unit is upto 60 meters and in non metro cities is upto 90 meters, and consideration is upto Rs 45,00,000/- the rate of GST is 0.75 % + 0.75 % = 1.5% on value of consideration received after reducing 1/3 rd of value for land cost. Therefore effective rate is 1%.The same rate is applicable on Real Estate Project( REP )project.[ Item 3(i)]
8. In projects other than affordable residential apartments ( where the carpet area of unit is more than 60 meters in metro cities / more than 90 meters in non metro cities is, or consideration is more than Rs 45,00,000/-) with commercial portion not more than 15 % (RREP), rate of GST on residential apartments is 3.75 % + 3.75%=7.5% on consideration value reduced by value of land cost at 1/3rdof total consideration. Hence, effective rate is 5%. [ Item 3(ia)] For Commercial apartments in RREP also where commercial portion is not more than 15 % same rate is applicable..[ Item 3(ib)]
9. In any other project where the commercial portion carpet area is more than 15% (REP other than RREP) of total carpet area rate of tax on affordable residential apartments (where the area of unit is upto 60 meters and in non metro cities is upto 90 meters, and consideration is upto Rs 45,00,000/-) rate of GST for residential portion shall be same 0.75 % + 0.75 % = 1.5% on value of consideration received after reducing 1/3 rd of value towards land cost. Hence, effective rate is 1%..[ Item 3(ic)]
10. In any other project where the commercial portion is more than 15% (REP other than RREP other than affordable residential apartments, rate of GST on residential apartment shall be 3.75 % + 3.75%=7.5% on consideration value less value of land at 1/3rdof total consideration. Hence, effective rate is 5%.
11. In REP project where the commercial apartments’ carpet area or units are more than 15%, on commercial apartments, residual rate of 9 % +9% = 18 % with claim of ITC, and no condition of 80 % purchase from Registered Supplier shall be applicable. Here land cost is not allowed to be deducted from the consideration since in residuary entry Paragraph 2 is not applicable. This is gross discrimination. Here proportionate ITC attributable to commercial portion is available in REP as per formula given in Annexure I. Same is applicable for RREP in Annexure II.
12. The liability in respect of goods purchased from unregistered supplier, the tax on RCM is payable at 9% + 9% = 18 %.[Notification No. 08/2019- Central Tax (Rate) Dt the 29th March]
GST on transfer of development rights or FSI or Lease Premium
Now transfer of development rights FSI or TDR to developer by land lord is or upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more, on or after 01.04.2019, for construction of residential apartments by a promoter in a project, intended for sale to a buyer, is specifically exempted (nil rated) from the liability of GST in case of residential apartments. The exemption is only for residential apartments that are where part consideration is received before OC or first occupation, and in case of unsold flat where the entire consideration is received after OC, proportionate GST on Transfer of Development Rights or FSI shall be payable on RCM [ Notification No. 05/2019- Central Tax (Rate) dt 29th March, 2019] by developer. Rate of tax in such cases is 0.5 % in affordable housing and 2.5% in other than affordable housing apartments. However, the liability of GST on transfer of development rights in respect of the commercial portion of project is not available and the same payable at the time of OC on RCM Exemption is available only for residential apartments and not commercial portion and hence proportionate for commercial construction, value is to be determined on the basis of total area ratio to commercial area. The same calculation applies to one time premium for lease land known as salaami etc. The liability is of developers. But no ITC is available on residential apartments remained unsold and GST on that count is payable. ( Notification No. 04/2019- Central Tax (Rate) dt 29th March, 2019 and Notification No. 06/2019-Central Tax (Rate) dt 29th March, 2019]
Contractors
Now we deal with the liability of contractors in case of development projects under various schemes as contained in item no (iii) to (vi) of the Notification No. 11 of 2017.
The rate of tax for the following items (i) to (xii) is 6 %.
It must be noted that these works contract are not Real Estate Projects for sale as defined in the RERA Act but are works contract for certain categories and hence clauses (i) to (if) shall not be applicable. Moreover, in the item No. (3) (iv), (v), (va), the applicability of these following categories be attracted only when they are not covered by Entry 3 (i), (ia), (ib), (ic), (id), (ie), and (if) as per amendment of the Notification 11/2017 by Notification 03/2019. It means if any of the item if covered by Entry 3 (i), (ia), (ib), (ic), (id), (ie), and (if) shall not be covered by rates in item 3(iv) and (v). In other words, those works contract or projects fall under Entry 3 (i), (ia), (ib), (ic), (id), (ie), and (if) shall automatically excluded following clauses (i) to (xi) after 1.4.2019.
(i) Any composite supply of works contract u/s 2(119) by way of civil structure pertaining to a scheme under JNNURM (Jawaharlal Nehru National Urban Renewal Mission ) or Rajiv Awas Yojana. (Item 3 (iv ) (c)of of Notification No. 11 of 2017.
(ii) Any composite supply of works contract u/s 2(119) by way of construction of a civil structure or any other original works pertaining to the “ln-situ redevelopment of existing slums using land as a resource, under the Housing for All (Urban) Mission/ Pradhan Mantri AwasYojana (Urban) Item 3 (iv ) (d)of of Notification No. 11 of 2017.
(iii) Any composite supply of works contract u/s 2(119) by way of construction any composite supply of works contract u/s 2(119) by way of construction a civil structure or any other original works pertaining to the “Economically Weaker Section (EWS) houses” constructed under the Affordable Housing in partnership by State or Union territory or local authority or urban development authority under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban); Item 3 (iv ) (da)of of Notification No. 11 of 2017.
(iv) Any composite supply of works contract u/s 2(119) by way of construction acivil structure or any other original works pertaining to the “houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/ Lower Income Group (LIG)/ Middle Income Group-1 (MlG-1)/ Middle Income Group-2 (MlG-2)” under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban); Item 3 (iv ) (db)of of Notification No. 11 of 2017.
(v) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to single residential unit otherwise than as a part of a residential complex. Item 3 (v ) (b)of of Notification No. 11 of 2017.
(vi) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;Item 3 (v ) (c)of of Notification No. 11 of 2017.
(vii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to low cost houses up to a carpet area of 60 square meters per house in a housing project approved by the competent authority under- (1) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri AwasYojana; (2) any housing scheme of a State Government; Item 3 (v ) (d)of of Notification No. 11 of 2017.
(viii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March,2017; Item 3 (v ) (da) of Notification No. 11 of 2017.
(ix) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017,provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession.However, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities Item 3 (v i) (a) of Notification No. 11 of 2017.
(x) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017,provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction of a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment; Item 3 (v i) (b)of of Notification No. 11 of 2017.
(xi) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017,provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction of a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017. Item 3 (vi ) (c) of Notification No. 11 of 2017
(xii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of affordable residential apartments having area upto 60 sq meters in metro cities or 90 sq meters in non-urban area at a price not more than Rs 45 lakhs, in a project which commences on or after 1st April, 2019, or in an ongoing project in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if), as the case may be, in the manner prescribed therein. The precondition is that the that carpet area of the affordable residential apartments, is not less than 50 per cent. of the total carpet area of all the apartments in the project. It ultimately it is found that there was shortfall, then by RCM the Developer shall be liable to pay differential tax on rate actually chargeable and rate applied.Item 3 clause (va) of Notification No 11/2017 as amended by Notification No. 3/2019.
By Vinay Sonpal LL.M.
Advocate,High Court Mumbai