August 2019

REAL ESTATE DEVELOPMENT – A ‘REAL’ CONUNDRUM

SUNIL GABHAWALLA | RISHABH SINGHVI | PARTH SHAH
Chartered Accountants

GST law has recently overhauled the entire taxation scheme of real estate development activities. Amidst discussions over inclusion of real estate in the GST fold, the 33rd GST Council made the following broad announcements on real estate development activities:

 

a)   GST to be levied at 5% on regular and 1% on affordable housing (‘final taxes’), without any input tax credit (ITC). Apartments up to 90 / 60 square metres in non-metro / metro cities having gross sale value below Rs. 45,00,000 are considered as ‘affordable residential apartments’;

b)   Tax on development rights / TDR / JDA, lease premium, FSI (‘intermediate taxes’) are to be exempted for apartments sold pre-completion, and taxable where apartments are sold after completion, in other words, intermediate taxes would be payable if final taxes are not applicable.

 

The philosophy behind the recommendations was stated as follows:

 

“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. Unutilised 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.”

 

In view of limitations in bringing the said amendments through primary enactments, the 34th GST Council adopted the route of issuing notifications to give effect to the said decisions. The modalities of the scheme were carried out by rate notifications and other procedural amendments. The rate notifications are the subject matter of discussion in this article:

Notification 3/2019 – CT(R): Beneficial rates for pure and mixed residential real estate

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