Challenging Case Studies.
i) The Real Estate Sector is one of the most important sectors in the Indian economy. Due to rapid urbanization, economic growth and rising income levels in the country, the real estate sector has attracted significant investment over the past few years. The contribution of the real estate sector to India’s gross domestic product (GDP) has been substantial. While housing contributes approximately 5%–6% of the country’s GDP, the retail, hospitality and commercial subsectors have also grown simultaneously, meeting the increasing infrastructural requirements. The Government’s mission of Housing for All is driving the residential real estate activity, while the Real Estate ( Regulation and Development ) Act, 2016 (RERA) is making the sector more transparent.
ii) The GST payable by the home buyer had increased as compared to the VAT/Service Tax Payable under the earlier laws due to higher rate of tax under GST. GST was being levied at the effective rate of tax of 8% for the affordable housing segment and 12% for others. The Government has envisioned ‘Housing for All by 2022’ wherein every citizen would have a house and the urban areas would be free of slums. In the backdrop of the above concerns and to boost the residential segment of the Real Estate sector, the GST Council recommended for reduction of GST rates for the housing sector. *
iii) The GST Council in its 33rd and 34th meetings held on 24th February, 2019 and 19th March,2019 respectively, has recommended major changes in the taxation of construction services under the GST regime w.e.f 1st April,2019. The New effective rates of tax are 1% for the affordable housing segment and 5% for other than affordable housing. The effective rates of tax for commercial units remains @ 12% (other than the commercial units in a residential real estate project).
iv) The sudden changes in rates of tax of GST in the real estate sector will be having a huge impact on the costing and pricing of the apartments in the real estate sector. The promoters of the on-going projects will have to work out the impact of the changes and evaluate the options of opting for the new rates without ITC or continuing with the existing rates with ITC. The real estate sector is already facing huge challenges in terms of very high supply of apartments as compared to the demand for apartments from the buyers. There could be other challenges being faced by the real estate sector relating to financing, operational, regulatory, costing, pricing and other issues. Overall, the current scenario indicates that it is a buyers’ market in the real sector, where the customer is the king.
v) In case of ongoing projects, if the promoters opt to pay tax at the existing effective rates of 8% / 12% with ITC, as applicable, they will be faced with competition from other promoters who would be comparatively charging 1% / 5 % without ITC to their customers. The total value ( cost to customer) of an apartment with 5% GST being charged by a promoter as compared to 12% GST being charged by another promoter for similar apartments would be much higher and would act as an deterrent to the customer who is cost conscious (subject to various other factors involved in buying an apartment such as location, amenities, quality of construction etc.)
vi) Various promoters are evaluating the option of continuing to pay tax at the old rates with ITC and offer discount of say 7% in case of un-booked apartments in an ongoing project. Such discount becomes a cost to the promoter. The issue which arises in such cases is that, if the promoter can offer discount of 7% on the value of apartment being sold after 1st April, 2019 , whether such discount should have been provided to the apartment sold prior to 1st April,2019 in that project. Will it trigger the anti–profiteering provisions ? What about the tax payable on the balance instalments due after 1st April,2019 in cases where the apartments are sold prior to 1st April,2019 in an ongoing project ?
vii) If in case, in an ongoing project, the promoter is opting to pay tax at the new rates of 1% / 5% without ITC, the ineligible ITC attributable to the un-booked apartments will either will have to be reversed or paid back in cash by the promoter. This will lead to increase in cost to the promoter. The promoter will have to evaluate the option of recovering such cost from the customers by way of increase in the sale price of the apartment or absorb the same as an cost, which will lead to reduction in profit to the promoter. In cases, where the cost of ITC is absorbed by the promoter for apartments sold after 1st April, 2019, whether the anti-profiteering provisions will be triggered for the apartments sold before 1st April, 2019 ?
viii) To overcome the rigours of anti-profiteering provisions, in the above scenarios the promoter will have to keep a detailed working of the costing and pricing of the apartments sold pre/post 1st April,2019 with specific reference to the ITC available / eligible / ineligible and the benefit of ITC passed on to the customers.
The impact of the new scheme of GST rates applicable to the real sector has been tabulated in an example given herein below :
Pre Amendment (other than affordable residential apartment)
Note: Available ITC as eligible can be set off against output GST
Post amendment (other than affordable residential apartment)- Opted for new rate of 5%
Note: Since ITC is not available,it will be added to the cost
There could be various scenarios applicable in different cases in different types of projects. The above is only an illustrative working. Depending on the facts and circumstances of each project, the working can differ and hence should be accordingly prepared. The various conditions prescribed in the notifications issued on 29th March,2019 should be duly fulfilled qua each project.
It may be worthwhile to note that the after the announcement of the recommendations of the GST Council in relation to the new scheme of GST rates applicable to the real estate sector, the Revenue Secretary, Government of India had announced that the proposed amendments should not push up prices and cases will be suitably dealt with by Anti Profiteering department.
Anti-profiteering is a mechanism to ensure that companies pass on the benefits derived from GST to customers. If NAA discovers that this hasn’t been done, it can fine the errant companies. Section 171 of the CGST Act relating to anti-profiteering measures is reproduced herein below :
(1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.
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