Arjuna (Fictional Character): Recently notifications were issued in relation to the real estate industry, what are the provisions in relation to applicability of Reverse charge mechanism (RCM) to builders and developers, do they need to pay tax under RCM ?
Krishna (Fictional Character): Arjuna, Yes, builders and developers are required to pay RCM under GST from 1st April 2019 under new Scheme.
Arjuna: In which case builder/developer are required to pay tax under RCM?
Krishna (Fictional Character): Arjuna the builder/developer are required to pay tax under RCM in following three cases – If promoter (Builder/developer) fails to purchase at least 80% of the value of input and input services, from registered suppliers. On TDR or floor space index supplied on or after 01-04-2019. Differential tax arising on procurement of works contract services in relation to construction of affordable residential apartments, if 50% criteria mentioned therein is not met.
Arjuna: Krishna, how the builder/developer need to calculate the threshold limit of 80% mentioned above?
Krishna: Arjuna, all the goods purchased and service procured would be considered except value of services by way of grant of development rights, long term lease of land ,floor space index or value of electricity ,high speed diesel ,motor spirit and natural gas used in construction of residential apartment in a project.(i.e they will be excluded for calculation purpose)
Arjuna: Krishna, if the value of purchases from registered supplier is less than 80% , what is the GST rate applicable on such purchases?
Krishna : Arjuna, if value of supplies from registered is less than 80% then promoter (builder/developer) has to pay GST @18% on reverse charge basis on all such inward supplies for the shortfall amount . Tax rate on Cement purchased from unregistered Person would be 28%. Whereas RCM rate on capital goods purchased would be rates as specified for the same.
Arjuna: Krishna for calculating 80% threshold limit, goods and service procured until what date needs to be considered?
Krishna: The builder/developer need to calculate 80% threshold limit for the purchases made during the financial year (i.e every year 80% threshold needs to be calculated) If the project completes in between the financial year then purchases till the date of issuance of completion certificate or first occupation of the project, whichever is earlier shall be considered.
Arjuna: In case of TDR, on what tax needs to be paid?
Krishna: Builders/developers shall be liable to pay tax on reverse charge basis, on supply of TDR on or after 01-04-2019, which is attributable to the residential apartments that remain un-booked on the date of issuance of completion certificate, or first occupation of the project
Arjuna: When the promoter should discharge its tax liability on TDR?
Krishna: The liability to pay GST on development rights shall arise on the date of completion or first occupation of the project, whichever is earlier.
Arjuna: What is the RCM applicability in case of procurement of works contract service for construction of affordable residential apartments?
Krishna: Arjuna, a supplier providing works contract services in relation to construction of affordable residential apartment would charge GST @ 12% instead of 18%,if the project fulfils the specified conditions. One of the condition specified therein is that more than 50% carpet area of the project should qualify as affordable residential apartments. In case it finally turns out at the end of the project that 50% criterion is not met, the developer will have to pay differential GST under RCM.
Arjuna: What one should learn from this?
Krishna: The government, have lowered the tax burden on the output side for the builders and developers by bringing in various notifications in relation to real estate. But where there is a bit ease at the output side the input side has been regulated.
The inward purchases for the builders and developers would now be regulated and it comes with the RCM burden as well. In addition, one should note that the new tax rates do not allow the builders/developers to claim the benefit of input tax credit therefore the tax paid under RCM becomes the cost in their hands. Builders and developers should be careful and take into consideration all tax compliances before entering into any contract.