The real estate industry went into a comatose state due to the triple impact of demonetisation, RERA and GST. While demonetisation is done and dusted and the industry is somehow complying with RERA, GST continues to be an issue.
The GST Council at its 34th meeting provided some relief to the sector.
But the GST lawmakers have also put in conditions and restrictions in most clauses in the Act.
For example, the reduced tax rates of 1 per cent for affordable housing and 5 per cent for the rest are subject to many conditions — input tax credit shall not be available and 80 per cent of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease (premiums)) shall be purchased from registered persons.
On shortfall of purchases from 80 per cent, tax shall be paid by the builder @ 18 per cent on RCM basis. However, tax on cement purchased from unregistered person shall be paid @ 28 per cent under RCM, and on capital goods under RCM at applicable rates. The purpose of a reduced rate without the benefit of input tax credit is to enable the taxpayer to comply with the laws without maintaining too many details of his inputs.
The condition to purchase 80 per cent of goods and services from registered persons forces the taxpayer to maintain details of all his inputs which works at cross purposes with the beneficial rates of tax.
The promoters shall be given a one-time option to continue to pay tax at the old rates (effective rate of 8 per cent or 12 per cent with ITC) on ongoing projects (buildings where construction and actual booking have both started before April 1, 2019) which have not been completed by March 31, 2019.The option shall be exercised once within a prescribed time frame and where the option is not exercised within the prescribed time limit, new rates shall apply. While this is a welcome move, the sunset clause of March 31, 2019 is too short.
The conditions don’t stop there. The new rate of 5 per cent without input tax credit shall be applicable on construction of all houses other than affordable houses in ongoing projects whether booked prior to or after April 1, 2019.
In case of houses booked prior to April 1, 2019, the new rate shall be available on instalments payable on or after April 1. All houses other than affordable houses in new projects, commercial apartments such as shops, offices in a residential real estate project in which the carpet area of commercial apartments is not more than 15 per cent of total carpet area of all apartments can also make use of the 5 per cent rate.
The transition formula for ITC approved by the GST Council is a combination of mathematics and guesswork. For residential projects, the formula extrapolates ITC taken for percentage completion of construction as on April 1, 2019 to arrive at ITC for the entire project. Then based on percentage booking of flats and percentage invoicing, ITC eligibility is determined.
Transition would be on pro-rata basis based on a formula such that credit in proportion to booking of the flat and invoicing done for the booked flat is available subject to a few safeguards. For a mixed project transition shall allow ITC on pro-rata basis in proportion to carpet area of the commercial portion in the ongoing projects (on which tax will be payable @ 12 per cent with ITC even after April 1, 2019) to the total carpet area of the project. The GST Council’s new proposals have added another layer of complexity to the real estate sector resulting in more chaos.