The Goods and Services Tax Council, in its 34th meeting discussed the operational details for implementation of the recommendations made by the Council in its 33rd meeting for lower effective GST rate of 1% in case of affordable houses and 5% on construction of houses other than affordable house. Here is a detailed analysis of the decisions taken by the Council:
A) Background:
Initially, a GST rate of 18% was fixed on houses other than affordable houses and a concessional GST rate of 12% was fixed on affordable housing. However, after receiving a lot of representations from the industry, the GST council gave an abatement, in respect of value of land, equal to 1/3rd of the value of the house. Thus, the effective GST rates were 12% of houses other than affordable houses and 8% for affordable houses.
The effective rates were still high as compared to the pre-GST regime which levied tax @ 5.5% (4.5% Service Tax plus 1% Value Added Tax) on houses, without any CENVAT/Input Tax credit available to the real estate developer.
The rationale for higher rates under GST was that complete Input Tax Credit was available to the real estate developer in respect of purchases made by him. Input Tax Credit will reduce the cost of construction to the real estate developer and the real estate developer was expected to pass on the benefit of the reduced cost to the buyers. However, no such benefit was passed on to the buyer by real estate developers.
It is for this reason that the GST Council felt the need to lower GST rates on residential houses.
B) New Scheme:
As per the new scheme to be implemented with effect from 1st April, 2019, a GST rate of 5% shall be charged on residential houses other than affordable houses and a concessional GST rate of 1% shall be charged on affordable houses (houses having area upto 60 square meters in metros/90 square meters in non-metros and value upto Rs. 45 lakhs).
This can be summarised as under:
| Nature of property | Old GST rate | New GST rate |
| Residential houses other than affordable houses | 12% | 5% |
| Affordable houses | 8% | 1% |
| Commercial Property | 12% | 12% |
Conditions to be fulfilled:
1) No Input Tax Credit shall be available to the real estate developer;
2) At least 80% of the Inputs and Input Services shall be purchased from registered dealers:
a) In case of shortfall from 80%, GST shall be paid by the real estate developer on the basis of Reverse Charge Mechanism (“RCM”) @ 18%. However, GST on cement purchased from unregistered dealers GST shall be paid @ 28% under RCM, and on capital goods at applicable rates under RCM.
This can be summarized as under:
| Purchased items | GST rate |
| Cement | 28% |
| Capital Goods | Applicable rates |
| Other inputs and input services | 18% |
b) Practical difficulties:
i) In case purchases from registered dealers is 60%, shortfall from 80% being 20%, where GST on RCM basis has to be paid on entire balance 40% or only on 20%?
ii) How to allocate purchase of cement between 80% and 20%?
iii) Whether payment of GST on RCM basis on purchases of Capital Goods from unregistered dealers is required irrespective of the condition of purchase of 80% of inputs and input services from registered dealers?
C) Transition provisions:
Ongoing projects (building where construction and actual booking have both started before 01/04/2019) shall be given a one-time option to continue to pay tax at the old rates. Such option shall be exercised within a prescribed time frame, failing which new rates shall apply.
All new projects shall be compulsorily required to pay tax at new rates.
In respect of transiting projects, ITC eligibility shall be determined on the basis of a prescribed formula.
D) Treatment of TDR/FSI/Long term lease premium:
Taxability on supply of TDR/FSI/Long term lease premium has always been a debatable topic right from pre-GST regime. In order to put an end to the debate, the GST Council has decided to exempt supply of TDR/FSI/Long term lease premium of land by landowner to real estate developer subject to the following conditions:
1) All the constructed flats are sold before issuance of the completion certificate and
2) Tax is paid on such flats sold.
In case flats sold after issuance of the completion certificate:
1) Exemption on supply of TDR/FSI/Long term lease premium shall be withdrawn and GST shall be payable @ 1% of the value of affordable houses sold after issuance of completion certificate and @ 5% of the value of the houses other than affordable houses sold after issuance of completion certificate.
2) The liability to pay GST shall be shifted to the real estate developer on RCM basis.
3) The date of liability to pay GST on RCM basis by the real estate developer shall be the date of the issuance of completion certificate.
E) Practical difficulties:
1) Now that the exemption has been given w.e.f. 1st April, 2019, does this mean the supply of TDR/FSI/Long term lease premium was taxable before 1st April, 2019?
2) Does this exemption also apply to TDR/FSI/Long term lease premium in respect of commercial property? If yes, what shall be the rate at which GST shall be payable on RCM basis in respect of commercial property sold after the issuance of completion certificate – 5%/12%/18%?
3) The liability to pay GST on RCM basis shall depend on the value at which the houses are sold after issuance of the completion certificate and the liability to pay shall be the date of the issuance of the completion certificate. How can the real estate developer know the value at which houses will be sold as on the date of issuance of completion certificate?
F) Conclusion:
The GST Council has come up with a major relief for buyers of residential houses. However, at the same time, a lot of practical questions and practical difficulties have been left unanswered.
Further, compulsory opting for new GST rates without ITC defeats the very purpose of GST, which was to enable smooth flow of credit and to reduce cascading effect of taxes. New GST rates should have been kept optional.
We expect appropriate Gazette notifications/circulars to address the issues in detail.
Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.