GST AND REAL ESTATE Source : www.ramanilegal.com Introduction The year 2017 witnessed significant reforms in real estate sector. With the coming into force of all the provisions of RERA, a much-awaited regulatory framework came into existence which restored sagging confidence of home buyers against the rampant abuse of dominant authority of unscrupulous developers and provided the buyers speedy and effective remedies against any injustice done to them. The Goods and Services Tax introduced from 1 st July was another development having influence over the economy in general including the real estate sector in a big way. 1.1 The issue of indirect taxation in relation to real estate has always been in the realm of uncertainty and could get finality only after prolonged litigation ending with legislative provisions putting end to the divergent views. The subject matter of taxation of Real Estate, being a unique combination of supply of land, of material and, of services employed in constructing the units, is an amalgam of supply of different inputs, transfer of property in which is affected by the transfer of the final product in the form of the constructed unit. This raises issues about the nature of the supply, which must be answered in order to determine the taxability in respect of the dealings in such units, particularly when the deal is made when services are continuing by the unit being under construction. The applicability of the Service tax and VAT which have now been subsumed in the GST are examples of the divergent views and disputes that preceded the legal provisions providing certainties to the issues. 1.2 The broad scheme of Goods and Services Tax (GST) is levy of tax on the supply of goods or services or both. The supply of goods or services has wide connotation which include all forms of transfers viz. sale, exchange, and even licence, rental, lease or disposal. Section 7 of the Act, however restricts taxable supplies to those which are (a) for consideration, unless, they are of the nature specified in Schedule I, and (b) made in furtherance of business. Goods are, broadly, moveable properties with certain exclusions and inclusions. The concept
excludes immovable property in any form. In GST Law, Services have been defined broadly as anything which is not goods. However, within the general scope of supply of goods and services, the Act, in Schedule II, lists out certain specific transactions which are to be treated, either as supply of goods or services. In the context of real estate transactions, it includes (a) lease or tenancy of land for any purpose, (b) lease or letting out of buildings for purposes of business or commerce, (c) construction of complex, building or civil structure intended for sale, except where the entire consideration has been received after issuance of completion certificate by the competent authorities or before its first occupation, whichever is earlier, and (d) works contract as defined in section 2(119) of the CGST Act, 2017. While including construction of buildings etc. within services, construction of units in respect of which no part of the consideration is received during construction is excluded. Schedule III, which is a negative list contains activities or transactions which are not to be treated either as supply of goods or supply of services. In relation to construction services, para 5 needs mention which excludes from service the sale of land and also of building, except sale of the building at construction stage in respect of which any part of consideration has been received before CC or its first occupation. 1.3 Real estate transactions which encompass supplies of goods as well as services, are termed Composite supplies of the nature of works contract which is defined as a contract for building, construction, fabrication, completion, and takes within its fold related services such as erection, installation, fitting out, improvements, modifications, repairs, maintenance, renovation, alteration or commissioning of any immoveable property wherein transfer of property in goods ( whether as goods or in some other forms) is involved in the execution of such contracts. Important to note that, unlike its meaning under the Central Sales Tax Act,1956, and the Finance Act, 1994, the activities of works contract are restricted to activities in relation to immovable property. 1.4 One of the basic features of GST is taxation of value addition only. In other words, it avoid cascading effect of taxation by allowing credit of taxes paid by the builder in respect of the inputs used in construction which are by way of material and services. What remains is the tax only on the value added by the builder thereby eliminating tax on tax.
1.5 Within the broad scheme of taxation under GST, this article examines the tax treatment of transfer of goods and services involved in various real estate transactions keeping in mind particularly the sale of flats by the builders during the construction stage and thereafter. Transfer of completed flats 2.0 The word completed signifies the units, construction of which is over, as per the following guidelines: - (a) the competent authorities have issued the completion certificate; or (b) the unit has been occupied by the first occupier even before the issue of completion certificate; and (c) no part of the consideration was received by the seller before the issue of completion certificate or its first occupation. The time of payment plays an important part in determination as to whether the flats is to be considered as completed for purposes of GST or the same is considered as transferred during construction stage. If any part of consideration, howsoever small and made by any name, even as advance, is made prior to issuance of CC or its first occupation, the sale of the unit fails to qualify as completed unit and is subjected to GST as such. 2.1 The law exempts transfer of completed units from GST as the same falls neither within the concept of goods nor of service. Schedule II mentions only those units within the tax net of GST which are under construction and no part of consideration of which is received after issuance of CC or its first occupation. It follows that all other buildings are out of tax net. Further, Para 5 of Schedule III provide exemption to sale of all buildings with the exception of only those which are mentioned as taxable in Schedule II i.e. those which are under construction and no part of consideration of which is received by the builder before the issuance of CC or its first occupation. From the combined reading of all these provisions, the clear picture that emerges is that sale of buildings considered as completed as per the tests mentioned above, is outside the taxability under GST. Such buildings being tax
exempt are not eligible to input tax credit. One has, therefore, to work out the net tax incidence of any decision taking into consideration the time of sale. Sale of under construction Flats 3.0 Para 5(b) of Schedule II, as mentioned above, treats construction of complex, building or civil structure intended for sale unless the entire consideration thereof is received after the issuance of completion certificate or first occupation, whichever is earlier, as supply of service. Thus, sale of an unit before the issue of completion certificate or before its first occupation is, therefore, subject to GST. The only exception is when entire consideration, is received after the issue of CC or first occupation. Being the taxable supply, the unit is eligible for input tax credit as a result it is only the net amount that is to be borne by the developer. 3.1 The GST law came into force on 1 st July,2017. All payments made in respect of the unit prior to this date are subject to the laws in force at that time. In other words payments made upto 30.06.2017 attract liability under the Service Tax Act and Sales Tax/ VAT as prevailing in the concerned State. These Acts, having been subsumed in GST, payments thereafter attract liability under GST w.e.f. 01.07.2017. 3.2 Exemption from tax is provided in respect of Construction services in relation to single residential unit otherwise than as a part of residential complex. Where the construction is of a single independent residential unit, say a bunglow, GST is not attracted. Exemption has also been provided in respect of construction services in relation to residential complexes under any scheme notified by the government and also when such services are rendered by the departments of Central, State or Local governments. 3.3 The GST is chargeable at 18% of the value of the unit. Works contracts being composite supply having elements of land value as well as value of goods and services rendered or employed in construction, the value attributed to land is excluded from the total value of the unit. The land value is taken to be one-third of the total value which means that 18% GST is charged at two-third of the value, bringing down the effective rate to 12%. Worked in similar manner, the effective rate in respect of affordable housing is 8% of the value. This, prima facie compares
very unfavourably for the buyers with the earlier tax burden of 4.5% under Service tax (15% with 70% abatement for land value) and 1% under the composition scheme of VAT, however, that was without benefit of Input Tax Credit. In GST regime though the tax rate is higher but full Input Tax Credit of GST paid on inputs, capital goods and input services is available thus net effect of tax incidence is not so high. The relieving feature, however, is the expectation from the builders to pass on the benefit of input credit to the buyers, which is mandated vide Anti-Profiteering provisions under GST Law. Further, the fixation of one-third of the value representing abatement for land, causes hardship in places like Bombay where the land cost forms major component of cost and far exceeds one-third of the total value. There is, therefore, a demand for linking such abatement with the actual or some realistic amount. It is understood that a solution to the problem is under active consideration of the Government and various alternatives are being considered including abatement of amount equal to circle rate or, an amount to be fixed based on the class of cities or, on the population of cities or, on any other basis. In order to get over the problem, a course is sometimes suggested under which the developer enter into separate agreements for supply of land and construction thereon. Such a course may not result in any difference in the tax incidence as the construction service is being supplied simultaneously with the land and is inextricably linked to the supply of land, even though under a separate contract. 3.4 Besides the base price for the unit, there are charges for additional facilities such as internal/external modification, woodwork, plumbing fixtures, sanitary fittings, power back up etc. These charges are part of the transactional value i.e. total consideration and as such, taxable in the same way and at the same rate as the construction service in relation to the flat. In other words, such charges are subject to GST at the same rate of 18% after abatement for land value which will mean at the effective rate of 12%. In case such additional services are rendered after the OC/CC or first occupation, they are not be considered as part of the consideration of the flat and will not be eligible to the benefit of one-third abatement. Such services will, however, be termed as work contract services and will attract tax at 18% without the reduction for land value. 3.5 Benefit like preferential location, parking facilities, firefighting installations etc. being bundled and supplied with the construction service of flat are part of composite services and accordingly, GST is payable as in relation to the principal
supply i.e. the supply of flat. The effective applicable rate in respect of such charges is 12%, the same as in case of the principal supply. Development/Redevelopment arrangements 4.0 The development arrangement is an agreement between the landowner and the developer in which the developer agrees to construct building on the land at his own cost in consideration of an agreed revenue share or area share. The issue of redevelopment generally arise in case of cooperative societies where there is unused FSI after taking into account the additional FSI which can be generated by loading the TDRs on the society land. There is an arrangement between the society and a developer whereby the society allows the developer to reconstruct the building at his own cost, by demolishing the existing structure and utilizing the FSI, including the additional FSI generated by loading of TDRs. The compensation for the cost incurred by the developer in the construction of the whole building, including the cost of TDR purchased by him, is provided to him by way of free sale area i.e. a share in the constructed area which he can sell as his own. 4.1 In certain cases, the society does not transfer the development rights over the entire land and retains for itself rights over so much of the land which is required for construction of flats for its existing members to be provided to them in lieu of their existing flats in the society. When the developer is entrusted with the job of constructing flats on the retained FSI/FAR, the developer assumes the position of a contractor rendering works contract service or job contract service for an agreed consideration and not consideration by way of revenue or area sharing. 4.2 In an arrangement of area sharing, which is the most prevalent one, the question of taxability under the GST for the developer and the society arises at the following events:- (a) When the development rights are assigned by the society to the developer allowing him to enter the land for carrying out the construction as per the development agreement with the society and its members; (b) When the developer delivers possession of the flats meant to be given to the society free of cost as per the development agreement.
(c) When the developer sells the flats which, under the agreement are to be retained by him and dealt with as his own property. We will consider the GST implications in respect of each event for the affected parties viz. the developer and the society. (a) Assignment of development rights 5.0 The society in a development agreement transfers the development rights over the land to the developer. In order to determine the chargeability under GST, the basic question that is to be decided is whether the transfer of such rights is a supply and whether the development rights fall within the meaning of goods or services. For this one may have to determine the nature of development rights and the broad classification they fall into. In case they are to be considered as immoveable property, they are not goods within the meaning as per section 2(52) of the Act. Further, the question whether transfer of development rights amount to service will depend on whether it is treated as such under Para 5(b) of Schedule II or, it is an exempted service under Para 5 of Schedule III which excludes from service the sale of land. 5.1 Although, the term immovable property is not defined in the CGST Act, the general view in the matter is that development rights, being rights in and over the land, are benefits arising out of the land. Taking support from the definition of immovable property as per section 3(26) of the General Clauses Act, 1897, it can be said that such rights are immovable property being the benefit arising out of land. The Maharashtra Stamp Act adopts the same definition. The Registration Act,1908, the Land Acquisition Act and the Bombay Land Revenue Code support the same meaning and term the benefits arising out of land as immovable property. As development rights are benefits arising from the land, one can proceed with the view that development rights are immoveable property of the nature of land. That being so, they are out of the definition of goods. 5.2 Going by the view that transfer of development rights is transfer of land, Para 5 of the Schedule III excludes sale of land from the meaning of services under the Act. Sale as defined in the Transfer of Property Act is transfer of ownership in exchange for a price paid or promised. When the development rights in and over the land are transferred to the developer, there is transfer of ownership over such rights,
as the society divests itself from such rights which, after the transfer, belong to the developer alone. Transfer of such rights tantamount to transfer of sale and accordingly, provision of para 5 of Schedule III is applicable which excludes such rights from taxable supply of goods or service for purposes of GST. 5.3 Transfer of development rights does not find place in the Schedule II also. Para 2 of Schedule II deems, interalia, the license to occupy the land or building, as service. Development rights are not the rights to occupy the land granted by the landowner to the developer. What is granted is the right to enter the land for carrying out the development activities. Such a transfer can also not be treated as in furtherance of business of the society. The term business is comprehensively defined in the Act which does not include the transaction of this nature. 5.4 Considering all the related provisions it seems to be a reasonable view that the development rights are neither goods nor service and, in any case, the transfer not being in furtherance of business (This view is disputable), it will not be a supply within the meaning of section 7. On a careful consideration of the issue it is possible to take the view favoring non-taxability in the hands of the society. It appears that the department is likely to take it as taxable service. In this connection, we may refer to the clarification provided on Twitter platform holding development rights to be indirectly taxable. Moreover, the Notification No.04/2018-C.T.(Rate) dated 25.01.2018 stipulates that the time of supply in case of supply of development rights shall be the time when the developer transfers possession of the building to the person supplying the development rights. It indicates that Govt. intends to treat it as a taxable supply and the time of supply is the time when the tax liability is to be discharged. The argument of such transfer being not in furtherance of business may also be disputed on the ground that when the rights are transferred, the transaction assumes the nature of business. The view, if taken, may become contentious. However, in case it so happens and the same is ultimately held taxable, there may be no significant impact on the developer who will be entitled to avail input credit when outward construction services are rendered by him on allotment of flats to the society and on sale of free sale area retained by him. 5.5 Corpus money and other payments by the developer: -The developer, apart from delivering the agreed number of flats to the society free of any charge, generally makes payment in the nature of hardship allowance, rent, shifting
allowance, contribution of corpus, brokerage and other amounts as per the development agreement. These payments are in effect part of the consideration for development rights and, as discussed above, not against any taxable supply. However, in case of Zaver Shankarlal Bhanushali, the Authority for Advance Ruling, Maharashtra held the same as liable to GST. In case, however, transfer of development rights are ultimately held to be subject to GST, they will be part of consideration for transfer of development rights and will be taxable. (b)delivery of possession of flats to the society 6.0 The developer undertakes construction activity in respect of the whole building, a part of which is to be given to the society and the other part to be sold by him to his buyers. The total cost incurred in construction is recovered by him from the money he gets from the customers of free sale area of his share. The question arises whether the developer renders any construction service to the society when he constructs flats for the society and give them free of any charge, so as to attract GST. 6.1 The flats of society s share are constructed by the developer for the society. The relevant question is whether he gets any consideration for such flats. Apparently, he does not get any monetary consideration from the society but, he gets consideration by way of development rights over the land. The Act defines consideration as any payment made or to be made, whether in money or otherwise. The grant of development rights being the consideration for the supply of flats, the services rendered are for consideration and in furtherance of business as developer and, therefore, falls within taxable service as per section 7 of the Act. 6.2 Time of supply: - As per the meaning given to continuous supply of services in section 2(33), works contracts having execution period of more than three months and having terms of periodic payments are continuous supply of services. In such cases, the time of supply is earliest of (a) the date of issue of invoice issued within the period prescribed u/s 31(2); (b) the date of receipt of payment and (c) the date on which the receipt of service is accounted for in the books of the receiver. These situations may not be workable in the case where the flats are allotted without any payment. The Govt. has issued Notification No.4/2018-CGST(Rate) deferring the time of supply in transactions of this nature. Under the Notification, the time of
supply in such cases will be the date of allotment of units to the landowner i.e. the society or, the date on which rights in such units are transferred to the landowner. 6.3 Valuation: - The issue also involves the question of valuation of the flats which are provided to the society free of charge. The value of the flats has to be determined under the provisions of section 15 of the Act read with Rules 27 to 35 of the CGST Rules, 2017. In terms of Rule 27, the value of supply in such cases shall be (a) the open market value of such supplies; (b) if the open market value is not available, the amount in money as is equivalent to the consideration in kind, if such amount is known at the time of supply; and (c) if the monetary value of supply is not determinable, the value of supply of goods or services of like kind and quality. The value of supply will, in generality of cases, be the value of similar flats charged by the developer from the buyers of flats of his own share. Or, in case of change in price over the period, the value of similar flats nearer to the date on which flats are made available. 7.0 Retention of development rights required for member flats: - As stated earlier, a practice generally prevalent these days is for the society to transfer only so much of development rights which are generated by virtue of Development Control Regulations on loading of TDRs. A separate agreement is entered into with the developer for construction of flats for the members on the land in respect of which the development rights are retained by the society. 7.1 In such cases, the consideration for transfer of development rights is not the flats to be given to the society free of cost but is largely in monetary form. The developer does not render any service to the society. He is free to sell all the flats constructed by him in the market when he becomes subject to GST. The society, in a separate agreement entrusts him the work of construction using the FSI retained by it. The developer in that case assumes the position of a contractor rendering works contract service. Since the developer is rendering Works contract service only, the applicable rate in such cases will be 18% without any abatement for land value.
Input tax credit 8.0 GST is a tax on value addition only, which means that in ultimate analysis tax at every stage is payable only in respect of the value added at each stage. This is made possible by the mechanism of seamless input tax credit made available to the supplier of goods or services in determination of liability under the GST. Section 16 of the CGST Act provides that every registered person shall, subject to such conditions and restrictions as may be prescribed, and in the manner specified in section 49, be entitled to take credit of input tax paid on any supply of goods and service or both to him, which are used or intended to be used in the course of furtherance of business and the said amount shall be credited to the electronic credit ledger of such person. 8.1 A builder/developer who supplies construction services uses inputs obtained in inward supplies viz. material used in construction and services of contractors, engineers, architects and others, which were made available to him after payment of GST. The tax so paid is referred to as input tax. His gross liability on outward services that is, when he supplies construction services by way of sale of flats, is determined @ 12% after the abatement for land value. His net liability is, however, determined by reducing from his gross liability, the amount of GST already paid by him at the time of inward supply of goods and services used in the construction of flats. This is done by the credit mechanism through the electronic credit ledger maintained for registered persons. 8.2 Input credit not available:- Under clause (c) of Section 17(5), the credit is blocked unless it is used for further supply of works contract service. In other words if the inputs were used in construction for end user and not for sale, the credit will not be available. Clause (d) of section 17(5) blocks credit in respect of inputs received by a taxable person for construction of immovable property on his own account including when such goods or services or both are used in course of furtherance of business. If, for example, inputs are used for construction of own office building, credit is not available even when the office is to be used for carrying on the business. 8.3 Credit restricted to tax on taxable services: - Input tax credit is available only against taxable supplies. Under section 17(2) if inputs are used partly for
effecting taxable supplies, including zero- rated supplies and partly for exempt supplies, input tax credit shall be restricted to so much of input tax as is attributable to said taxable supply. Exempt supplies for this purpose include supplies on which the recipient is liable on reverse charge basis. As such when some of the flats are sold before they are completed that is, before the receipt of OC/CC or first occupation and, some after completion that is after OC or first occupation, GST is payable only in respect of the flats sold before their construction is complete. In this situation, while the inputs have been used in the construction of all the flats, credit will be available only against the tax on taxable supply that is, against the tax payable in respect of uncompleted flats only. The amount of credit claimed in respect of total inputs in a tax year will be restricted to the input tax attributable to the taxable supplies and the balance credit will have to be reversed on receipt of OC/CC or first occupation. 8.4 There are situations when the goods or services procured for construction of flats for sale are used also for non-business purposes. In such cases also, the input tax credit is restricted to supplies availed in respect of business activity only. Section 17(1) lays down that if inputs are used partly for utilization in business activities and partly for any other purpose, then the credit will be restricted to an amount which is attributable for business purpose. 8.5 Computation of attributable tax: - The method of working out the tax attributable to taxable services is laid down in rule 42 (for goods and services) and in Rule 43 (for capital goods). Simply explained, the tax on value of total input involved in a tax period is reduced by (i) the tax intended to be used exclusively for purposes other than business; (ii) Taxes intended to be used exclusively in respect of exempt supplies; (iii) tax in respect of which input tax credit is not available ( refer Para 8.2). The balance tax is credited to the Electronic Credit Ledger maintained for the person. From this, the input tax intended to be used exclusively for taxable supplies is taken out and the balance representing common credit is allocated in the ratio which aggregate value of each type of supply bears to the total turnover. 8.6 Input credit in ongoing projects: - The GST came in operation from 01.07.2017 when certain inputs were in stock with the developers. Issue arises whether credit in respect of such inputs can be allowed in respect of residential/
commercial complexes which were ongoing when the law came into force. Section 140(3) of the CGST Act permits credit of input taxes of inputs in stock on that day to the developers against taxes due after that day subject, of course, to the condition that such inputs were intended to be used for making taxable supplies and the registered developer was entitled to input tax credits as per law. A further condition is that such registered person is in possession of invoice or other prescribed document evidencing payment of duty under CENVAT Credit Rules,2004 and such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding 1 st July, 2017.