GST Impact on Real Estate

CMA Bhogavalli Mallikarjuna Gupta

Founder : India-gst.in
Director – Business Advisory Services, Procode Softech India Pvt Ltd
SME, Speaker, Author & Advisor - Indian GST, GCC VAT & Malaysian GST
Agenda
GST – Impact on Real Estate Sector
• Introduction
• Key Concepts of GST
• Impact Areas
• Q&A
Introduction
GST – Impact on Real Estate Sector
Real Estate – dictionary meaning
Land and anything fixed, immovable, or permanently attached to it such as
appurtenances, buildings, fences, fixtures, improvements, roads, shrubs and
trees (but not growing crops), sewers, structures, utility systems, and walls.
Title to real estate normally includes title to air rights, mineral rights, and
surface rights which can be bought, leased, sold, or transferred together or
separately. Also called real property or realty.

In today’s discussion we will discuss only on residential and commercial

projects

Source : http://www.businessdictionary.com/definition/real-estate.html
GST – Impact on Real Estate Sector
Till recently it is mostly in the organized sector
Contributes to nearly 30% of the employment after farm sector
Housing sector is expected to touch 5% - 6% GDP
Expected to grow at a CAGR of 11.2% for FY 2008 -2020
Expected to attract investments worth US$ 7 billion in 2017
FDI Inflows from FY 2000 – 2017 US $ 24.29 billion
SEBI has given approval for Real Estate Investment Trust
Real Estate (Regulation & Development) Act has been introduced

Source : https://www.ibef.org/industry/real-estate-india.aspx
Taxation Pre GST Era
Service Tax – centralized registration
VAT – differed from state to state
Central Excise – Not applicable
State Levies – Stamp Duties
Input Tax Credit – available only for Service Tax and VAT in few
states
Key Concepts in GST
GST – Impact on Real Estate Sector

Works Contract : Section 2, Sub-section 119

“works contract” means a contract for building, construction, fabrication,

completion, erection, installation, fitting out, improvement, modification,
repair, maintenance, renovation, alteration or commissioning of any
immovable property wherein transfer of property in goods (whether as
goods or in some other form) is involved in the execution of such contract;
GST – Impact on Real Estate Sector

Composite Supply : Section 2, Sub-section 30

“composite supply” means a supply made by a taxable person to a recipient

consisting of two or more taxable supplies of goods or services or both, or
any combination thereof, which are naturally bundled and supplied in
conjunction with each other in the ordinary course of business, one of
which is a principal supply;
GST – Impact on Real Estate Sector
Supply: Section 7, Sub-section 1, clause (a)

All forms of supply of goods or services or both such as

• sale,
• transfer,
• barter,
• exchange,
• licence,
• rental,
• lease or
• disposal made or agreed to be made for a consideration by a person in the
course or furtherance of business;
GST – Impact on Real Estate Sector

Input Tax Credit Negative List : Section 17, Sub-section 5

(c) works contract services when supplied for construction of an immovable

property (other than plant and machinery) except where it is an input
service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction
of an immovable property (other than plant or machinery) on his own
account including when such goods or services or both are used in the
course or furtherance of business.
Explanation.––For the purposes of clauses (c) and (d), the expression
“construction” includes re-construction, renovation, additions or
alterations or repairs, to the extent of capitalisation, to the said immovable
property;
Impact
GST – Impact on Real Estate Sector

Schedule II, Clause 2

Land and Building (a) any lease, tenancy, easement, licence to occupy land
is a supply of services; (b) any lease or letting out of the building including a
commercial, industrial or residential complex for business or commerce,
either wholly or partly, is a supply of services.
GST – Impact on Real Estate Sector

Schedule II, Clause 5, Sub-clause (b)

construction of a complex, building, civil structure or a part thereof,

including a complex or building intended for sale to a buyer, wholly
or partly, except where the entire consideration has been received
after issuance of completion certificate, where required, by the
competent authority or after its first occupation, whichever is
earlier.
GST – Impact on Real Estate Sector
Schedule II, Clause 5, Sub-clause (b)

Explanation.—For the purposes of this clause— (1) the expression

"competent authority" means the Government or any authority authorised
to issue completion certificate under any law for the time being in force and
in case of non-requirement of such certificate from such authority, from any
of the following, namely:—
(i) an architect registered with the Council of Architecture constituted
under the Architects Act, 1972; or
(ii) a chartered engineer registered with the Institution of Engineers
(India); or
(iii) a licensed surveyor of the respective local body of the city or town or
village or development or planning authority;

(2) the expression "construction" includes additions, alterations,

replacements or remodelling of any existing civil structure
GST – Impact on Real Estate Sector
Schedule II, Clause 6, Sub-clause (a)

works contract as defined in clause (119) of section 2 is a composite

supply
GST Impact on Inputs
Item / Component Tax Rate
Iron & Steel 18%
Sanitary fittings 28%
Electrical Cables 18% or 28%
Sand 5%
Building Bricks 5%
Fly ash Bricks 12%
Ready Mix Concrete (RMC) 28%
Services 18%
Cement 28%
Input Tax Credit
Input tax credit is available to builder on GST on all inward
supply of good or services or both if they are used for the
furtherance of business.

In case if the flats are sold and consideration is received after

receipt of occupancy certificate, then Input Tax Credit availed
has to be reversed on pro rata basis.

Is Interest / Penalty applicable on reversal of ITC ?

ITC on equipment

Is ITC on the purchase of earth moving

equipment or tower cranes available ?

Yes it is available as earth moving equipment

like or tower crane.
Time of Supply
Time of Supply for Services – Section 13, Sub-section 1

Receipt of advance from the customers – date of accounting in the

books of accounts or deposit in the bank account which ever is
earlier.

This will have an impact on the cash flows if the payment terms are
not renegotiated.
Taxability on sale of residential houses / villas /
flats
Tax Rates – Notification No. 11/2017-Central Tax (Rate) , 28th June,
2017

(i) Construction of a complex, building, civil structure or a part

thereof, including a complex or building intended for sale to a
buyer, wholly or partly, except where the entire consideration has
been received after issuance of completion certificate, where
required, by the competent authority or after its first occupation,
whichever is earlier. (Provisions of paragraph 2 of this notification
shall apply for valuation of this service)

(ii) composite supply of works contract as defined in clause 119 of

section 2 of Central Goods and Services Tax Act, 2017.

(iii) construction services other than (i) and (ii) above.

Taxability on sale of residential houses / villas /
flats
Tax Rates – Notification No. 11/2017-Central Tax (Rate) , 28th June, 2017

2. In case of supply of service specified in column (3) of the entry at item (i)
against serial no. 3 of the Table above, involving transfer of property in land
or undivided share of land, as the case may be, the value of supply of service
and goods portion in such supply shall be equivalent to the total amount
charged for such supply less the value of land or undivided share of land, as
the case may be, and the value of land or undivided share of land, as the case
may be, in such supply shall be deemed to be one third of the total amount
charged for such supply. Explanation .– For the purposes of paragraph 2,
“total amount” means the sum total of,- (a) consideration charged for
aforesaid service; and (b) amount charged for transfer of land or undivided
share of land, as the case may be.

This will have an impact in the areas where the prices of the land is high in
prime localities. In such cases, the contract clauses have to be revisited.
Taxability on sale of residential houses / villas /
flats after receipt of occupancy certificate
Is GST Applicable ??????
NO

Why?

Schedule III of the CGST Act as it is neither a supply of goods or

services.

Will it have any implications ? Yes, as GST is not applicable, it means ITC
is not available. Commercial implications should be explored.
Taxability on sale of land / plots
On sale of land GST is not applicable as per Schedule III,
Clause 5 of the CGST Act as it is neither a supply of goods or
services.

What will be tax impact on the development charges for the

plot?
Yes taxable under GST @ 18%

Valuation of development charges – simple thumb rule is

consideration received from the buyer minus value on which
the stamp duty is paid. Can differ from case to case basis.
Alterations or changes to flat over and above sale
agreement

GST is applicable on such alterations / changes as

requested by the customers.

It will be treated as works contract and applicable

tax rate is 18%

Valuation – the actual value / consideration paid by

the buyer to the builder.
Is GST applicable on the following services charged
Item / Component Applicable Tax Rate
Customer Advances Yes 12% or 18%
Floor raise charges Yes 18%
Corner flats Yes 18%
Facing Charges Yes 18%
Extra Parking Space Yes 18%
Club house charges Yes 18%
Amenities Charges Yes 18%
Maintenance Charges Yes 18%
Cancellation Charges Yes 18%
Corpus Fund ???? ????
Is GST applicable on the following services charged

Free gifts such a car, consumer goods, or gifts given

to buyers?

On such items also GST is applicable. It will be a

mixed supply.

Such schemes under GST have to revisited.

Stamp Duty

Stamp duty is levied by the State Governments and outside the GST
ambit.

Is stamp duty collected by the builder is to be included in the

transaction value?

Yes & No
Yes - If it is not shown on the tax invoice issued by the builder separately then it should be
included in the transaction value.

No – if it shown on the tax invoice separately, then it can treated as services by the
builder as pure agent and need not be included in the transaction value. Refer to Rule No
– 33.
Implications of Notification # No. 15/2017-Central
Tax (Rate)

Refund of unutilized Input Tax Credit is not available on

account of inverted duty structure.

Separate accounts to be maintained by the works contractor

for each and every works contract. Refer to Rule 56, clause 14
of the CGST Rules.
Development Agreement

The agreement between the developer and land owner liable

for GST?
Yes, as per definition of Supply given in sub-section 1 of
section 7 of the CGST Act. As it says Supply includes “(a) all
forms of supply of goods or services or both such as sale,
transfer, barter, exchange, licence, rental, lease or disposal
made or agreed to be made for a consideration by a person in
the course or furtherance of business”.

The developer is receiving portion of land in lieu of the

construction, it can be defined or treated as “barter” /
“exchange” and both are covered under definition of supply.
Development Agreement

Time of Supply in case Joint Development

Agreement

Date on which the developer receives the right

for construction.
On that date Receipt voucher has to be issued.
Valuation – open market value
Development Agreement

If the developer agreement is in revenue

sharing basis?

The developer have to collect the GST from the

customers and pay the same.
Anti profiteering
Section 171 of the CGST Act clearly states that the input tax credit benefit
derived should be passed on to the consumer.

The builders were not able to take input tax credit of Central Excise, as a
result the tax burden is passed on to the consumer but now under GST the
same is allowed, the price offered to the customers have to be reworked.

In transitional provisions also the builders can taken input tax credit on the
closing inventory or in semi finished status, this credit has to be passed on.

In case of VAT, the treatment is different from state to state, for few states it
is under composition / TOT scheme and they were not able to take ITC, now
under GST and for transitional credit is also available.
Books of Accounts
Chart of Accounts / Ledgers have to be analyzed
completely.

Accounts have to be maintained separately project wise.

New ledger accounts / additions to chart of accounts

have to be done to accommodate the reporting
requirements under GST.

On receipt of advance from customers, Receipt voucher

has to be issued.
Vendor Management
Most of the sub-contracts are from the un-organized sector.

All major sub-contracts should be advised to take registration

under GST as for many of them the contract values are more
than Rs 20 Lacs per year.

Sub-contractors have to be trained on GST if not the return

filing and matching will be a time consuming process.

If sub-contractors do not file returns on time, then matching

will not happen and ITC availed has to reversed. This will
have an impact on the working capital and lower profitability.
Vendor Management
Is GST Applicable on material issued to sub-
contractor ?
Is GST Applicable on the usage of equipment /
machinery by the sub-contractor?

Depends on the contract terms. If contract has a

provision that material will be issued to sub-
contractor then GST is applicable on that.

Agreements have to be redrafted.

Miscellaneous

Impact of GST on goods lost or stolen or

destroyed at site?
ITC has to be reversed

ITC availed has to be reversed on Retention

Money?
Yes – Sub-section 2 of section 16 of the CGST
Act
Miscellaneous

Can a developer take input tax credit, if the

flats or commercial space given in lease or
rent?

No, it is not allowed. Negative list of ITC –

clause (c ) sub-section 5 of Section 17 of CGST
Act.
Miscellaneous

Is GST Applicable on Retention Money

withheld at the time of payments ?
Yes

Is GST Applicable on Mobilization advance?

No
 Points which need some brain storming…
What should be the treatment of development
agreement done prior to GST and flats given after
rollout of GST?

Will there be any change on the percentage of

undivided land? As the cost of land is more in metro
cities?
How to adjust pricing of flats on account of # No.
15/2017-Central Tax (Rate) .

How to address working capital requirements.

CMA Bhogavalli Mallikarjuna Gupta
Mobile : + 91 99496 44633
Email : mallikarjunagupta@india-gst.in
Website : india-gst.in