GST Council gives relief to builders of under-construction residential projects

The move will help address apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits and pricing that were bound to arise on account of the change.

Illustration: Uttam Ghosh/Rediff.com

The all-powerful GST Council on Tuesday allowed builders an option to choose between old tax rates and the new ones for under-construction residential projects to help resolve input tax credit issues.

The council, headed by Union Finance Minister Arun Jaitley, which also included representatives from all states, at its 34th meeting in New Delhi laid out transition rules for implementation of the new tax rates for the real estate sector.

Builders will get a one-time option to continue paying tax at the old rates (effective rate of 8 per cent or 12 per cent with Input Tax Credit or ITC) on ongoing projects (buildings where construction and actual booking have both started before April 1, 2019, but which will not be completed by March 31, 2019), revenue secretary A B Pandey told reporters in New Delhi.

The new tax rate of 1 per cent for affordable houses and 5 per cent for others, without ITC, will apply on new projects.

The move will help address apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits and pricing that were bound to arise on account of the change.

"GST Council today has approved transition plan for the new rate structure for real estate residential projects... from April 1, builders have to choose either of the options for which they will get time," he said.

On the time-frame for transition, Pandey said the council has agreed on providing reasonable time to developers.

The matter would be decided in a next few days in consultation with the states, he said, adding that it could be 15 days or one month.

The council also clarified that projects with upto 15 per cent commercial space will be treated as residential property.

This will resolve issues faced in cases where buildings have commercial amenities such as clubs and restaurants as well as in case of residential-cum-commercial projects.

Additionally, a condition has also been imposed that 80 per cent procurement by developers should be from registered dealers to avail the composition scheme.

The new tax rates of 1 per cent (on the construction of affordable houses) and 5 per cent (on other than affordable houses) shall be available subject to the condition that input tax credit shall not be available and that 80 per cent of inputs and input services shall be purchased from registered persons.

Any shortfall in purchases according to these norms would be levied a tax of 18 per cent.

Tax on cement purchased from unregistered person shall attract a 28 per cent duty.

The council approved the formula for calculating ITC.

"ITC rules shall be amended to bring greater clarity on a monthly and final determination of ITC and reversal thereof in real estate projects.

“The change would clearly provide a procedure for availing input tax credit in relation to commercial units as such units would continue to be eligible for input tax credit in a mixed project," an official statement issued after the meeting said.

Pandey further said that the decision will help the builders in clearing inventories.

"This go-ahead by the GST Council brings quite a relief for this sector in handling transition issues in specific," EY India Partner Abhishek Jain said.

For upcoming projects, reduced rates of 5 per cent and 1 per cent will be applicable beginning April 1.

On the next GST Council meeting, the Revenue Secretary said that is unlikely till the election process is over.

He, however, said that if any emergent situation arises then a meeting could be called with the permission of the Election Commission.

On apprehensions being raised on possible price rise due to new tax structure, the secretary said if prices escalate, the National Anti-profiteering Authority will look into it and take appropriate action.

Deloitte India partner M S Mani said the pragmatic move to segregate under construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit.

"This would also enable them to price the loss of input tax credits in the new projects.

“Reversal of Input tax credit on a proportionate basis would entail significant computational issues for builders as each project would be in various stages of construction and have differing pre and post-completion sale patterns," Mani said.

Pratik Jain, Partner & Leader, Indirect Tax, PwC India said the council giving developers an option would be beneficial for those who had already factored the entire input credits of the project while arriving at the sale price and in many cases these benefits may already have been passed on to customers.

"Further, the new composition rates would be mandatory for all projects for which construction starts after 1 April 2019 and hence, such tax blockage would need to be factored at time of budgeting.

"In such case, the council has mentioned that the credit reversal would need to be done proportionate to area space, the details of which are awaited.

“The developers would need to work out the amount of input credit for various projects (where certain projects are covered under composition and certain under normal scheme or projects having both residential and commercial segments)," he said.

These changes made by the GST Council would have substantial impact on real estate sector, he said, adding the industry will have to work out which option works best and come up with the revised price structure quickly.