GST Impact on Real Estate CMA Bhogavalli Mallikarjuna Gupta Founder : India-gst.in Director Business Advisory Services, Procode Softech India Pvt Ltd

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1 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

2 Agenda

3 GST Impact on Real Estate Sector Introduction Key Concepts of GST Impact Areas Q & A

4 Introduction

5 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 :

6 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 Expected to attract investments worth US$ 7 billion in 2017 FDI Inflows from FY US $ billion SEBI has given approval for Real Estate Investment Trust Real Estate (Regulation & Development) Act has been introduced Source :

7 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

8 Key Concepts in GST

9 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;

10 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;

11 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;

12 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;

13 Impact

14 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.

15 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.

16 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

17 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

18 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%

19 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?

20 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.

21 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.

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

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

24 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.

25 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 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.

26 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.

27 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????????

28 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.

29 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.

30 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.

31 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.

32 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

33 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.

34 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.

35 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.

36 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.

37 Vendor Management Is GST Applicable on material issued to subcontractor? 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 subcontractor then GST is applicable on that. Agreements have to be redrafted.

38 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

39 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.

40 Miscellaneous Is GST Applicable on Retention Money withheld at the time of payments? Yes Is GST Applicable on Mobilization advance? No

41 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.

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43 CMA Bhogavalli Mallikarjuna Gupta Mobile : mallikarjunagupta@india-gst.in Website : india-gst.in