ACCOUNTING & TAXATION

GST on Real Estate Transaction Post and Pre 01.04.2019

GST on transactions under Real Estate Sector

Outright Purchase of Land/Plots without tenants: –

Situation where the promoter/builder purchase the plot/land on which they wish to construct their schemes, but this situation is very rare as this involves lot of working capital blocked as the cost of land is huge.

 

Sr.no.	Particulars	Seller	Promoter/Builder
1	If full payment is made to the seller in monetary terms	– Schedule III brings out the position that transaction for sale of land falls neither under ‘supply of goods’ nor under ‘supply of services’ and accordingly, is outside the ambit of GST.– Seller will not be liable to collect any GST on sale of land.	– As there will be no GST to be charged by seller. Buyer has no obligation to pay that.
2	If partial payment in money and the balance in the form of constructed area in the building to be constructed	– Schedule III brings out the position that transaction for sale of land falls neither under ‘supply of goods’ nor under ‘supply of services’ and accordingly, is outside the ambit of GST.	– In case of effecting transfer to independent buyers, after issue of completion certificate, there will be no GST on transfer of such units.
		– The fact that consideration was fully or partly paid in terms of the constructed area does not detract it from its nature of sale, so long as the transfer is by execution of the conveyance deed.	– However, where transfer is as a consideration for land, the consideration of the constructed units by way of land was received before the issue of completion certificate and, therefore, GST will be payable by the developer.

 

2. Outright Purchase of Land/Plots with tenants: –

Situation same as above (1) but here builder has additional job to deal with the tenants who already occupied the plot/land. In this para we will discuss the liability of tenant and builders.

We need to understand first GST will be applicable to tenant too as tenant renounces his right in the property and transfer it to the builder, grants permission to enter and hand over peaceful possession of the property in consideration of either a lumpsum amount or as a compensation as a new unit in existing or alternative accommodation in another residential unit of promoter/builder.

Sr. no.	Particulars	Tenant	Promoter/Builder
1	Tenants evicted by paying them monetary consideration	– Subject to the tax net GST, tenant will be liable to charge GST @ 18% to the Promoter/ Builder.	– They can take ITC if they have schemes other than RREP.
2	Compensation, a unit in the new building in lieu of their existing occupation	– GST liability will arise on the parallel to as defined in Notification No. 04/2018 at the time of the transfer of possession or the right in the unit by the developer to the tenant by entering into the conveyance Deed or any other similar instrument.	– The developer will be rendering construction service by constructing the permanent alternate accommodation for the tenants.
		– The value of service will be the value of the consideration will be the price of similar accommodation charged by the developer from the independent customers at the same time or nearest to that time.	– The valuation of such services will be governed by the price at which he is able to sell his units in the building to his customers and the liability will arise on parallel to as defined in Notification No. 04/2018, at the time when he transfers possession to the tenant by executing the transfer document.
			– The tenant is liable to GST in respect of the service by way of vacating the unit. Such supply of service by the tenant becomes the input for the supply of construction services by the developer and, accordingly, the developer is eligible to claim input tax credit of the tax paid by the tenant.
3	Tenant demands additional area as a compensation	– the tenant is liable to GST on the total value of the area of the new unit he will have the primary liability as the service provider and on the additional area.

 

The developer ‘A2Z’, in consideration of the tenant ‘T’ vacating the unit admeasuring 1,000 sq. ft. agrees to provide him unit of 1000 sq. ft in the building to be constructed as alternative accommodation. “He is rendering construction service to the tenant in respect of such accommodation as the consideration of vacation services rendered by the tenant”. When he transfers possession of such unit to the tenant, he will be subjected to GST at the effective rate of 12%. Presuming that he is selling his units @ Rs. 5,000 per sq. ft. then the value of the construction service will be Rs. 5,000 X 1,000 sq. ft. i.e. Rs 50,00,000. If, however, the tenant has been subjected to GST on services supplied by him to the developer, then such service by the tenant becomes the input for the construction service and therefore the developer will be eligible to take credit of the tax paid by the tenant. This, by and large, will result in tax neutrality.

3. Redevelopment arrangements with Housing Societies

Basic of Development agreements and Deliverables

• The agreement generally is by way of a tripartite agreement between the society, the developer and the members of the society.
• From the perspective of the society/ landowner, there is transfer of development rights over the land in favour of the developer.
• The members agree to vacate the units occupied by them in order to enable the redevelopment for which the developer agrees to provide:

1. the same area which the member was occupying; or
2. the same with additional area as per development agreement;
3. additional area which can be purchased by the member.

• Delivery of agreed constructed units to the society in terms of the redevelopment agreement
• Sale of free sale area by the developer

 

The developer ‘A2Z’, in consideration of the tenant ‘T’ vacating the unit admeasuring 1,000 sq. ft. agrees to provide him unit of 1000 sq. ft in the building to be constructed as alternative accommodation. “He is rendering construction service to the tenant in respect of such accommodation as the consideration of vacation services rendered by the tenant”. When he transfers possession of such unit to the tenant, he will be subjected to GST at the effective rate of 12%. Presuming that he is selling his units @ Rs. 5,000 per sq. ft. then the value of the construction service will be Rs. 5,000 X 1,000 sq. ft. i.e. Rs 50,00,000. If, however, the tenant has been subjected to GST on services supplied by him to the developer, then such service by the tenant becomes the input for the construction service and therefore the developer will be eligible to take credit of the tax paid by the tenant. This, by and large, will result in tax neutrality.

 

GST on execution of Redevelopment agreement before 31.03.2019

The view being taken is that the development agreement results in supply of taxable service to the developer attracting GST payable by the supplier of service i.e., the Society (landowner). The timing of supply in terms of Notification No. 04/2018, referred to in Part II, will be the time when the promised constructed area is transferred by execution of conveyance deed or any other instrument by the developer in favour of the Society (landowner).

value will be determined by the constructed units of like kind and quality which, in generality of cases, will be the price of similar units charged by the developer in respect of his own free sale area.

Even though the Notification 04/2018 refers to tax liability of the landowner who transfers development rights to the developer, there is a contrary view according to which ‘development rights’ are benefit arising from the land and, accordingly, such rights are ‘immovable property’ being akin to land. A Writ petition challenging the chargeability of GST in respect of transfer of development rights is pending for decision before the Hon’ble Bombay High Court.

The issue therefore, is argumentative. Based on the notification referred to above, the Department is taking the view in favour of chargeability. A cautious view is, therefore, called for in the matter.

GST on execution of Redevelopment agreement after 31.03.2019

Notification No.03/2019 dated 29thMarch,2019 has closed all above controversies in respect of supplies taking place on or after 01.04.2019. The notification has shifted the primary liability from the Landowner-Promoter to the Development Promoter. Notification stated that: –

• the supply of TDR, FSI, long term lease (premium) of land by a landowner to a developer shall be exempted subject to the condition that the constructed flats are sold before issuance of completion certificate and tax is paid on them.
• Exemption of TDR, FSI, long term lease (premium) shall be withdrawn in case of flats sold after issue of completion certificate, but such withdrawal shall be limited to 1% of the value in case of affordable houses and 5% of value in case other than affordable houses.
• The liability to pay tax on Development Rights/ FSI, used for construction of apartments which remained un-booked on the date of issuance of completion certificate will be discharged by the developer under the reverse charge mechanism and the same shall be payable on the date of issue of completion certificate.
• As far as the flats to be provided to the landowner/society are concerned, the Developer-Promoter will be liable for GST and accordingly, the Landowner-Promoter will be exempt from GST in respect of the transfer of development rights.
• The value of flats given to landowner in lieu of development rights shall be the open market value of the similar flats charged from independent buyers, nearest to the date on which development rights of FSI was transferred

Insertion of Para 2A in Notification No. 11/2017- Central Tax (Rate), changed the scenario which provided that where a registered person transfers development right or FSI (including additional FSI) to a promoter against consideration, wholly or partly, in the form of construction of apartments, the value of construction services in respect of such apartments shall be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers, other than the person transferring the Development rights or FSI (including additional FSI), nearest to the date on which such development right or FSI is transferred to the promoter, less the value of transfer of land, if any.

GST applicability on Members of Co-operative Housing society on redevelopment

For ascertaining liability of members in this tripartite agreement, we need to understand whether there is any supply by the member to the society or developer and whether members are entitled for any consideration in this overall agreement. Again, lets count the deliverable, roles and responsibilities from member point of view and its other parties in the agreement.

• Whether there is any supply component by members to builder or society
• the members of CHS are the consenting parties in the agreement between the society and the developer.
• Now, question arises whether this consent to vacate the existing flats which are occupied by them for their individual purpose will amount to supply of service. Considering the definition of supply – members “by agreeing to vacate the flats and allowing demolition thereof and fresh construction thereon”, the member is supplying a service subject to GST.
• Analysing further, we must also see to whom member of CHS give consent to vacate and demolish, they give it to the society not promoter builders. The agreement to vacate the accommodation is with the society and society thereafter agrees with the developer to transfer development rights over the aggregate land to him. There is no service rendered to the developer by the members and the question of taxable supply does not arise.
• Consent given to the society should be taken to be the consent to self and, accordingly, not subject to GST.

 

Privity of Contracts

A view is possible under which the consent by the member is taken to be a service to the developer. Consider this for inconvenience faced by members, agreement provides payment of rent for the intervening period, which will become a consideration for his service and be the value for this purpose.

• Other points in Redevelopment of CHS
• In most of the cases of redevelopment agreement additional area to the members are allotted then the total area consented and given for redevelopment. As the value of service provided by the society is determined by the value of constructed units allotted to it, the value so determined will take into account the value of additional area as well and, therefore, no further adjustment will be required.
• Any additional purchase of area by members from the builder directly will be outside the redevelopment agreements and it will be like independent sale by the developer akin to sale of free sale area by him to his purchasers.

Redevelopment from builder’s perspectives

• In this overall arrangement, builder provides construction service to the society which attracts GST in the hands of Builder, prior to 01.04.2019 builder used to pay effective rate of 12% (8% in the case of affordable housing) after credit for inputs. After 31.03.2019, the rate of tax will be 5% (1% in the case of affordable housing) without any input credit unless the promoter opts for continuing with the old tax regime.
• the time of supply of such construction services will be when the Developer transfers right over such units to the society by executing a deed of conveyance or any other instrument of that nature during the period prior 01.04.2019; under the new regime, the liability on the Developer arises on the date of completion or first occupation, as the case maybe, whichever is earlier.
• The value of flats given to landowner in lieu of development rights shall be the open market value of similar flats charged from independent buyers, nearest to the date on which development rights of FSI was transferred; less the value of transfer of land, if any, as prescribed. The prescribed value of land is one-third of the total amount charged for the supply.

References: –

• Notification no. 11/2017- C.T. (Rate) dated 28/06/2017 as amended by Notification no. 03/2019- dated 29/03/2019.
• Notification no. 04/2019 – CT (rate) dated 29th March 2019
• No. 354/32/2019-TRU Government of India Ministry of Finance, Department of Revenue, (Tax Research Unit) Dated the 7th May, 2019, New Delhi
• Notification no. 11/2017 – CT (rate) dated 28th June 2017, as amended by Notification no. 03/2019- dated 29/03/2019.
• No. 354/32/2019-TRU, Government of India, Ministry of Finance, Department of Revenue, (Tax Research Unit), Dated the 14th May, 2019, New Delhi, “FAQs (Part II) on real estate- reg.”