GST Council held its 34th meeting via video conferencing on 19th March, 2019 in New Delhi. Mr. Arun Jaitley presided over the meeting. The meeting was summoned to implement the declarations made with regards to rate cuts on housing in the 33rd GST Council meeting. These were later drafted in a circular by the law and fitment committee.
The recommendations included implementing lower effective GST rate of 1% in case of affordable houses. And the rate in case of construction of houses other than affordable houses was recommended to be 5%.
Following are the decisions taken by the GST Council with regards to the GST rates on real estate sector.
I. Choice Available for Ongoing Realty Projects
The promoters of on – going real estate projects are given two options to implement the GST rates. These on-going projects refer to the ones that do not get completed before 31st March 2019. Furthermore, the promoters need to choose either of the two options. These include:
- Option 1: To continue to pay tax at old GST rates on on – going projects as a one time option. As per this option, promoters would have to pay an effective GST rate of 8% on under – construction affordable housing projects. Whereas, an effective GST rate of 12% would be levied on under – construction projects other than affordable housing.
- Option 2: To pay tax as per the new GST rates decided in 33rd GST Council meeting. As per this option, the promoters would have to pay an effective GST rate of 1% on under – construction affordable housing projects. Whereas an effective GST rate of 5% would be levied on other under – construction projects other than affordable housing.
The option to exercise the old rates shall be provided once and that too for a specific time frame. And in cases where the option is not exercised in the specified time limit, the new GST rates shall apply.
II. New Tax Rates For Real Estate Sector
The 34th GST Council meeting implemented the new GST rates for construction of affordable and other houses. These rates were declared in the 33rd GST council meet. The new tax rates would be applicable to new as well as ongoing projects that have chosen to exercise the option to pay taxes according to the new tax rates. Thus, the new rates implemented are as follows:
GST Rate for Affordable Houses
A GST rate of 1% without Input Tax Credit (ITC) would be charged on the under – construction affordable housing projects. This new rate shall be applicable to:
- All houses that come under the purview of affordable housing definition as declared by the GST council in its 33rd meeting. The Council adopted a twin approach to define affordable housing. Accordingly, the term ‘Affordable Housing’ is defined on the basis of: (i) Carpet Area and (ii) Cost of Under – Construction Property. As per the carpet area approach, a residential house or flat would be taken as an affordable house if it has (a) a carpet area of 90 sqm in non-metropolitan cities/towns and (b) 60 sqm in metropolitan cities. Alternatively, a residential house/flat would come under affordable housing if its value is up to Rs 45 lakhs. This is both for metropolitan and non – metropolitan cities.
- All affordable houses that are being constructed in ongoing projects under the existing central and state housing schemes. Houses under such schemes are presently eligible for concessional rate of 8% GST. This rate is after deducting 1/3rd of the taxable value for land abatement.
GST Rate for Under-Construction Houses Other Than Affordable Housing
A GST rate of 5% without Input Tax Credit (ITC) would be charged to under – construction houses other than affordable housing projects. This new rate shall be applicable to :
- All houses apart from affordable houses whether booked before or after April 1, 2019. In case the houses are booked before April 1, 2019, new rate of GST shall be applicable on the installments payable on or after April 1, 2019.
- All houses apart from affordable houses
- All commercial shops, offices etc part of residential real estate project. These commercial spaces would attract a GST rate of 5%. Provided the carpet area of such commercial spaces is not more than 15% of the total carpet area of all apartments.
Terms and Conditions to Levy New Tax Rates
The new GST rates on real estate projects include (a) 1% on construction of affordable houses and (b) 5% on construction of houses other than affordable houses. Such rates shall be levied based on the following terms and conditions:
- Input Tax Credit (ITC) shall not be available
- 80% of inputs or input services must be purchased from registered persons. Such inputs include goods other than capital goods, Transfer Development Rights (TDR), Joint Development Agreements (JDA), Floor Space Index (FSI), Long Term Lease Premium.
- In case the purchases made are below 80%, then the builder needs to pay GST rate of 18% on Reverse Charge Mechanism Basis. However, tax paid on cement purchased from an unregistered person shall amount to 28% under Reverse Charge Mechanism. Whereas, GST on capital goods shall be paid at applicable rates by the builder under Reverse Charge Mechanism.
III. Transition for New Ongoing Projects That Decide to Exercise New Tax Rates
- Ongoing projects that choose to adopt new GST rates shall transition ITC as per the method suggested by the GST Council. Ongoing projects include buildings where construction and booking both has started prior to April 1, 2019. But the same have not been completed before March 31, 2019.
- The GST Council has come up with a transition formula to calculate the ITC for the residential projects. To calculate ITC to be transitioned for the entire project, percentage completion of construction as on April 1, 2019 is taken into consideration. Then, ITC eligibility is determined based on percentage booking of apartments and percentage invoicing. This is to say that transition would be on prorata basis based on a simple formula. Thus the transition would take place in a way that credit in proportion to booking of apartments and invoicing undertaken for the booked apartments is available. Provided it is subject to a few safeguards. In case of a mixed project, ITC transition shall take place on pro – rata basis. Such a transition would be in proportion to the carpet area of the commercial portion in the ongoing project to the total carpet area of the project. However, the GST payable on the commercial portion in the ongoing project will be 12% with ITC even after April 1, 2019.
IV. Treatment of TDR, FSI and Long Term Lease for Projects Commencing After April 1, 2019
- The supply of TDR, FSI and Long Term Lease (premium) of land shall be exempted from GST. Such an exemption is subject to a condition that the constructed apartments should be sold before completion certificate is issued. And the requisite tax is paid on such constructed flats. In case the constructed flats are sold after the issuance of completion certificate, then exemption of TDR, FSI and Long Term Lease Premium shall be withdrawn. But such a withdrawal shall be limited to: (i) 1% of value of constructed apartments in case of affordable houses (ii) 5% of the value of constructed apartments other than affordable houses. This condition will bring about a fair degree of taxation parity between under – constructions and ready to move property.
- In case of Reverse Charge Mechanism, tax on TDR , FSI , Long Term Lease Premium shall be paid by the builder instead of the land owner.
- This condition relates to the date to pay tax on TDR, FSI, Long Term Lease (premium) of land under Reverse Charge Mechanism. It is in respect of flats sold after completion certificate. In this case, such a date has been shifted to the date of issue of the certificate.
Similarly, in case of a JDA, the liability of the builder to pay tax on construction of houses given to land owner has been shifted to the date of completion.
V. Changes to be Brought About in ITC Rules
To bring about more clarity on monthly and final calculation of ITC and its reversal thereof in case of real estate projects, the ITC rules shall be amended. Such an amendment would provide defined procedure for availing ITC with regards to commercial units. This is so because such units would continue to be eligible for ITC in case of a mixed project.