The real estate sector has seen a tremendous growth in the year 2022 with sale of residential housing increasing by over 50% in comparison to the year 2021. The real estate sector currently accounts for 7% of India’s GDP and is predicted to increase to 10% by 2025 with market size expected to reach USD 1 trillion by 2030.
In the erstwhile regime, the real estate sector had numerous taxes like VAT, Service Tax, etc. However, pursuant to the introduction of GST, the new taxation regime has reduced the level of complexities which has significantly benefited both the developer and the purchaser in the real estate sector.
Determining the correct assessable value, taxable event, applicable tax rate, Input Tax Credit (ITC) eligibility, etc. under the GST laws for a real estate transaction have always been complex. The Government by issuing various amendment notifications and circulars have brought in clarity in relation to real estate sector thereby laying rest to many ambiguities such as taxability of transfer of development rights (TDR), preferential location charges and liquidated damages.
Transfer of Development Rights
Any transaction in the real estate industry revolves around three main participants i.e. landowner, land developer and buyer. Typically, landowner and the land developer enter into a Joint Development Agreement (JDA) for development of a land parcel wherein landowner grants TDR in the land to the developer. In lieu of such rights, under the area sharing model, the developer provides construction service to the landowner, whereas, under the revenue sharing model, the developer provides a share in revenue as consideration to the landowner.
In the erstwhile Service Tax regime, ‘Service’ was defined to mean any activity carried out by a person for another for consideration but did not include an activity which constituted merely a transfer in title in goods or immovable property. Department alleged that there is a barter transaction between the landowner and developer under the area sharing JDA and demanded service tax on the same. The real estate industry did not accept the demand and chose to contest the same.
Under the GST laws as well, specific provisions for determining the taxability of TDR were not provided. Hence, no clarity on taxability of TDR in the real estate industry continued. In the meantime, the Government vide notification in January 2018 notified that GST is payable on the date of entering into a conveyance deed or similar instrument in relation to TDR. It clarified the intention of the Government to levy GST on TDR. However, this issue became more complex with the real estate industry not welcoming the intention of the Government.
To resolve the issue, the Government released various notifications w.e.f. April 1, 2019 in terms of which TDR was notified as a supply of service and liable to GST by the developer under Reverse Charge Mechanism (RCM).
However, the CESTAT in relation to matter under the service tax regime, in the case of DLF Commercial Project Corporation held that TDR is a benefit arising out of land and must be held to be an immovable property. Transfer of title of immovable property is excluded from the definition of ‘service’ and thus, outside the ambit of Service Tax. Thus, again the debate on taxability of TDR got fueled.
Further, a major shift came when benefit of ITC provided to the real estate sector at the time implementation of GST regime on construction service and other services procured during development of the real estate project, became barred with the amendments introduced w.e.f. April 1, 2019, except when specifically allowed.
Preferential location and other charges
Various facilities such as preferential location, parking, club house and other facilities are provided by developers to buyers in addition to the property. There has been a debate whether charges for additional facilities can be clubbed with value of property and chargeable at GST rate applicable on sale of property or chargeable at the rate applicable on such additional services individually. Developers have argued that these charges paid by the buyer’s consequent to the decision of purchasing the property, thus, inextricably linked to the supply of property.
Further to add to the confusion, various Advance Ruling authorities under GST have held otherwise and treated such services as a separate supply and held that GST @18% is applicable on such separate services. However, the CBIC vide Circular dated August 3, 2022 clarified that preferential location charges paid upfront are part of consideration charged for sale of property and are exigible to same tax treatment. Thus, clearing the air and putting rest to this ambiguity. However, uncertainty on other charges for parking, club house etc. remains.
Liquidated damages
Developers also recover liquidated damages for delays in construction from sub-contractors/ vendors. Taxability of liquidated damages has been a matter of litigation under both the erstwhile regime and the GST regime. The ambiguity on this subject continued till it clarification of the CBIC clarifying that liquidated damages are payments that do not constitute consideration for a supply and hence are not exigible to GST.
Refund to unregistered buyer
A facility is made available at the GST common portal to unregistered buyers for refund of GST paid on advance payments to the developer, where the agreement got cancelled in subsequent financial years and time period for issuance of credit note has passed. Further clarity provided on procedural aspects of filing the refund, determining the limitation period for filing the refund, etc.
What is expected?
Although various issues have been streamlined such as GST levy on TDR, preferential location charges, liquidated damages, refund to unregistered buyers, however there are certain issues which still needs to be addressed.
In terms of GST provisions, one third of the value of the property is deemed to be the value of land transferred to the buyer, irrespective of the actual value of land and accordingly, exempt from GST. In this regard it is pertinent to point out that value of land and construction cost varies across the country due to various factors. Deemed deduction of one-third from value of property in all cases is not viable and should be appropriately addressed by the Government. This deemed restriction of land cost has, however, has been held ultra vires the valuation provision in High Court of Gujarat in the case of Munjaal Manishbhai Bhatt.
Further, real estate industry maintains project wise ITC reversal computations made at the time of receipt of completion certificate, thus increasing the compliance burden on the developers. A simpler manner of availment and reversal of ITC would ease the compliance burden on the developer.
There is no doubt that GST related issues in the real estate sector have been consistently streamlined by the Government, however there are still painful areas that need more clarity. However, with continued regulatory reforms and policy changes, the sector is well-positioned for continuous growth in the future.
