MARCH 20, 2019

By S Sivakumar, LL.B., FCA, FCS, ACSI (London)

THE GST council, in its 34th meeting held on March 19, 2019 has come out with many interesting conclusions, vis-à-vis the proposed scheme for the Realty Sector that is coming into effect from April 1, 2019. In terms of the press release issued on March 19, 2019, the Developer will have the option to continue to follow the existing scheme wherein, he is allowed to avail of Input Tax Credit, in respect of running projects.

Writing in TIOL, I had expressed the difficulties that Developers would face, if they are forced to shift to the new scheme, in respect of existing projects, as they would be forced to bear the loss of input tax credit without being able to increase the base prices. It does seem that some good sense has prevailed on our babus in the North Block. The option to continue with the existing scheme, should therefore, come as a huge relief for Developers.

It is common for large Developers to go in for projects involving multiple residential towers wherein Completion Certificates are taken for each of these towers. It would be good if the Government clarifies as to whether the option to continue under the existing scheme would be available for the project as a whole. From a practical perspective, it would be good if Developers are allowed to follow the existing scheme for the whole project.

The Press Release, in para 2, states that t he promoters shall be given a one-time option to continue to pay tax at the old rates (effective rate of 8% or 12% with ITC) on ongoing (buildings where construction and actual booking have both started before 01.04.2019) which have not been completed by 31.03.2019. It would seem that, even if a single agreement has been signed towards the booking of the flats, the option to continue with the existing scheme would be available to Developers. Further, it seems that the option to continue with the existing scheme will have to exercised by the Developer, for all of his projects, in the State and that, a project wise option may not be permitted. It would be better to have a clarification from the Board, in the notification that they are planning to issue.

From the Developers' perspective, it would seem that they would be happy to opt to follow the existing scheme, for existing/running projects, as of March 31, 2019.

A reading of Para 4 of the press release, seems to suggest that the new scheme of 5% without ITC (for non - affordable housing) would be mandatory for all new projects and for existing projects at the option of the Developer. I would take the view that the new scheme of lower GST rates without ITC can only be an alternative as any scheme which disallows ITC would require the amendment of the CGST Act. Thus, in my view, the Developers would still be allowed to choose between the new scheme and the existing scheme, even for new projects.

Be that as it may… will the Developer be allowed to increase his base prices to offset the loss arising out of the denial of ITC, under the new scheme. In my view, despite some statements from the Finance Ministry officials that Developers would not be allowed to increase the base prices, there is nothing in the GST law that can force the Developers not to increase the base prices. In my further view, Section 171 of the CGST Act dealing with anti-profiteering would not apply in these cases.

The other development is that of shifting the liability to pay GST on the transfer of TDRs/FSI and long - term lease (premium) from the land owner to the builder, under the reverse charge mechanism (para 7.2 of the press release). This is a highly retrograde step which would severely affect Developers. My legal view continues to be that, development rights including TDRs are to be considered as 'land' and cannot be subjected to the levy of GST at all. It would have been good if the Government had accepted this legal view and exempted the levy of GST on TDRs, premium on long term lease of land, etc. By shifting the responsibility to the Developer/Builder, to pay GST on these transactions under GST, the Government has only complicated the matter further. The clarification given in Para 7.3 that the date on which builder shall be liable to pay tax on TDR, FSI, long term lease (premium) of land under RCM in respect of flats sold after completion certificate is being shifted to date of issue of completion certificate, is of course, welcome.

Another important aspect clarified by the Council is to treat projects with upto 15% commercial space as residential property, in terms of Para 6.3 of the press release. This is a welcome step and will help residential projects having commercial amenities such as clubs, restaurants etc. i.e, the residential-cum-commercial projects. However, in many cases, the decision to earmark the portion for commercial purposes such as clubs, etc. is taken at a much later stage and to this extent, this benefit would involve practical challenges for the Developer of residential-cum-commercial projects.

The stipulation that Developers who procures more than 80% of the total value of inputs and input services from un-registered suppliers would be required to pay GST @ 18% (28% for purchase of cement) is highly retrograde and also impractical. Small and medium sized Developers, especially those who are operating in smaller cities and towns, would find it very difficult to meet the 80% criterion and would also find it very difficult to implement this rule. One wonders as to the stage, at which, this 80% criterion would have to be implemented by the Developer? It would be good if the Government scraps this unnecessary and impractical condition.

On the whole, the decision of the GST council to allow Developers and Builders to continue the existing scheme, for running projects, should come as a big relief.

One expects that the Notifications/Circulars/Guidance Note to be issued by the Board will cover the issues discussed in this article.

(The views expressed are strictly personal)