MAY 17, 2019

By Arvind Baheti, Executive Director and Rahul Dhanuka, Principal Associate, Khaitan & Co

TAXABILITY of real estate transactions has always been a contentious issue more so in light of the various innovative models of joint development agreements being adopted by the developers and the inter-play of various taxes and duties.

In its 34th meeting held on 19-March 2019, the Goods and Services Tax council (GST Council) vowed to reduce the tax incidence on the construction services to give a boost to the real estate sector and obviate the working capital challenges being faced by the land-owner/promoter combine.

The recommendations of the GST Council have been operationalized through issuance of 7 different notifications, all dated 29 March 2019, with a multi-pronged approach to reduce the tax rates on the outward supply of construction services; defer the time of payment of goods and services taxes (GST) on cross supply of construction services vis-à-vis development rights (TDR)/ floor space index (FSI) to improve cash flow positioning; instill discipline among the promoters by advocating purchases from registered suppliers and devise a mechanism for computation of input tax credit (ITC) in light of the amendments.

Though the underlying intent is noble and the Notifications, at first blush, appear to be reasonable, the Notifications are complex in their remit and extremely onerous to implement. In addition, the said Notifications are in some instances counterproductive and fail to achieve the stated objectives, for the reasons discussed below:

- The intention behind deferring the liability to pay tax on transfer of TDR or FSI or long-term lease and the corresponding supply of construction services in lieu of such TDR or FSI or long-term lease, to the date of completion certificate (CC), was meant to ease the working capital woes of the developers. However, the same may create an issue in the hands of the landowner promoter who wants to sell such units before receipt of CC. While ITC is allowed in the hands of the landowner promoter in respect of tax charged by the developer promoter, the same may just be a cost in case the landowner promoter sells his share prior to the issuance of the CC.

- Notification No. 3/2019 - Central Tax (Rate) dated 29 March 2019 requires the promoters to maintain project wise accounting in respect of inward supplies. Further, Notification No. 16/2019 - Central Tax dated 29 March 2019 requires the promoters to compute ITC for each project separately. Therefore, the intent appears not to allow cross utilization of ITC against different projects in the same state, thereby having an adverse effect on the cash flow position.

- Notification No. 3/2019 - Central Tax (Rate) dated 29 March 2019 requires the promoters to source 80% of their inputs and input services from registered suppliers during a financial year. The promoter shall have to pay tax at 18% (other than cement) and at 28% for cement on any shortfall below the said limit. This could lead to situation wherein the promoter pays tax under reverse charge for any particular year which is a cost to him and sources more than 80% of the inputs and input services in subsequent years. The purchases in excess of 80% is not available as set-off against the shortfall in any particular year. This may increase the cost of the project.

- The contents of Notification No. 3/2019 - Central Tax (Rate) dated 29 March 2019 and the illustrations given therein are inconsistent as regards inclusion or otherwise of cement sourced from unregistered suppliers in computing the 80% threshold. The developer may keep wondering whether cement is in or out for computing the threshold for registered procurements.

- Notification No. 4/2019 - Central Tax (Rate) dated 29 March 2019, inter alia, prescribes that the value of TDR or FSI by a person to a promoter against consideration in the form of commercial apartments shall be deemed to be equal to value of similar apartments charged by the promoter from independent buyers nearest to the date on which such TDR or FSI is transferred. The said provision does not prescribe any deduction towards value of land. Therefore, in case of commercial apartments, the transfer of TDR or FSI shall be subject to tax at 18% on the entire value of apartment including the value of land. This will go on to increase the tax cost in the hands of the developer.

- Projects wherein CC has been issued prior to 31st March 2019 and in respect of which some portion of payments from buyers are still due after 31st March 2019, neither qualify as new projects nor as ongoing projects. The exercising of option for transition to new rates only applies to ongoing projects. If the option is not exercised, the new rates are automatically applicable. However, the new rates itself only applies only to new and ongoing projects. Hence, the same lead to confusion amongst the promoters for such projects.

These aberrations are just the tip of the iceberg. Suffice to say that transition to the new regime will not be short of a roller-coaster ride for the real estate sector.

[The views of the author(s) in this article are personal and do not constitute legal/professional advice of Khaitan & Co.]