JUNE 11, 2019

By Raghavan Ramabadran, Partner, and Sahana Rajkumar, Senior Associate, Lakshmikumaran and Sridharan Attorneys

STARING at a blank sheet of paper, I rifled through my mind for the simplest vocabulary to pen down an article on the latest changes to the Goods and Services Tax (GST) laws concerning the real estate sector in India. After all, it is time for the realty sector, to gear up and face the reality. Any contribution to aid the process felt righteous.

But to the dismay of my well-trained professional brain, attempting to condense the various changes into layman's term appeared to be the most herculean task; such was the intricacy of the law. And as I sat there, in the comfort of my favourite sofa, all I could think of was, isn't 'home' one of nicest words in the English dictionary and what incredible joy it brings to every family moving into a new one. That to me was all the inspiration I needed to unravel these complicated amendments.

It all began on the 19th of March 2019, where few good men of the GST Council met for the 34th time and decided to construct a new foundation for the real estate sector in India with a fond hope that it would stand the test of time. The endeavour was to pave the way for a sector that had been embroiled in disputes due to the ambiguities created by the erstwhile tax laws. The focus was thus on steering in new changes for all stakeholders involved in the real estate sector by way of streamlining various open-ended issues and also reducing the tax rates on construction of flats.

Although the intention is admirable and praiseworthy, the Notifications issued bringing into effect the changes suggested by the GST Council from the 1st of April, 2019 put even few of our prominent personalities hilariously verbose tweets to shame. It surely felt like an "exasperating farrago of distortions". One could even feel a poetic irony in the amendments being brought into effect on April Fool's day.

Jokes apart, the Ministry of Finance did try to simplify matters by issuing two sets of FAQs dated 7th and 14th May 2019 and clarifying various ambiguities that arose from interpretation of the law. In our opinion, the key-takeaways for the various stakeholders are the following:-

- For residential projects under construction as on 1st April 2019, the builder has an option to charge and collect from his customer, either a concessional rate of tax of 5% or a standard rate of 12% for the construction services provided. Affordable residential apartments will attract GST at an effective rate of 1%.

- The builder has/had a one-time option to choose between charging tax on the construction services provided either at the concessional rates or at the standard rates, latest by the 20th of May 2019. If the builder fails/failed to exercise the option, it would be deemed as though the builder had chosen to charge GST at the concessional rates of tax.

- Where the construction has commenced prior to 1st April 2019, the buyer cannot insist on the builder charging the concessional rates of tax.

- For residential projects commencing after 1st April 2019, the builder has to mandatorily charge their customers a concessional rate of 5% or 1% (affordable residential apartments).

- The concessional rates will be applicable only for payments made after 1st April 2019 and not for payments made prior.

- The concessional rates are associated with a condition that the builder should not avail input tax credit on the procurements made by them for constructing the apartments. The builders are also required to reverse credits availed in the past in respect of such apartments attracting the concessional rates of tax.

- The rights granted by a land owner to a builder by way of permitting the builder to enter into the premises and start construction (referred to as grant of development rights) has been exempted from payment of GST. The exemption is applicable only for development rights granted after 1st April 2019, to the extent of apartments sold prior to completion of construction.

- For apartments that remain unbooked after completion, the builder is liable to pay tax on the development rights granted by the land owner.

- In case of change in price or cancellation of booking, the builder can adjust the tax paid on construction services provided by way of issuing a credit note.

To those of you who managed to make it this far down the article, good to know I still have your attention. There is no doubt in my head that the above musings do not do justice to the actual complexity of the matter. A lot of work remains to be done for the realty sector in terms of implementation of the latest amendments, transition, compliance, technical ambiguities etc.

For all you readers dreaming of moving into a new abode, always remember that the devil lies in the detail. Although, on paper, the concessional rates of tax appear to be more beneficial to all buyers of new apartments, since the builder is not eligible to avail the credit of tax paid by them on their procurements, the builders would be left with no option but to recover the loss of credit by increasing the value of the flat.

At this point in time, if all stakeholders involved in the realty sector wish to make informed decisions, an exhaustive understanding of the law is the need of the hour. The efforts of the Government to ease the process of comprehending the law through clarifications is laudable, yet what is in fact required is a more simplified commandment to comply. As of now, the entire situation seems like a gloomy cloud, but there is no harm in hoping that the Government will pull through with a much-needed silver lining.

(The opinions expressed in the article are entirely personal.)