GST for the REAL ESTATE SECTOR

Chapter 1 : Introduction

• Section 1: Understanding the Real Estate Sector 1
• What comprises real estate? 2
• Various arrangements under Real Estate 6
• Real Estate – A legal perspective 7
• Here are some key legal considerations in real estate 7
• The different Legislations governing Real Estate Transactions 9
• Section 2: Levy under the Constitution 11
• Section 3: History of levy of indirect taxes on immovable property 12
• Constitutional framework for indirect taxation 12
• Power of State Legislature to Levy Tax on Sale of Goods 13
• Initial interpretation of taxable goods 13
• The emergence of works contract taxation 14
• The Supreme Court verdict: Gannon Dunkerley case 14
• Another Judgement impacting Levy of Sales Tax on Works contract 16
• The 46th Constitutional Amendment and Its Impact 16
• Key judicial developments in works contract taxation 18
• Evolution of Indirect Taxation in the Real Estate Sector 22
• Section 4: Introduction of GST and Challenges to Its Constitutional Validity 23
• Addressing ambiguity and challenges 24
• July 2017 – March 2019: Introduction of GST 24
• April 2019 onwards: Major changes in GST for Real Estate 24
• Proposed Amendment to the Scheme for Real Estate 25

Chapter 2 : Basics of GST as relevant for the Real Estate Sector

• Section 1: Navigating complexity in the Goods and Services Tax era 26
• Section 2: Taxable Event 27
• Section 3: Understanding supply under GST 28
• Supply in GST 28
• Meaning of goods and services in GST 29
• Understanding works contract under GST 30
• Construction of apartments and its classification under GST 30
• Tax implications on sale of Residential/Commercial units 31
• Completion certificate and first occupation 31
• Understanding ‘first occupation’ 32
• Partial occupancy certificate (Part OC) and GST implications 32
• In the course and furtherance of business 33
• Definition of business under GST 33
• Meaning of “in the course or furtherance of business” 34
• Reverse charge mechanism (RCM) and business definition 35
• Section 4: Sale of land under GST 37
• Land component in a sale of under-construction unit 37
• Practical implications of land deduction 39
• Can Developers allocate a higher land value? 39
• Applicability of Rule 42 in Context of 1/3rd Land Deduction 40
• Section 5: Re-sale during Under-Construction stage 42
• Classification of the transaction under GST 42
• Concept of Novation agreement and international precedents 43
• GST treatment in India for resale of under-construction units 43
• Section 6: Input Tax Credit 46
• ITC: General Principles 46
• ITC restrictions for real estate projects under the 5 / 1% GST regime 47
• Reversal of ITC in case of unsold units at completion 47

Chapter 3 : Relevance of RERA in GST

• Section 1: Carpet Area 49
• Section 2: Project 51
• Section 3: Promoter 53
• Section 4: Apartment 55

Chapter 4 : Time of Supply

• Continuous supply of services 57
• Time of supply for continuous supply of services 57
• Practical application for Developers 58

Chapter 5 : Place of Supply

• Place of supply for immovable property 60
• Implications for construction services 60
• Importance of place of supply 61

Chapter 6 : Valuation of Supply

• Section 15 of the CGST Act, 2017 63
• Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 64
• Deemed value of land 64
• Valuation method 64
• Calculation 65
• Compliance and documentation 66

Chapter 7 : RCM for Real Estate Sector

• Specified services subject to RCM 67
• Relevant notifications and provisions 67
• Scenarios where RCM applies to Developers 67
• Procurements from unregistered persons 69

Chapter 8 : Taxation upto March 2019

• GST rates for real estate transactions 70
• Under-construction properties 70
• Completed properties 70
• Affordable housing projects 70
• ITC 70
• Eligibility 71
• Utilization of ITC 71
• Abatement for land value 71
• GST on services related to Real Estate 71
• Reverse charge mechanism (RCM) 71
• Amendments 72
• ITC reversal 72
• Section 17 72
• Rule 42 72
• Overview of ITC in Real Estate 73
• Purpose of Rule 42 73
• Method of ITC apportionment and reversal 73
• Calculation 74
• Step-by-Step calculation 74
• Annual reconciliation 74
• Issues faced in calculating the Rule 42 reversal for the period upto 31st March, 2019 74
• ITC for Reversal – ITC of full project or ITC of the financial year of completion 75
• Basis to calculate the reversal –value of sold/ unsold units 75
• Impact on cash flow and tax liability 75
• Conclusion 76
• Impact on Real Estate Sector 76

Chapter 9 : Taxation effective from 1st April, 2019

• Definitions under GST 77
• Residential real estate project (RREP) 77
• Real estate project (REP) 77
• Affordable Housing 78
• Non-affordable housing 78
• Conditions for new GST rates 79
• No ITC 79
• Transitional provisions 80
• Impact on the Real Estate Sector 81

Chapter 10 : Transitional Provisions effective from 1st April, 2019

• What qualified as ongoing projects 82
• Options for ongoing projects 83
• Credit reversal 83
• Detailed steps for transition 84
• Impact on the Real Estate Sector 84

Chapter 11 : Land Procurement Models

• Outright purchase 85
• Development Agreement (DA) 85
• Area Sharing Model 86
• Revenue Sharing Model: 86
• Land Leasing 87
• Government Land Allotment 88
• Society Re-development Model 88
• Slum Rehabilitation Model 89

Chapter 12 : Business Models and its GST Implications

• Section 1: GST on outright land purchase model 91
• Section 2: Transfer of development rights: A controversial taxation 93
• Understanding development rights 93
• Arguments for GST applicability on development rights 93
• Arguments against GST applicability on development rights 95
• Section 3: GST implications on land procured under Development Agreement (DA) Model 99
• GST implications in revenue sharing model 99
• GST implications in area sharing model 100
• Time of supply of transactions between developer and
landowner in a development agreement 101
• Implications of Section 148 102
• Exemption for supply of development rights: Notification
No. 4/2019-Central Tax (Rate) 105
• Reverse charge mechanism: Notification No. 5/2019-Central Tax (Rate) 106
• Valuation of development rights and construction services 108

Chapter 13 : Various Scenarios under the Development Model

• Section 1: Residential – Area 112
• Section 2: Residential – Revenue 117
• Section 3: Commercial – Area 121
• Section 4: Commercial – Revenue 127
• Section 5: Mix (RREP) – Area 132
• Section 6: Mix (REP) – Area 136
• Section 7: Landowner sales 140
• Section 8: TDR Certificates 142

Chapter 14 : Transfer of long-lease Rights and GST Implications

• Understanding long-lease rights in Real Estate 146
• GST on lease premium paid to Government authorities 146
• Exemption on lease component in sale of under-construction units 147
• Exemption on long-term lease of land for residential projects 147
• Reverse charge mechanism (RCM) on long-term lease transactions 148
• Judicial Interpretation: Gujarat High Court’s judgment 148
• Sale of units after completion 149

Chapter 15 — 80:20 Procurement Rule for Real Estate Projects

• Understanding the 80:20 procurement rule 151
• Key Issues in calculation 152
• Periodicity of calculation 153
• Consequences of not meeting the 80% criteria 153
• Reporting and compliance 154

Chapter 16 : Rule 42 Reversal

• Revised Rule 42 155
• Applicability to real estate projects 155
• Key provisions of the revised Rule 42 156
• New apportionment formula based on carpet area 156
• Compliance requirements 157
• Impact on real estate developers 157

Chapter 17 : Other Components in a Sale of Under-construction Unit

• Preferential location charges (PLC) 160
• Infrastructure and development charges 160
• Nature of charges 160
• Parking charges 161
• Water and electricity connection charges 161
• One-time maintenance deposit 161

Chapter 18 : Credit Notes and Refund under GST in case of Unit Cancellation

• Section 1: Credit Notes for Cancellations 164
• Section 2: Refunds for Cancellations 165

Chapter 19 : Closing Thoughts 168

Chapter 20 : Addendum 170

Relevant Notifications
• 4/2018 – Central Tax (Rate) dated 25th January 2018 170
• 3/2019 – Central Tax (Rate) dated 29th March 2019 171
• 4/2019 – Central Tax (Rate) dated 29th March 2019 206
• 5/2019 – Central Tax (Rate) dated 29th March 2019 212
• 6/2019 – Central Tax (Rate) dated 29th March 2019 214
• 7/2019 – Central Tax (Rate) dated 29th March 2019 216
• 8/2019 – Central Tax (Rate) dated 29th March 2019 218