FEBRUARY 28, 2019
By S Sivakumar, LL.B., FCA, FCS, ACSI, Advocate, K Vidhyashree, B Com., LLB., Advocate & R Vaidyanathan, M.Com., M.Phil., GST Practitioner
THE GST Council, in its 33 rd Meeting held on 24 th February, 2019 has recommended that the GST rate for non-affordable housing would be reduced to 5% without ITC, while the GST rate for affordable housing would be reduced to 1%, with effect from April 1, 2019. In the press release issued on February 24, 2019, the Government has justified this proposed reduction in the GST rates as a boost for the residential realty sector.
Be that as it may… it would seem that this proposal is bound to drastically affect the residential realty sector.
The Input Tax Credit (‘ITC’) that is borne by the Developer would easily work out to about 9 to 10%of the selling price. The main reason for this rather high ITC is mainly due to cement being taxed at a GST rate of 28%. Elevators and certain other costly items also get charged at 18% GST, apart from services being charged at the GST rate of 18%. At the existing GST rate of 12% (on the construction value + land value), the Developer would be able to completely recoup his ITC. Since the Developer is allowed to avail of ITC on most inward supplies [except for certain small-time restrictions contained in Section 17(5)], the Developer is only too happy to see that his ITC is fully covered by the output GST charged to his flat buyer, under the current regime. When the output GST rate for the non-affordable residential segment is reduced to 5% without ITC, it would mean that the Developer would lose the entirely ITC, resulting in an incremental loss of margin to the tune of about 5 to 6%.
The question that would arise is whether the Developer would be entitled to increase his basic prices by5% to 6% to cover himself for the loss of ITC? Is there anything in the GST law that would prevent the Developer to cover himself for the loss that he would suffer, on account of loss of ITC. My view, by way of a reiteration, is that, the Developer would indeed be entitled to increase his basic price to cover himself for the loss of ITC, as anti-profiteering provisions contained in Section 171 are inapplicable here. Of course, if the Developer is indeed allowed to increase his basic price, one would wonder as to the very purpose of the proposed reduction in the GST rate.
Taking this discussion forward……whether the proposed reduction in the GST rate would be applied even for running contracts, wherein, the Developer has already charged and collected GST @ 12% for the period prior to April 1, 2019? In my strong view, if the Government prescribes that the rate reduction should also apply to running contracts as of April 1, 2019, we are sure to have chaos all around. Issues related to ITC including its reversal, etc. are bound to create major issues. Hence, one does hope that the Government implements the new scheme only for contracts to be signed on or after April 1, 2019.
Another issue that would be relevant is whether, it would be compulsory for Developers to implement the new scheme with effect from April 1,2019? In my view, the Government should offer the new scheme as an alternative to the existing scheme of charging GST @ 12% after claiming ITC. Making it compulsory for Developers to implement the scheme could face constitutional challenges, for sure, as this would go against the concept of seamless credit which is at the heart of the GST regime.
Another issue is whether, the Developer would be free to choose the new scheme of lower GST rates without ITC for some projects and the regular scheme of higher GST rates with ITC for some other projects? In my view, the Government should ensure that the Developer is given the freedom to choose the scheme that he finds appropriate.
Yet another issue that would bother Developers is the unutilized ITC carried by them including the transitional credit. Many Developers have huge ITC balances that have been carried forward from the erstwhile service tax and VAT regimes. If they are forced to shift to the new scheme, they will have no means to adjust the unutilized ITC balances, leading to huge losses.
We will, of course, have to wait for the relevant Notification to be issued by the Central Government in this regard and one fervently hopes that the issues discussed in this article are duly considered.
It is good to see that the Government is proposing not to charge GST on transfer of development rights, at the hands of the Landowners/transferors. Of course, given the fact that the Developer is entitled to avail of ITC of the GST paid by the Landowners, etc., this proposal is unlikely to reduce the costs at the hands of the Developer. Of course, in my strong view, development rights are equivalent to ‘land’ and consequently, Notification No. 4/2018-CT (Rate) dated 25 th January 2019 would tantamount to levying GST on land and is consequently, bound to struck down by the Courts.
Seamless flow of credit is at the core of the GST scheme. One is surprised to see the Government push for a GST regime for the all-important Realty Sector, without ITC. It would be better if the Government comes out with a scheme of a reduced GST rate of say, 9% with ITC. Pushing for a GST regime without ITC would mean robbing Paul to pay Peter. Moreover, implementing a scheme for Residential Realty Sector without ITC would be a major deviation from the basic principles of the GST regime, which ideally, should be taken by the new Government after the 2019 general elections. A Government, going into elections, is completely unjust in trying to push a half baked scheme, especially concerning the Realty Sector which employs the largest manpower after agriculture.
One is rather amused to see the Government justifying the proposed reduction in the GST rate as a measure to boost the real estate sector. If the Developers could have afforded it, they could themselves have reduced their basic prices to push up the demand. The Government, by trying to push this scheme down the Developers’ throats, is creating more issues for the sector, without any justification.
Currently, Developers who are works contractors, are allowed to classify their output supplies under SAC Sl No. 9954(ii), in terms of which, the actual value of land is allowed to be claimed by them as exemption. It would remain to be seen as to how Developers, who are works contractors, are treated under the proposed regime.
It is understood that many Developers have already started receiving calls from their flat buyers not to bill them till March 31, 2019. While I am not sure as to whether the proposed reduced GST rate would indeed push up demand, it would certainly result in most Developers see significant reduced cash flows till March 31, 2019.
This article is more relevant for the affordable realty segment, given the fact that the proposed reduction in GST is steeper.
The Government/GST Council, for reasons best known, has not addressed issues concerning denial of ITC in terms of Section 17(5)of the GST Act to the commercial realty sector. Neither has it addressed issues concerning refund/adjustment of GST to Developers, on cancellation of flats by the flat buyers. Had we seen some development in this regard, one would not have attributed the present proposal as a pure pre-election gimmick!