GoM not in favour of GST relief to real estate sector

Most members in the Group of Ministers (GoM) of the Goods and Services Tax (GST) Council are not in favour of any relief to the real estate sector with regard to the tax incidence on collaborative ventures between developers and land owners. “Most members feel the rate structure should remain as it is for real estate projects under joint development agreements (JDAs), but we will discuss it further in subsequent meetings, before submitting a final report to the GST Council,” a member of the GoM told FE. 

On Tuesday, the Council’s nominated GoM, met in Goa to discuss the issue. Pramod Sawant, chief minister of Goa is the convenor of the GoM. The committee was constituted in June to suggest a scheme to “boost the real estate sector under the GST regime.” So far, the GoM has not submitted any report to the Council for consideration.

In JDAs between real estate developers and land owners, GST is typically triggered when possession or rights in the property are transferred, usually at the time of handing over the completed units to the landowner. For such agreements entered into before March 31, 2019, GST at 18% was applicable on the construction services, but the developer was entitled to claim Input Tax Credit (ITC) on taxes paid on inputs used for the project. This ITC mechanism allowed developers to offset the GST liability, making it a more favourable option in terms of tax credit recovery.

But for JDAs executed on or after April 1, 2019, the GST rates were revised. The applicable GST rate is now 1.5% for affordable housing and 7.5% for non-affordable housing without the benefit of ITC. No ITC benefit affects the overall project costs. The real estate sector is seeking availability of ITC even in the latter regime.

JDA is a legal arrangement in real estate in India, where landowners and developers collaborate to undertake construction projects. Under JDAs, the landowner contributes the land, while the developer brings in the expertise, resources, and finances for developing the project.

Sources say the GoM is deliberating on various aspects of JDAs, which include deciding whether ITC benefit should be available under the new regime, and whether the JDA should attract GST at all.

Experts say several issues around JDAs include taxability on transfer of development rights (whether it should be subject to GST or is in the nature of land), taxability on units given to existing members in case of redevelopment, the nature of such services and value on which tax needs to be paid.

“It must be kept in mind that the developer earns no revenue from the units for existing members and the consideration received from new buyers (which includes the cost incurred for providing free units) suffers GST in any case,” said Harsh Shah, partner at Economic Laws Practice.

Additionally, the industry expects the GoM to look into the aspect of valuation of a land for the purpose of GST levy. However, sources say this issue was not discussed on Tuesday.

Under the present provisions, for levy of GST in case of sale of an under-construction property, a flat one-third deduction from value is given to compute GST liability. However, in many metro cities, the land cost for a developer is much more than one third of the overall apartment cost and a flat one third deduction leads to indirectly levying GST even on the part of the land cost.

It has been a standing demand of the industry to consider giving location-based deduction towards land value (e.g. higher deduction in metro cities like Mumbai, Delhi etc and comparatively lower deduction in say, tier 2-3 cities), to adequately reflect the value of land. The industry is also seeking to avail deduction towards value of land on actual basis, where such cost is clearly available, said Gyanendra Tripathi, partner, BDO India .

Source:- Financial Express