The high-powered GST Council on Tuesday decided to ease the GST burden for developers of residential projects and gave them the option to charge either the newly lowered GST rates without availing input tax credit (ITC) or to charge the old GST rate of 12 per cent with ITC available for their residential properties which are incomplete as on March 31.
Earlier, on February 24, the 33rd GST Council meeting had lowered the indirect tax rates applicable on residential properties of both affordable and general housing categories. Tax rates were brought down from 12 per cent to 5 per cent for general residential properties while for affordable category of housing, the tax rates were lowered from 8 per cent to 1 per cent now.
Residential housing developers, however, were in a fix as to how their input tax credits would be adjusted by the government.
In Tuesday's meeting, most states expressed that the system should not be very complicated and hassle free for the builders during this transition phase. The tax authority determined that builders would get a time limit within which they would have to choose one of the options for levying GST.
“This time limit will be decided later after discussion with all the states,” said Ajay Bhushan Pandey, revenue secretary, after the GST Council meeting. West bengal Finance Minister Amit Mitra raised objections about the transition system citing that builders would have to follow a complicated procedure and could lead to tax evasion as well.
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"This system would require builders to maintain project-wise or even building-wise accounts. This is not a system that is followed by builders earlier. It would bring in complicated calculations and an increase in property prices paid by consumers," said Mitra after the GST Council meeting.
Mitra had earlier sent a letter to Finance Minister Arun Jaitley, who chairs the GST Council, and suggested that the new rates be applicable only on housing projects which would be completed after April 2019.
“This could have ensured a continuity for builder's accounts. Consumers, too, could have benefitted from the simpler tax calculation on residential properties,” said Mitra, adding that states had agreed to the effective rate of 1 per cent for affordable housing factoring in the ITC.
For buildings with mixed use as residential and commercial, developers would have to determine the proportion to which there is commercial usage for the building, as the tax rate for those services would vary from the GST rates on housing.
On the use of ITC accrued by builders so far, based on their GST paid invoices for inputs, a similar formula would be applied. “Input Tax Credit will be allowed on proportionate basis for commercial and residential purpose use of same building,” said Pandey.
Real estate developers who choose the new GST rates will have to proportionately reverse their input credit. The GST Council has also mentioned that real estate developers will need to purchase 80 per cent of goods and services from GST registered vendors, even without the input tax credit benefit.
This is a reversal of the earlier system which allowed procurement from non-GST registered vendors to a larger extent for developers. “In smaller cities and town it would be difficult for builders to adhere to this requirement. This would require increased vendor control and the fine print would need to be analysed to determine whether the condition is only limited to vendor registration or also the vendor compliances like payment of tax and filing of returns,” said Pratik Jain, partner and leader, indirect taxes, PwC India.
Jain said that developers would have to adopt a fast-paced and cautious approach to comply with the new regulations. “Industry will have to work out which option works best and come up with the revised price structure quickly. It is important to undertake changes in IT systems, documentation and processes at the earliest considering the April 1 cut off date. Industry would need to be cautious of anti-profiteering provisions as well and the need to do a detailed analysis for the ongoing projects," he said.
Developers expressed that they would also have to face a hard time explaining to their customers about the GST rate applied on their finished and under construction properties. "Most people have the idea that the GST rates have been reduced. But when we revise the tax rates taking into account the lack of ITC, it would be difficult to convince most buyers," said Parth Mehta, managing director, Paradigm Realty.
