Goods and Services Tax (GST) is a comprehensive tax system that was introduced in India in 2017. It replaces multiple indirect taxes that were levied by the central and state governments, such as value-added tax (VAT), excise duty, and service tax. The aim of GST is to simplify the tax system and reduce the tax burden on businesses and consumers. Under GST, businesses pay a tax on the value added to goods and services at each stage of the supply chain and claim credit for GST paid on input services thereby eliminating the cascading effect.
The real estate industry in India holds a prominent place in the nation’s economy and the lives of its citizens. As the population grows and cities become more populated, the need for homes and commercial buildings rises, positioning real estate as a thriving industry in India.
The GST on commercial buildings can be divided into the following scenarios:
- Buildings developed for Sale
- Land acquired by Purchase
- Land acquired by JDA
- Buildings developed for leasing income
- Land acquired by Purchase
- Land acquired by JDA
Buildings Developed for Sale
Commercial buildings developed for sale are structures constructed with the purpose of being sold to businesses or HNIs for use as office space, retail space, or other commercial purposes including for generating leasing income from the said purposes.
The method by which a developer acquires and holds land for constructing assets affects the calculation of GST.
- Land acquired by Purchase:
In case the land is acquired by way of purchase, the GST provisions are fairly straightforward.
At the time of Sale of building, the GST on the sale value is payable. The rate of GST is 18% with a 1/3rd (33.3%) rebate for land and therefore the net GST rate chargeable from the buyer will be 12%. Land sale /transfer is exempt from GST as it is an immovable asset and not considered a good or service on which GST is leviable, hence the 1/3 deduction is given assuming the sale value has land component also built into it. There is a beneficial GST rate of 5% / 1% (without ITC) on sale of residential units, this will not be applicable for commercial buildings.
Input credit: Full input credit is allowed for the GST paid on constructing the building subject to reversal of ITC propotionate to unsold area as on OC.
GST remittance and Input Guidelines: The GST is payable on sale as and when the consideration is due or received (whichever is earlier). In case consideration payable basis a timeline / payment schedule, it is payable whenever each tranche is due or paid whichever is earlier. The Input credit can be claimed for all the GST paid for constructing the building and recorded in the GST ledger.
After the Occupation Certificate (OC) has been received, the nature of the building changes from Goods/Services to immovable property and hence no GST is applicable if sale is made post OC (This does not include agreements entered prior to OC and payment received in full or part pre OC). Further, if all the area is not sold prior to OC, there needs to be a reversal of the credit utilized as: Reversal of Credit = Credit availed till OC x % of unsold area. Additionally, the unused credit in the books also needs to be reversed.
- Land acquired by JDA
The GST applicability for Developer on the construction costs remain the same but a few nuances for the JDA come into play. A JDA is considered barter service where one party the Landlord (LL) gets the land and the Developer constructs the same. The spoils of the venture is then divided between the two by way of either an Area Share or Revenue Share. Therefore the essence of the agreement is that both parties are offering services to each other and therefore the GST is applicable on oth the legs of the transactions a) on Land righst given by the landlord , b) area / revenue given to the landlord by the developer. The calculation of the GST payable under the JDA is given below:
TDR Value = under Area Sharing: Commercial area to be provided to landlord x Value of commercial Area at the time of JDA (needs to be minimum RR rate) or Consideration given to Landlord under revenue sharing
GST Payable = TDR Value x 18%
The payment timelines are important here:
- Revenue Share: At the time of signing the JDA agreement under reverse charge mechanism by the developer (But full input tax credit can be received) [Revenue share will only be available at the time of OC and hence expected revenue share will be used for payment of GST on provisonal basis which will be reassessed at later stage on OC]
- Area Share: On or before OC under reverse charge mechanism. (Input credit can be taken at the time of OC, and the same can be utlized for discharging the GST liability against the area provided to landlord and also sale of units to 3rd party)
GST Credit Reversal: If all the area is not sold prior to OC, there needs to be a reversal of the credit utilized as: Reversal of Credit = Total credit availed till OC x % of unsold area. Additionally, the unused credit in the books also needs to be reversed.
Buildings Developed for Leasing Income
These are properties that are built and designed specifically for the purpose of generating rental income from tenants. These buildings may include office spaces, retail spaces, industrial spaces, and other types of commercial spaces and held by the developer in their books for generating rental income.
- Land acquired by Purchase:
As there is no sale during or post OC of the building no GST liability arises and hence no input tax credit is allowed.
- Land acquired by JDA
JDA being defined as a separate service being offered by the LL to the Developer the GST liability arises. The GST applicability on construction costs remain the same for the Developer.
The calculation of the GST payable under the JDA is given below:
Development Value of Land = Commercial area to be constructed x Value of commercial Area at the time of JDA (needs to be minimum RR rate)
GST Payable = Development Value of Land x JDA Share% of landlord x 18%
The payment timelines are important here:
- Revenue Share: At the time of signing the JDA agreement under reverse charge mechanism by the developer (But full input tax credit can be received) [Revenue share will only be available at the time of OC and hence expected revenue share will be used for payment of GST on provisonal basis which will be reassessed at later stage on OC]
- Area Share: On or before OC under reverse charge mechanism. (Input credit can be taken at the time of OC, and the same can be utlized for discharging the GST liability against the area provided to landlord)
Strategies for GST Optimization:
A couple of strategies can be applied for GST optimization in a few cases where there is leakage:
- Land Acquired under area share JDA for Sale buildings: In this scenario, as the GST liability arises at the time of OC on a reverse charge mechanism and there is no opportunity to adjust this GST, this input credit is a loss for the developer. Nothing prevents the developer to pay this GST a few months prior to OC, where there are receipts pending for the last couple of tranches of sale receipts, thereby giving an opportunity to adjust this GST receipt.
- For buildings developed for Leasing: GST is payable on the lease rentals. There can be opportunity for input tax credit for ‘part’ of construction costs. The CoC needs to be divided into a. Civil costs and b. Plant and Machinery costs. GST input will be available to be set off from GST payable on rental income on GST paid on Plant and Machinery
Important Notice: The views expressed are personal views of the author. The author will not be liable for any tax implications on the Developer, Landlord or any other person. This is not a tax advice. The article should not be construed as a tax advice and the readers should consult their tax advisors.