In 2017, India implemented the Goods and Services Tax (GST) as a comprehensive tax system that replaced several indirect taxes levied by the central and state governments, including value-added tax (VAT), excise duty, and service tax. The primary goal of GST is to simplify the tax structure and ease the tax burden on businesses and consumers. The GST system entails businesses paying taxes on the value added to goods and services at every stage of the supply chain, while also allowing them to claim credit for GST paid on input services. This mechanism eliminates the cascading effect of taxes, resulting in a more efficient and equitable tax system. The GST Council made changes to the tax rates for residential properties in March 2019, reducing them from 18% to 7.5%, and from 12% to 1.5% for affordable housing. However, the Input Tax Credit (ITC) benefits will not be available under the revised tax rate policy. (Note: There is 1/3rd deduction for land in the GST rate thereby, the effective tax rates will be form 12% to 5% for residential properties and 8% to 1% for affordable housing projects). As now all new developments have to come under the new GST scheme, the article focusses on the same.
The GST on residential buildings can be divided into:
- Buildings developed for Sale
- Land acquired by Purchase
- Land acquired by JDA
- Buildings developed for rental housing / self-use (employee quarters)
- Land acquired by Purchase
- Land acquired by JDA
Buildings Developed for Sale
Residential units developed for sale refer to housing projects that are constructed by real estate developers with the intention of selling them directly to end consumers.
The impact of GST changes the way the land is acquired (owned / under JDA) by the developer for constructing the asset for sale.
Land acquired by way of Purchase:
In case the land is acquired by way of purchase, the GST provisions are fairly straightforward.
For all the units sold prior to OC and full / part payment received, a 5% / 1% GST is charged from the customers for affordable and non-affordable housing respectively.
After the Occupation Certificate (OC) has been received, the nature of the building changes from Construction 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 part or full pre OC).
Input credit: As this is under the new scheme (projects started on or after 01.04.2019), no input tax credit is available.
GST remittance and Input Guidelines: The GST is payable on sale as and when the consideration is due (based on the milestones set out in the agreement) or received (whichever is earlier). In other words, in case consideration is payable basis a timeline / payment schedule, it is payable whenever each tranche is due or paid whichever is earlier.
Land acquired by JDA
A Joint Development Agreement (JDA) is typically regarded as a barter service in which the landlord provides development rights to the developer for construction purposes. The profits of the venture are then shared between the two parties either through an Area Share or Revenue Share model. As a result, the GST is payable on Joint development rights @18% on the value of joint development rights (since both parties are providing services to each other) proportionate to unsold area as on OC.
In the case of residential developments, there is an additional condition that limits the GST payable to 5% or 1% (depending on whether it is an affordable housing project or not) of the value of unsold area as on the date of issuance of the Occupation Certificate (OC).
The calculation of the GST payable under the JDA is given below:
Minimum of A or B, where:
TDR Value of Land (For Area Share) = Residential area to be shared to land lord x Value of residential Area at the time of JDA (needs to be minimum RR rate) + non-refundable security deposit if any
Or
TDR Value of Land (For Revenue Share) = Total Amount of revenue share given to the landlord including non-refundable security deposit if any
A = TDR Value of Land x unsold area in project/total area in project x 18%
B = Unsold Area in the Project x Sale price nearest to OC x 5% (or 1%)
The payment timelines for both area and revenue share JDAs will be at the time of OC.
IMP: As the developer is paying GST at concessional rate of 5% / 1%, developer cannot avail ITC of the GST paid on JDA.
GST on Construction Services: As the developer has provided construction services to the landlord for the area handed over to him, the value of the area handed over is chargeable to GST: Area handed x Price closest to JDA date x 5% / 1%.
The landlord can get an ITC credit on this GST paid when he sells the units to the end consumer and charges GST from them. (ie. On units sold prior to OC)
Buildings Developed for Rental Housing / Co-Living:
Rental housing refers to housing units that are rented out to residential tenants for a specified period in exchange for a monthly rental payment. Rental housing is an alternative to homeownership and provides flexibility to individuals who cannot or do not want to own a home. Several state governments have launched rental housing schemes that offer increased Floor Space Index (FSI) to encourage the development of affordable rental housing.
Land acquired by Purchase:
As the construction of Residential dwelling/apartment is not intended to sell before OC, no GST liability arises and no Input Tax Credit is taken.
Land acquired by JDA
JDA being defined as a separate service being offered by the LL to the Developer the GST liability arises.
The calculation of the GST payable under the JDA is given below:
Minimum of A or B, where:
TDR Value of Land (For Area Share) = Residential area to be shared to land lord x Value of residential Area at the time of JDA (needs to be minimum RR rate) + non-refundable security deposit if any
Or
TDR Value of Land (For Revenue Share) = Total Amount of revenue share given to the landlord including non-refundable security deposit if any
A = TDR Value of Land x unsold area in project/total area in project (which is 100%) x 18%
B = Unsold Area in the Project (Which is 100%) x Sale price nearest to OC x 5% (or 1%)
The payment timelines for both area and revenue share JDAs will be at the time of OC.
GST on Construction Services: As the developer has provided construction services to the landlord for the area handed over to him, the value of the area handed is chargeable to GST: Area handed x Price closest to JDA date x 5% / 1%.
Strategies for GST Optimization:
- For Rental Housing / Co-living, in case the land is acquired under JDA, there is an unnecessary GST liability. The same mechanics / essence of the transaction with the landlord can be achieved by partial sale of land. The developer can buy the % of land which was supposed to be their area / revenue share from the landlord. They can make deferred payment to the landlord for this land purchase. Simultaneously, the landlord can give a construction contract to the developer for the area share which was supposed to be handed over. Thereby optimizing GST on JDA.
- For buildings developed for Co-Living: 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. [Note: Leasing for residential use is exempt from GST]
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.