Applicability of GST on Real Estate Developer | Joint Development Agreement (JDA)

Are you a Real Estate Builder entering into a Joint development agreement with Landowner for constructing residential apartments/flats? Do you need assistance in Drafting a Joint development agreement or need assistance in accounting and tax compliance? Do you need assistance in RERA registration and compliances?

We at Balakrishna & co, chartered accountant firm will assist you in the following:

• Drafting tax efficient Joint Development agreement.
• RERA registration, certifications and other compliances.
• Monthly accounting & tax compliances.

Recent amendments in GST have increased the confusion among real estate builders on the applicability of GST on Transfer of development rights & construction service provided to landowner.

Applicability of GST to Joint Development Agreements (Residential Apartments):

1. Transfer of Development rights from Landowner to Builder

A. Agreement entered before 31/03/2019

• The landowner should pay GST on forwarding Charge @18%.
• Value is determined as per Rule 27 of the CGST act.
• Time of supply on date of transferring right.
• Input tax credit is available.

B. Agreement entered After 31/3/19

• If flats are not booked before Completion Certificate, GST on RCM to be paid by Builder at 5%.
• Value is determined based on amount charged for similar flats by the Builder.
• Time of supply on Obtaining CC/First Occupation.
• Input tax credit is not available.

2. Construction service by the builder to landowner

A. Agreement entered before 31/3/19

• Builder should pay GST 18% On the value of flat handed over to land owner
• Value is determined as per Rule 27 of CGST act.
• Time of supply is date of Transfer of possession.
• Input tax credit is available.

B. Agreement entered after 31/3/19

• Builder should pay at 5% On the value of flats handed over to land owner
• Value is determined based on amount charged for similar flats by the Builder.
• Time of supply on Obtaining CC/First Occupation.
• Input tax credit is not available.

3. Sale of flats by Builder

• If flat is booked or part of the amount received before obtaining CC, GST payable at 5%
• If not, GST not applicable.

4. Sale of flats by Landowner:

• If flats are booked before obtaining Completion certificate GST payable at 5%.
• If flats remain unbooked till obtaining Completion certificate GST is payable by Builder under RCM @ 5%.

Note: Where-ever GST rate 5% is used, it is assumed that project is non-affordable housing project. If affordable housing project, GST rate is 1%.

The affordable residential apartment has been defined to extend the scope to include apartments having carpet area of 60 sqm/90 sqm and where consideration does not exceed Rs. 45 lakhs.

Applicability of Reverse charge mechanism:

• Builder is liable to pay GST on reverse charge basis on supply of Development rights only for the buildings which remain un-booked on the date of completion.
• Builder is liable to pay GST on procurements other than cement and capital goods if total procurements from registered person during the year falls below 80% of total procurement. For Eg. If total procurement from registered person during the year is 60%, (80-60) only for remaining 20%, builder should pay GST under RCM. (Applicable tax rate is 18%)
• Builder is also liable to pay GST under RCM is cement is purchased from Unregistered dealer. Applicable tax rate is 28%.
• Builder is also liable to pay GST under RCM for the capital goods purchased from unregistered dealers. GST to be paid at the rates applicable to such capital goods.

Important thing to note here is builder cannot claim ITC for the GST paid under RCM.

Hence, for builder, applicability of GST arises at several point in time as below:

• Sale of flats (if booked before CC). Applicable tax rate is 5%.
• Transfer of development rights from Landowner. GST is payable under RCM at 5% on flats which remain un-booked on the date of CC or handover.
• Construction service provided by builder to Landowner. GST is payable at 5%.
• Purchase of capital goods or cement from un-registered dealer.
• Other procurements for the project, if total purchase from registered dealer false below 80%.

Important Income tax provisions:

For Builder:

As per section 50C, If Guidance value is higher than 120% of Sale value, the difference between Stamp value and Sale value will be taxable.

For Eg: If sale value of a flat is 100 lakhs and Guidance Value is 110 lakhs. Then 120% of 100 lakh is 120 lakhs > 110 lakhs. This is fine.

If stamp value is 130 lakhs in the above example, 120% sale value is 120 lakhs < 130 lakhs.

In this case (130-100) 30 lakhs will be considered as income for the builder.

But valuation adopted in Stamp Value can be objected in case assessment made by the income tax department and officer of Income tax has to make reference to valuation officer.

For Landowner:

Landowner is chargeable to tax at 2 points. Firstly, when Completion certificate is obtained for his share of properties. Difference between Stamp Duty Value and indexed purchase cost of land will be taxed as capital gain.

And on actual sale difference between sale price and stamp duty value is taxed as capital gain.

Commonly asked questions with respect to RERA.

Yes. If the area of land proposed is more than 500 Square meters or project has more than 8 flats RERA registration is compulsory.

RERA registration should be taken prior starting the project.

• Builder is liable to penalty which may extend up to 10%.
• Any aggrieved person can lodge complaint against builder to RERA authorities.

https://rera.karnataka.gov.in/complaintHome

• Any person can report unregistered Projects in the following link. https://rera.karnataka.gov.in/reportRegForm
• Project and company name will be displayed if investigation is started and displayed in following website.

https://rera.karnataka.gov.in/unregProjectList

• Even bankers are educating the home buyers to check for RERA registration of projects for which they are lending loan. Hence, buyers may face trouble in getting loan too.

Conclusion:

As Real estate sector has most complex tax compliances and regulations involved, there is a need to work out total taxes involved and compliances to be dealt for estimation of profits. Any ignorance or violations may be very costly and also impact the sales & profitability very badly.

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