Top 10 Issues in Real Estate Sector in GST1

Feb 09, 2021

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Madhukar Hiregange
Partner, Hiregange and Associates

1. Whether GST could be paid only on the construction value of flats while excluding
the land value from tax net?

Comments: The transfer of land is in the nature of transfer of title to land, which could
get covered in Schedule III entry 5 as sale of land. The authors view is that the actual
deduction of land is permissible when it is supported by the sufficient evidence such as
certificate of the approved valuer and the 1/3rd deduction is not always mandatory and
may be challenged.

2. Where the unit is booked after 65% of the project is completed, whether GST should
be paid on 100% of the consideration?

Comments: It can be said that the construction done till customer enters the scene, it is
self-service by developer and GST is payable only on the portion of construction activity
done after entering Agreement To Sell [ATS] by developer with customer. Suppose at the
time of ATS, the 65% of the construction is over, then GST is to be paid only on 35% of
sale value and balance 65% would be out of GST.

This view maybe disputed by dept but in light of L&T decision supra it is defendable. In
said decision it held that the construction done post entering agreement with buyer is
works contract.

3. Whether GST could be collected from landowner on the landowner’s share of the
infrastructure works done under JDA?

     (a)     The developer is liable to pay GST on the infrastructure development service

done for the share of landowner’s which is given in lieu of the land received from
landowner for the development purposes in accordance with the JDA.

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      (b)        The same is supported by the 4th GST Council meeting on May 18th and 19th,
2017-18 sectoral groups were constituted representing various sectors of the economy
in order to ensure smooth roll-out of GST by timely responding to the issues and
problems of their respective sector(s). One such sectoral group is “Media &Entertainment
Sectoral Group” which has issued some FAQs on GST in respect of Construction of
Residential Complex by Builders/Developers. These maybe considered as the views of
the revenue. If they are not in line with the Act then they are not applicable. In these
FAQs, the said clarification was given as below-

Further, whether GST is payable on the owner’s share of the flats/houses/portion of the
building constructed by the builder/developer and given to the landowner as per the
development agreement?

      (a)        The builder/developer is liable to pay GST even on the share of the landowner
and given in lieu of the land received for the development, besides GST on the
builder/developer’s share of the complex/building.

      (b)        The GST liability is that of the developer and not of the landowner. If
developer does not pay GST, then the same could be demanded along with interest and
penalty from developer by department and not from landowner. In normal circumstances,
the developer could collect and pay the GST, only if the landowner agrees.

      (c)        When there is a specific clause in the JDA setting out that GST as applicable to
be borne by landowner to extent of respective entitlement, the developer could legally
seek to enforce the collection of such taxes from the landowner through a civil suit.

      (d)       It could be recovered from the landowner as it is an indirect tax, is supported

by the case of Bala Bhaskar v CST maintained in Supreme Court (supra).

4. Whether it is correct to structure agreement by fixing the land cost and absorbing the
development charges?

The developer may sell the completed plots to end buyers after completion of the
development works. In such a case, he may structure the agreement by fixation of land
cost and absorption of the development charges. It is a sale simpliciter of land, which is
covered under Paragraph 5 of Schedule III and excluded from GST levy. However, he
should not receive an advance during the course of development.

 
5. Whether the valuation adopted for stamp duty has any bearing with the valuation
under GST for the development activity?

The objective and manner of valuation under the State stamp act could be different in
different Sates with some going for the guidance value. The practices appears to be
divergent. Therefore the valuation of the development could be based on the agreement
or rule 30.

However, where the activity is considered as a sale of land, the possibility of the
difference between the registered value and the collected value in excess of registered
value could be questioned by revenue.

6. Whether deduction of tax paid turnover of sub-contractor is available to the main

contractor under GST?

Such deductions of tax paid turnover of sub-contractor are not available to the main
contractor under the GST regime. Under the earlier VAT regime, in some States, the
value of tax paid turnover billed by the sub-contractors was available as a deduction from
the turnover of the contractor, as transfer of property by accretion could take place only
once, i.e. from sub-contractor to the client. It was similarly held in L&T decision[1] [please
refer the relevant decisions given below].

And whether the sub-contractor is exempted from payment of GST if the main
contractor has duly discharged the liability?

GST law levies tax on supplies of goods/services done by each taxable person. The GST
law is made to ensure that each person who has the contractual obligation to supply the
goods/services or who agrees to supply goods/services, is made liable to pay tax. The
seller [such as sub-contractor] uploads his tax remittance details by linking it to the
customer registration number and the customer [such as the main contractor], who is
registered under GST also avails the credit of the tax paid on the sellers tax invoice,
against his output tax liability.

Accordingly, the sub-contractor has to discharge GST on the supplies made by him.

7. A sub-contractor is providing works contact service by way of construction of canal

to its main contractor, who in turn is providing the canal construction service [with
material and labour as works contract] to the State Government. What would be the tax
rates applicable for such contracts?
For main contractor: Under GST, concessional rate of 12% is applicable to the main
contractor providing any services by way of construction of canal to State Government.
This is vide entry 3(iii) of Notification No.11/2017-CT(R).

For sub-contractor: Entry 3(ix) of Notification No. 11/2017-CT(R) under HSN/SAC 9954-
composite supply of works contract provided by a sub-contractor to the main contractor
providing services specified in item (iii) to the Central Government, State Government,
Union territory, a local authority, a Governmental Authority or a Government Entity liable
to GST at 12%.This is w.e.f. 25.1.2018.

8. Whether the landowner can avail credit of tax charged and collected by developer on
flats of landowner share of constructed area for new project post April 2019?

The landowner is liable to GST on the flats which he sells in course of construction to end
buyers by entering agreement of sale with them. When the landowner is liable to pay
output GST on the sale of flats of his share sold prior to completion of construction, he
can avail credit of tax charged to him towards such units/flats by developer, when output
GST paid by him is higher than the input tax credit availed by him. The completed flats
which are sold/supplied after completion, are to be treated as exempted supply and
credit attributed to same cannot be availed.

9. What would be the GST implication on the renting of residential property for say 11
months?

The exemption stated in Serial No. 12 of Notification No. 12/2017 – CT (Rate) is

applicable for the services supplied to licensees being in the nature of renting of
residential dwelling for use as residence.

However, the notification does not specify the time period for occupation of the
property. It may be understood in the general sense that the exemption would be
available for a long term occupation but not for a temporary stay (say 2-3 days in a
hotel/inn/guest house).

Consequently, exemption may be available when residential dwelling is rented for use as
residence for 11 months.

Further, the credit attributed to such exempted supplies has to be reversed by the
landlord.
 

10. Whether ITC of construction cost of a commercial complex could be availed when

the same is proposed to be let out by the owner?

Section 17(5)(d) of the CGST Act restricts ITC in respect of goods and services received
by a taxable person for construction of immovable property (other than plant and
machinery) on his own account even if such goods or services are used in the course or
furtherance of business.

Recently in the case of Safari Retreats (P) Ltd.[2], the High Court held that if the assessee
is required to pay GST on the rental income arising out of the investment on which he
has paid GST then the assessee is eligible to an input credit of GST paid on inward
supplies used for the construction of such property. This matter is now sub-judice before
the Hon’ble Supreme Court.

In view of the author, credit could be eligible when the same is used for effecting taxable
supplies and this provision may be challenged.

[1]               State of Andhra Pradesh & Ors. v Larsen & Toubro Limited &Ors., TA \l “State
of Andhra Pradesh & Ors. v. Larsen & Toubro Limited & Ors., (2008-TIOL-158-SC-
VAT).” \s “State of Andhra Pradesh & Ors. v. Larsen & Toubro Limited & Ors., (2008-
TIOL-158-SC-VAT).” \c 1
[2]               Safari Retreats Pvt Ltd v C.C of CGST, [TS-350-HC-2019(ORI)-NT]