UNDER CONSTRUCTION PROPERTY AND GST

This year, the real estate industry in India is set to undergo major transformation with the implementation of the Real Estate (Regulation and Development) Act 2016 (RERA). Another significant change is the implementation of the Goods and Services Tax (GST) from July-17. GST is the biggest tax reform post independence.

It is clarified by govt that GST will be applicable from 1 July 2017. GST rate for under construction property is 12% for the amount paid on or after 1st July 2017. Considering this many builders advised their flat purchasers to pay major portion to save in GST.

Exactly how does GST impact the real estate in India? Let`s analyse that.

Presently work contract Tax as per Gujarat VAT is 0.60% and Service Tax is 4.5%. So one will be able to save 12% minus 5.10%, which is a major saving. Therefore government issued a press release to clarify that even if the GST is collected 12% post 1st July, the developer will have to pass on the input credit which will ultimately reduce the tax burden in the flat purchasers. Otherwise, u/s 171 of the GST Act, it will be considered as profiteering and necessary actions will be initiated.

A question arises, whether flats which are for resale or sale of plot of land or flats which have received Occupation certificate or completion certificate is liable to collect or pay GST. Answer is no GST is payable as it becomes an immovable property.

Let us analyse the reasons and provisions under GST.

First of all let us see what is movable and what is immovable. Both the definition has not been defined in the act. So we have to take reference of various case laws that we have in excise regime that have defined movable. Like Supreme Court in case of Municipal Corporation of greater Mumbai held “if article can be moved to another place as such without any dismantling then it is movable”.

In Sirpur Paper Mills Ltd. [1998 (97) ELT 3 (S.C.)] apex court held that “if a machine is embedded to the earth only to ensure wobble-free functioning, that would not be considered as immovable”. And we know everything which is not movable is immovable.

Definition of goods as per GST act says that “goods mean every movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”, so it is clear that goods does not include immovable property.

But definition of service in the same act says “Service means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged”

Looking to both the definition one can conclude that definition of service includes Immovable property.

But will tax be levied on sale of immovable property? is our question.

Now let’s see scope of supply as GST is levied of supply of goods or services or both.

Section 7 of the GST Act says supply include all form of supply of goods or service or both such as sale, barter, exchange lease, renting etc. and also include activities specified as supply of goods or supply of service as per schedule II GST act.

But section 7 does not treat activities listed in schedule III of the GST act, as supply of goods or services or both.

As per paragraph 5 of schedule III activities or transaction relation to sale of land and subject to clause b of paragraph 5 of schedule II, sale of building shall not be treated as supply.

Clause b of paragraph 5 of schedule II reads as “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”.

Now it is quite clear that sale of land will not attract GST and sale of building after obtaining completion certificate or after its first occupation will not attract GST. Sale of building before its first occupation or before issuance of completion certificate will be taxed under GST, and shall be treated as supply of service.

Thus, no GST is applicable on resale of the flats, on completed flats having Occupation Certificate or Building Completion Certificate which is popularly known as BU permission. All under construction flats which are sold by the builder or resale of under construction flats when the balance amount is payable to the builder, GST is payable as and when such demand is raised by the developer.