GST UPDATE ON RCM INTRODUCED IN REAL ESTATE SECTOR

GST UPDATE ON RCM INTRODUCED IN REAL ESTATE SECTOR:-
In earlier updates, we have discussed the basic features of the new scheme introduced for the real estate sector by the government recently. In the present update, we seek to discuss the provisions pertaining to of reverse charge mechanism in the real estate sector and its implications thereon. As we know that there are two types of reverse charge mechanism in GST- one under section 9(3) pertaining to specified categories of goods and services and other under section 9(4) pertaining to purchases by unregistered persons. The present update seeks to discuss the notification no. 07/2019-Central Tax (Rate) dated 29.03.2019 issued under section 9(4) of the CGST Act, 2017 with respect to purchases from unregistered persons. The following entries have been inserted for enabling reverse charge mechanism for developers in case of purchases from unregistered persons:-

The promoter has been specified as the recipient liable to pay tax under reverse charge mechanism for supply of such goods and services or both which constitute shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project in a financial year or part of financial year till the date of issuance of completion certificate or first occupation, whichever is earlier.
The promoter has been specified as the recipient liable to pay tax under reverse charge mechanism for cement which constitute shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project in a financial year or part of financial year till the date of issuance of completion certificate or first occupation, whichever is earlier.
The promoter has been specified as the recipient liable to pay tax under reverse charge mechanism for capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975, supplied to a promoter for construction of a project on which tax is payable or paid at the concessional rates.

General Points from Real Estate Rate Notification No. 03/2019-Central Tax (Rate) dated 29.03.2019 which have impact on the present notification:-

Proviso no. 5 to the notification states that eighty per cent of the value of input and input services, (other than exceptions as mentioned below) used in supplying the service shall be received from registered supplier only. However, the condition of 80% procurement will not be applicable for the following inputs/input services (being exceptions)-
Services by way of grant of development rights
Long term lease of land against upfront payment in the form of premium, salami, development charges etc.
FSI (including additional FSI)
Electricity
High speed diesel
Motor spirit
Natural Gas
It has been stated that in proviso no. 6 that the inputs and input services on which tax is paid on reverse charge basis shall be deemed to have been purchased from the registered person.
It is further stated in proviso no. 7 that where value of input and input services received from registered suppliers during the financial year (or part of the financial year till the date of issuance of completion certificate or first occupation of the project, whichever is earlier) falls short of the said threshold of 80 per cent., tax shall be paid by the promoter on value of input and input services comprising such shortfall at the rate of eighteen percent on reverse charge basis and all the provisions of the Central Goods and Services Tax Act, 2017 shall apply to him as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.
However, the proviso no. 8 overrides the provisions of above mentioned provisos and states that notwithstanding anything contained herein above, where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates on reverse charge basis and all the provisions of the Central Goods and Services Tax Act, 2017, shall apply to him as if he is the person liable for paying the tax in relation to such supply of cement.
The Explanation no. 1 to the notification further clarifies that the promoter shall maintain project wise account of inward supplies from registered and unregistered supplier and calculate tax payments on the shortfall at the end of the financial year and shall submit the same in the prescribed form electronically on the common portal by end of the quarter following the financial year. The tax liability on the shortfall of inward supplies from unregistered person so determined shall be added to his output tax liability in the month not later than the month of June following the end of the financial year.
Notwithstanding anything contained in Explanation 1 above, tax on cement received from unregistered person shall be paid in the month in which cement is received.

On harmoniously reading the above provisions, the following conclusions have been drawn:-

Promoter is liable to purchase all capital goods from registered persons for the project otherwise the promoter will be required to pay GST at the applicable rate under reverse charge mechanism.
The purchases of inputs/input services are also required to be made from registered persons to the extent of 80%. The assessee is required to compute the shortfall and pay tax only on shortfall at the rate of 18% except on cement and capital goods. The rate of tax applicable to cement and capital goods will be considered while paying tax under reverse charge mechanism. It is submitted that although for the computation of 80%, cement will be included but all purchases of cement from un-registered suppliers will attract payment of GST at the rate of 28% under reverse charge mechanism and this is also clear from the illustrations given in the notification no. 03/2019-Central Tax (Rate) dated 29.03.2019. Therefore, promoters are to ensure that the cement is being purchased from registered suppliers only else they will be liable to pay tax under reverse charge mechanism.
One major issue that will be faced by the condition of purchasing 80% inputs/input services from registered persons is that the promoter/developer will be required to pay GST at the rate of 18% on the shortfall irrespective of the nature of inputs/input services. Furthermore, the promoter will be required to pay GST even if the shortfall consists of exempted inputs/input services. To illustrate, water is exempted but it is main input for construction industry. It is also pertinent to mention that as per the provision contained in 23(1), any person exclusively engaged in the business of supplying goods that are not liable to tax or wholly exempt are not liable to registration. Consequently, the purchase of water will also be leviable to 18% GST under reverse charge mechanism which is totally against the basic framework of GST. Similarly, there will be interest expenses incurred by the promoter which is exempt but will have to be considered for the purpose of computing 80% inputs/input services and will be liable to GST at the rate of 18%. Well, one may interpret that the government assumes that the proportion of exempted inputs/input services is to the extent of 20% only as the non-GST goods such as motor spirit, high speed diesel have been kept out of purview of this computation.

This is solely for the educational purpose.
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GST UPDATE ON RCM INTRODUCED IN REAL ESTATE SECTOR

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