SLASHED GST RATE ON RESIDENTIAL PROPERTIES PART-1

SLASHED GST RATE ON RESIDENTIAL PROPERTIES PART-1

The 33^rd GST Council Meeting was held on 24.02.2019 wherein substantial amendments have been proposed in the GST rates on construction of residential properties with a view to boost the residential segment of the real estate sector of the Country. The government seeks to achieve its objective of “Housing for All by 2022” by substantially reducing the applicable GST rates on the construction of residential properties. It has been proposed that the GST shall be levied at the following effective rates on the construction of residential properties with effect from 01.04.2019:-
i. GST shall be levied at effective GST rate of 5% without ITC on residential properties outside affordable segment;
ii. GST shall be levied at effective GST of 1% without ITC on affordable housing properties.

It is worth mentioning here that introduction of lower GST rate without providing benefit of ITC has number of pros and cons and more importantly, it is against the policy of seamless input tax credit in the GST regime. Although no notification has been issued till date in this respect but the proposals made in the GST Council Meeting have far reaching consequences in many aspects such as valuation, credit reversal, accounting in case of construction of commercial and residential properties together etc. All the probable issues will be discussed in the series of updates prepared by us on this topic. The present update deals with issues pertaining to input tax credit on implementation of new GST rate without the facility of ITC for construction of residential properties by the builder.

The first and foremost question arising in the minds of the builder of such residential properties is that whether the reduced GST rate without ITC facility will be available as an option or will be mandatory for the builders. Furthermore, whether the reduced GST rate would be applicable for the ongoing projects for construction of residential properties or only for new projects undertaken post 01.04.2019? It is also not clear whether separate accounting will be required in case builder undertakes construction of residential and commercial projects simultaneously as the facility of ITC will be admissible in case of commercial projects undertaken by the builders.
If it is assumed that the reduced GST rates without the facility of ITC is applicable for ongoing projects of the builders, then in such situation, what will be the requirement of credit reversal on part of builder. In this respect, reference may be made to Explanation (iv) of the Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 which reads as follows:-
Wherever a rate has been prescribed in this notification subject to the condition that credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that,-

(a) credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and

(b) credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder.

It is worth mentioning here that in view of the above explanation, builder will require to reverse credit attributable to construction of residential properties at which GST is paid at reduced rates by treating the said supplies as ‘exempt supply’. However, it is to be noted that the said supplies would be considered as exempt supply only for the purpose of computing proportionate credit reversal in terms of section 17(2) of the CGST Act, 2017. This is for the reason that the definition of ‘exempt supply’ given under section 2(47) of the CGST Act, 2017 does not include the supplies on which GST at reduced rates is being paid without availing the facility of input tax credit. This leads to interpretation that the builders are not even required to reverse the input tax credit of stock of materials available as on 01.04.2019 or on materials contained in construction completed as on 01.04.2019 because the situation is not covered by the provision contained in 18(4) of the CGST Act, 2017 pertaining to credit reversal where goods or services supplied by registered person become wholly exempt. Since in the present case, only GST rate is being reduced, the provision of credit reversal on stock of goods would not come into picture.
Now, the next question is whether the balance of input tax credit available with the builders as on 01.04.2019 would lapse? As of now, there is no clarification as to what will happen to the huge credit balance available with the builders which is also a huge cause of concern for the builders. Well, the disposal of the credit balance available with the builders will be known only after issuance of notification in this regard.

This is solely for the educational purpose.
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SLASHED GST RATE ON RESIDENTIAL PROPERTIES PART-1

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