We all are aware about various amendments in respect of taxation of construction of complex – ‘Builders & Developers’ wef 1.4.19. These amendments have brought in sweeping changes in the tax rates, ITC [for promoter- opting for old scheme], JDA/redevelopment and RCM provisions amongst others. In this article the term ‘new scheme’ is used to refer to the provisions of taxation of transactions in respect of ‘builder & developers’ in view of Notifications 3/2019 to 7/2019 w.e.f. 1.4.2019. The RCM provision is applicable to the builder and developer who has opted for new scheme and not applicable to old scheme.
On introduction of new scheme by the Govt., builders and developers are required to follow certain conditions provided in the Notification 3/2019. One such condition is that the Promoter -builders and developer is required to acquire 80% of inputs and input services from registered person (RP) and on short fall of the same, tax is to be paid by the said promoter- builder & developer under RCM @ 18%. This requisite procurement of 80% of inputs and input services from RP is required to be calculated project wise and not at the entity level.
To implement this condition, vide notification no. 03/2019 dated 29th March, 2019 a new entry ‘39’ in Notification 11/2017 dt 28.06.17 is inserted wef 1.4.19.
Please view below the entry 39 and rate of the tax of the same.
|Sr. No.||Description of entry||Rate of tax|
|Entry 39 [chapter 99]||Supply of services other than 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.) or FSI (including additional FSI) by an unregistered person to a promoter for construction of a project on which tax is payable by the recipient of the services under sub- section 4 of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), as prescribed in notification No. 07 / 2019- Central Tax (Rate), dated 29th March, 2019, published in Gazette of India vide G.R.S.no. 690, dated 29th March, 2019.
This entry is to be taken to apply to all services which satisfy the conditions prescribed herein, even though they may be covered by a more specific chapter, section or heading elsewhere in this notification.
|9% CSGT + 9% SGST|
Further, vide notification no. 7/2019 dt. 29.3.2019 inserted entry no 2 in respect of RCM on cement and entry no 3 in respect of RCM on capital goods. The RCM on cement is @28% [as per present rate] and on capital goods as per prescribed rate of tax on goods procured from unregistered person. The RCM on such goods is required to be paid in the month in which cement/capital goods is procured.
Please view the entry 2 and entry 3 of the Notification no 7/2019
|Sr. no.||Category of supply of goods and services||Recipient of goods and services|
|2||Cement falling in chapter heading 2523 in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) which constitute the 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 the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, at items (i), (ia), (ib), (ic) and (id) against serial Promoter. number 3 in the Table, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.||Promoter|
|3||Capital goods falling under any chapter in the first schedule to the Customs Tariff Act, 1975 (51 of 1975) supplied to a promoter for construction of a project on which tax is payable or paid at the rate prescribed for items (i), (ia), (ib), (ic) and (id) against serial number 3 in the Table, in notification No. 11/ 2017- Central Tax (Rate), dated 28th June, 2017, published in Gazette of India vide G.S.R. No. 690, dated 28th June, 2017, as amended.||Promoter|
While examining the calculation 80% of inward supplies and services to be from RP, from the total inwards supplies, one first need to exclude service by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas. The RCM paid on GTA, security, Advocate and on Director etc needed to be considered as supplies from RP. Accordingly, threshold of 80% of inwards supplies is to be computed.
By inserting such provision, Govt. has restricted builder to compulsorily avail input and input services from the RP to the extent of 80% and pay RCM in case of any shortfall. This will regularise and promote the purchases from RP. Since the builder is not eligible to claim ITC under the new scheme, the tax realisation to an extent, on the input/input services, is ensured by the Revenue. This will also discourage builder & Developer to effect inward supplies from URP in order to save money.
An example will help understanding the computation of the RCM payable:
|Total inward supplies (input and input Service)||XXX|
|Less||HSD, Electricity, motor spirit, natural gas||XXX|
|Balance (For RCM)||100%|
A promoter purchased 50% of input and input services from registered supplier. 15% Cement & 20 % other input & input services received from unregistered person, during financial year 2020-21. Pl. see following 3 scenarios:
|Particulars||Scenario 1||Scenario 2||Scenario 3|
|(a)||Promoter is required to purchase at least 80% from registered person. (after deducting TDR/FSI/Salami, HSD, Electricity, motor spirit, natural gas)||100%||100%||100%|
|(b)||His Inward supplies from registered supplier are||70%||63%||70%|
|(c)||purchase of Cement from unregistered person (irrespective of % total purchase)||15%||15%||–|
|(d)||Other material purchases from unregistered person||15%||22%||30%|
|Total purchase from RP [Cement & other RP supplies]||85%||78%||70%|
|Liable to pay under RCM on shortfall||Nil||2%||10%|
Observation Scenario 1 of the above example
Any value of Cement purchased from an unregistered person by a promoter would be liable to pay RCM irrespective of the threshold limit. In the above example, purchases from registered supplier is 70%, promoter is liable to pay RCM on 10% of short fall, however RCM on cement is compulsorily required to be paid if purchased from URP. Hence, RCM is paid on cement on 15, aggregating RP inward supplies at 85%. Thus, it results in paying in excess of 5% over and above 80%. In new scheme builders is not eligible to claim ITC including RCM, hence additional burden, in this case on 5% inward supplies, is additional cost on account of compulsory RCM on cement.
Observation of Scenario 2 of the above example
In this case the value of inward supply from RP is 63% & RCM is paid on cement on 15%. Thus, the total RP is 78%. Accordingly, RCM on the other mandatory purchases is on 2% @18%.
Observation of Scenario 3 of the above example
Value of the other materials (ie other than cement) purchased from an unregistered person by a promoter would be liable to pay RCM : In the above example, purchased from registered supplier is 70%, promoter is liable to pay RCM on 10% of short fall. In the said example promoter is not additionally burden by 5% as other purchase of other material from URP as the case of scenario 1.
– Inputs and input services on which tax is paid by promoter under reverse charge under sec 9(3) shall be deemed to have been procured from registered person.
|(a)||Promoter is required to purchase at least 80% from registered person.||100%|
|(b)||His inward supply from registered supplier is (including from registered composition person)||60%|
|(c)||He is liable to pay under RCM for total purchase of Capital goods from unregistered person (irrespective of % total inward supplies)||15%|
|(d)||Input services on which tax is paid under reverse charge under sec 9(3)||13%|
|Total Purchase from RP||88%|
|Liable to pay under RCM on shortfall a-(b+c+d) No shortfall as total of (b+c+d is 88%) that crossed limit of 80%||NIL|
Purchase from Composition Dealers: Input & input services from composition dealer shall be considered as purchase from registered person even if paying taxes under composition scheme.
How to pay RCM
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 ie due date of Form 3B of June. Moreover, such RCM, which is not eligible as ITC, have to report as ‘ineligible credit’ in GSTR-3B in table 4(d)(2) -‘others’. Please note that the RCM on the purchase of cement and capital goods is to be discharged along with filing periodic return [monthly/ quarterly] in GSTR-3B at the applicable rate whereas on the other inward supplies; the RCM @18% is to be paid after reviewing the same for the previous FY while filing the GSTR – 3B for the month / quarter of June of the succeeding year.
The object of this article is to discuss certain issues that are likely to arise in this respect. Therefore, we first reproduce the FAQ’s dated 7.5.2019 and 14.5.2019 issued in respect of payment of RCM by Builders and Developer covered by the ‘new scheme’.
FAQ’s dt 7.5.2019
|8||Does a promoter/ builder have to purchase all goods and services from registered suppliers only?||A promoter shall purchase at least eighty percent. of the value of input and input services, from registered suppliers. For calculating this threshold, the value of services by way of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in 5 construction of residential apartments in a project shall be excluded.|
|9||If value of purchases as prescribed above from registered supplier is less than 80%, what would be the applicable GST rate on such purchases?||Promoter has to pay GST @ 18% on reverse charge basis on all such inward supplies (to the extent short of 80% of inward supplies from registered supplier) except cement on which tax has to be paid (by the promoter on reverse charge basis) at the applicable rate, which at present is 28% (CGST 14% + SGST 14%)|
FAQ’s dt 14.5.2019
|5||In case of a Real Estate Project, comprising of Residential as well as Commercial portion (more than 15%), how is the minimum procurement limit of 80% to be tested, evaluated and complied with where the Project has single RERA Registration and a single GST Registration and it is not practically feasible to get separate registrations due to peculiar nature of building(s)?||The promoter shall apportion and account for the procurements for residential and commercial portion on the basis of the ratio of the carpet area of the residential and commercial apartments in the project.|
|15||The condition in Notification No. 3/2019 specifies that 80% of inputs and input services should be procured from registered person. What about expenditure such as salaries, wages, etc. These are not supplies under GST [Sl. 1 of Schedule III]. Now, my question is, whether such services will be included under input services for considering 80% criteria?||Services by an employee to the employer in the course of or in relation to his employment are neither a goods nor a service as per clause 1 of the Schedule III of CGST Act, 2017. Therefore, salaries and wages paid by promoter to his employees will not be relevant for the minimum purchase requirement of 80% .|
|17||Whether the condition of receiving 80% of inputs and input services from the registered person shall be applicable if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project?||No, if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project, the condition of receiving 80% of inputs and input services from the registered person doesn’t apply.|
|18||Whether the inward supplies of exempted goods / services shall be included in the value of supplies from unregistered persons while calculating 80% threshold?||Yes. Inward supplies of exempted goods / services shall be included in the value of supplies from unregistered persons while calculating 80% threshold.|
|19||Whether the purchase of Land from an unregistered person shall be required to be included in the value of Input and Input Services for the purpose of calculation of 80% threshold?||No. As per Schedule III, Entry No 5, of CGST Act, sale of land is not a supply. In addition, as per 5th proviso to entries at Sl. No. (i), (ia), (ib), (ic) and (id) against Serial No 3 in the Notification No.11 / 2017-CTR dated 28.06.2017 as amended by Notification No. 3 / 2019-CTR dated 30/03/2019, transactions by way of grant of development rights, long term lease, FSI etc. are not required to be included in the value of Input and Input Services for evaluation of criteria of 80% from registered persons.|
We now turn to some other issues on the subject.
While calculating the threshold of 80% of inward supplies from RC one may have question in respect of accounting head(s) that may be considered for the purposes. Moreover, the inwards supplies may have supplies in respect of exempt or NIL rated supplies. Whether such supplies would be forming part of 80%?
It may be noted that the notification (read the explanation provided in the notification 3/2019 dt 29.3.2019) provides that the data is to be maintained on project-wise basis. The project is to be considered as per the registration under the “RERA”. Therefore, the expenditure for the project / site will have to be considered for the purposes. Such inward supplies may include some exempt supplies say water or non-GST supplies say electricity. The issue would be to see if these are from registered vendors. The general principal is the input which otherwise may not attract GST would also not attract RCM and hence the same may not constitute for the calculation of 80%. However, one may notice that the FAQ No. 18 dt 14.5.19 does mention it to be considered.
The next issue is in respect of the other overheads and common expenses e.g. professional fees paid for accounting or accounting software, which is/are not directly related to a particular site / project. Such input and input services, if allocated to a particular project will have to be considered as part of project for threshold of 80%. However, if they remain common expenses; say general administration etc. will not be part of the computation of 80%.
RCM is required to be paid in respect of URP inward supplies other than on cement and capital goods not later than June following the end of the financial year.
In view of the provision in a case where book of accounts is not finalised till June 2021 and some expenses gets provided in the books of account as of 31.3.2021 as finalised the account such inward supplies will have to be considered. However, in a case where the invoice of the year is booked and accounted for subsequent period the same may not constitute part of the threshold computation of 80%.
In case of residential complex, where there are many buildings with different RERA registration numbers [typically phase wise development] and have common Club house. Take a case where
construction of club house is started after obtaining of completion certificate of some of buildings and some of the buildings are under construction. In a such case whether construction expenses related to Club house which is a common facility for the complex to be considered for computation of 80% threshold? Or, should we exclude expenses relating to the club house which do not have separate RERA registration as other buildings? The other view could be to calculate qua the area of the buildings which are under construction. The FAQs issued do not address this concern and a clarification is required. One may take a stand that the club house or internal roads etc are part of common facility and do not form a part of particular RERA registration and hence strictly reading the provision; the 80% threshold of inward supply from RP do not apply. Reader is to advised to take considered view in the matter since this may be litigative.
As per the notification 3/2019 dt 29.3.2019, third proviso after the explanation clarified that 80% inwards supplies from RP are to be taken in to account till the date of issuance of completion certificate and not for the whole year qua that project. Take an example where project got completion certificate on 09.4.2021. It is common knowledge that some expenses are incurred even after the OC / completion certificate issued by the competent authorities. Such expenses e.g. the expenses on compound wall, garden, land scaping, common lobby and other beautification is typically done to post the OC. Looking it at the wordings of the notification; one may take a stand that the expenditure so incurred post issuance of OC which are directly relatable to a project will not constitute part of the 80% threshold. The revenue may argue that such expenditure which are typically accounted as a project expenditure for site and therefore should be included in the computation. A counter to this can be raised only based on the strict interpretation notification condition which has provided the manner of discharge of liability as well.
As entry 39 is added vide notification no 3/2019 dt 29.3.2019 for the any inputs/input services other than TDR, on short fall of 80% inwards from RP then RCM @ 18% is required to pay. One would have observed that the certain inward supplies typically from URP are in respect of purchases of sand, gravel or broken or crushed stone etc. These items attract GST @5%. Similarly, input service of sub-contractor related to the affordable housing of tax rate @12%. However, if this were to be part of the URP which gets RCM attracted the rate of RCM @18%. This may highlight un-economical tax burden. One may however, notice that the scheme of RCM does allow / recognise URP inward supplies of 20%. Therefore, one may have to appreciate the facts of the matter to ascertain as to whether some such inward supplies would have borne higher taxes on account of RCM provision.
Should the short fall of 80% is to considered Act wise ie IGST & CGST or only CGST/SGST? An interesting preposition is to examine as to whether the threshold of 80% to be applied on inwards supplies which are intrastate and interstate separately? The notifications as also illustrations given under notification 3/2019 do not speak about bifurcation to be made for intra state inward supplies. The notification speaks about inward supplies for the project therefore there is no need to work out the 80% threshold limit qua the intra state & qua the interstate supplies. The next question therefore is, when one does work out the short fall for the payment of RCM, under which act such payment be made, under CGST & SGST or under IGST. The scheme is silent about this. Therefore, the challenge is how can one identify the supply for which RCM payment is to be made. Take an example where shortfall of 9% is work out. That is to say, there are 29% inward supplies (other than cement, capital goods, TDR, FSI etc). This inward supplies of 29% comprises of both intra state and interstate supplies made from URP. The challenge, we discuss here is in respect of identifying intra state or interstate purchases out of the said 29% for payment of RCM. Once again depending on the facts of the matter, what is practically done is to pay tax under CGST & SGST. The practical stand is also taken with the common understanding that the revenue of GST in such case would be divided equally between the Centre and the State and hence would not cause any revenue implications.
Whether RCM on Cement is to pay even after obtaining of completion certificate?
It may be observed that the fourth proviso in notification 3 of 2019 provides that “notwithstanding anything contained hereinabove” and then goes on to provide RCM for purchase of cement as rate applicable to cement i.e. 28%. The earlier proviso mentions/ states that the threshold of 80% is to be worked out for supplies during the FY or part of the FY till the date of issuance of OC/ first occupation whichever is earlier. Therefore, the issue is would RCM on cement procured from URP post issuance of OC would still attract RCM? If one were to see the observations below illustration 3 in annexure III attached to the notification of 3 of 2019 one would noticed the following words:
To fulfil his tax liability on the shortfall of 30 % from mandatory purchase, the promoter has to pay GST on cement at the applicable rate on reverse charge basis. After payment of GST on cement, on the remaining shortfall of 15%, the promoter shall pay tax @18% under RCM.
Please see the highlights words above “after payment of GST on cement”. It appears the treatment of payment of RCM cement is specifically provided and not linked to the other “mandatory purchases”. If one were to accept this proposition, RCM on cement from URP post OC would also get attracted.
The provisions regarding payment of RCM regarding inward supplies in excess of threshold of 80% of total inward supplies is brought in with the objective of revenue to discourage the tendency to effect inward supplies from unregistered person when ITC is not available. The taxation of builders and developers under the erstwhile law and GST continues to be a vexed issue. Even the provisions regarding RCM are not exception to it. Some of the issues have been discussed herein above readers would have come across variants of these issues or would have come across some other issues. We look forward to resolution of this issues before it is too late.