GST Impact On Real Estate

GST gains: Prices of flats may drop by up to 5%,After allowing for credit for taxes paid on inputs such as cement, steel, paints and other items, the actual burden will be lower

Housing price are likely to fall by up to 5% following the implementation of goods and services tax (GST) after the Centre and states decided to peg the levy at 12% on finished houses or apartments.

After allowing for credit for taxes paid on inputs such as cement, steel, paints and other items, the actual burden will be lower. As a result, the price of a Rs 1-crore apartment may come down by Rs 3-5 lakh, said a consultant.

The net price of houses in the affordable segment, which cost up to Rs 30 lakh (at Rs 3,500 per sq ft of built-up area) should fall by 5%. Once GST kicks in, home buyers will not have to pay the 4.5% service tax on the final price that they shell out while taking possession.

As a result, tax consultants and realtors said that fixing the GST rate at 12% was a customer-friendly move and would lead to either lower tax liability or be tax neutral.

For a premium product, however, Credai chairman and CMD of ATS Infrastructure Geetambar Anand said that at 12% GST, customers will benefit from projects that cost up to Rs 6,000 per sq ft.

A premium project may not gain significantly as developers build high margins into such properties. Manoj Gaur, Credai vicepresident and MD of Gaursons, said that if input credits are allowed properly, the 12% GST rate is favourable to buyers.

Suresh N Rohira, partner, Grant Thornton India, said that GST at 12% would certainly bring down the tax liability in the affordable segment. He said that the taxes on inputs for construction are more than 12% of the final price.

But if a developer is working with a high margin, which is the case in premium project, the net tax will remain significant. Priyajit Ghosh, partner – indirect tax, KPMG India, said that under the GST regime, 12% GST on construction sector would make the sector better off. Because of input credit, the net tax on finished product would have a downward pressure.

According to a Crisil report, at present, a developer pays excise tax and VAT on inputs like cement and steel at 27.7% and 18.1% respectively, which vary from state to state. Now, cement and steel will be taxed at 28% and 18% respectively under GST.

Similarly, other inputs like paints and white goods are going to be taxed at 28%. But the final product that is a housing unit will be taxed at 12%, with the allowance of credit against taxes paid on inputs. But as 12% tax will be levied on entire cost including the land, the amount will be sufficient enough to provide for the input credit, said Ghosh.

He said that 12% tax rate is favourable to the industry. For normal houses (up to Rs 6,000 per sq ft), 12% GST on a finished house or an apartment will be effectively reduced to near zero as the developer will take the credit for taxes he paid on inputs. At the same time, the buyer will not have to pay the service tax4.5% of the price of the house. This will reduce the cost of acquisition of the house. In some cases, even input credit could be more than the GST levied on the finished product, but a developer can claim a maximum credit to the extent of the GST he would be paying on the finished product.

Take a simple example: A developer is completing a housing project where the work has been awarded to a contractor. The cost of construction is around Rs 2,000 per sq ft, the going rate in the market for average quality. The contractor will collect a tax at 18% on the amount at which he is completing the work. In this case, he will collect a tax of Rs 360 on Rs 2,000 per sq ft from the developer. If the developer sells the house at Rs 3,000 per sq ft built-up area, which is the going rate for the affordable segment housing, he will pay a tax at 12 % on the final cost. In this case, it will be also Rs 360 per sq feet.

Therefore, his fresh tax liability would be nil. If other expenses and tax paid thereon is included, the developer could have claimed more. But under GST, he can claim only up to the fresh tax liability. But the service tax that a buyer pays so far at the rate of 4.5% will not be levied now. So the next cost for buyers of not-so-premium houses will decline. But if the product is in the premium segment, the entire input tax credit is not sufficient to bring down the fresh tax liability to nil. 

A premium construction can be done at Rs 5,000 per sq ft. The net tax collected by works contractor would be Rs 900 per sq ft from the developer. But while selling at Rs 10,000 per sq ft, the developer needs to pay Rs 1,200 per sq ft. Therefore, after adjusting against the taxes on input, he will have to pay Rs 300 per sq ft or 3%, which he will recover from the customer. But as the developer will also pay taxes on other expenditures, the net tax liability at 12% GST on finished product would be very small.

Source: ET Realty

Government exempts big realty from obtaining environmental clearance

Going against its own orders, issued six months ago, the environment ministry has decided to exempt big buildings and real estate projects from taking environment clearance, a mandatory requirement under the law for the past more than a decade.

Going against its own orders, issued six months ago, the environment ministry has decided to exempt big buildings and real estate projects from taking environment clearance, a mandatory requirement under the law for the past more than a decade.

The U-turn will take the construction industry out of the environment ministry’s purview and no project could be challenged on environmental grounds before the National Green Tribunal, says experts.

Under the current law, the building and township projects of more than 20,000 square meters size are required to carry out an Environment Impact Assessment (EIA) study to gauge possible impacts of the project on the surrounding environment before starting its construction. If the project is considered safe, the State Environment Impact Assessment Authorities (SEIAA) appointed by the environment ministry, give permission (environment clearance) to the project.

The ministry has now issued a draft notification on April 29 which says the states which will integrate environmental conditions in the building approvals under their Building Bylaws will not have to get environment clearance for construction projects. It replaces the area-specific EIA and environment clearance process carried out by SEIAA prior to starting of the project with standard conditions such as ‘sewage discharge’, ‘water harvesting’ and ‘DG Sets specification’ imposed and monitored by the local urban authorities post construction of the project.

“This will mean, no construction project can be ever stopped or rejected on environmental grounds. Since there will be no environment clearance under the Environment Protection Act, the projects could also not be challenged before the National Green Tribunal which doesn’t have its jurisdiction over the state building bylaws,” said environment lawyer Ritwick Dutta.

The National Green Tribunal has, in the past, penalized developers for constructing environmentally damaging projects. In May, it quashed the environment clearance of a project that encroached and damaged 3 acres of lake in Bangalore and slapped Rs 117 crore fine on the developer. In July last year, the tribunal slapped a fine on Akshardham Temple for carrying out expansion near Yamuna Flood Plains without an environment clearance. The Supreme Court also said in an order in January this year that housing projects coming up without environment clearance were illegal.

The latest position of the environment ministry is a break away from the past. The environment ministry, itself, reiterated in its order on November 10, 2015 that the states should follow the procedure for environment clearance for building projects “in letter and spirit.” To cut the delays, the order insisted that SEIAA will assess the project only on the “thrust environmental areas” while the rest of permissions should be dealt with by the local authorities. The order came after a series of reviews of the need of environment clearance for building projects in the environment ministry including by a High-Level Committee (see box: ‘flip flop flip’).

The latest notification and the change in the ministry’s stance has come after hectic discussions between the environment ministry, the urban development ministry, the Prime Minister’s Office, and the representatives of the construction industry, said an official in the environment ministry. The documents, accessed by HT, indicate the environment ministry sent a proposal to the ministry of urban development in February “regarding incorporation of environmental guidelines in the building bylaws” and the matter was treated by the two ministries as “urgent and important.”

The environment ministry’s notification stresses upon government’s efforts for “ensuring Ease of Doing Responsible Bussiness, and streamlining the permissions for buildings and construction sector”, which, it says, is important for providing “affordable housing to weaker section in urban area.” However, rather than making exemptions for affordable houses which are often smaller than 20,000 sq meters, it exempts all big construction projects such as shopping malls, multiplexes and office complexes.

When asked for the reason of change in the ministry’s stand, Manoj Kumar Singh, Joint Secretary in the Environment Ministry, said in an email reply “The draft notification dated 29.04.2016 proposes to integrate the standard and objectively monitorable environmental conditions with the building permissions starting from built up area of 5000 sq. mtrs. and above. The number of buildings in this category and cumulative built up area of such buildings is much larger than buildings of 20000 sq. mtrs. and more. So here idea is to make more buildings follow the environmental norms.” He insisted the proposed notification will not take out these buildings (20000 sq. mtrs to 150000 sq. mtrs.) from the purview of EIA Notification, 2006 and E (P) Act. “It proposes to integrate these standard environmental conditions with the building permissions,” he added.

(Source: Hindustan Times)

Know Real Estate: RERA FAQs

Know Real Estate: RERA FAQs: What is RERA? The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home...

RERA FAQs

What is RERA?

The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. The bill was passed by the Rajya Sabha on 10 March 2016 and by the Lok Sabha on 15 March 2016.

What are objectives of Real Estate (Regulation and Development) Act, 2016?

The main objectives of RERA are:

-       To protect interest of consumer in real estate sector;

-       To establish a process for speedy dispute redressal.;

-   To ensure sale of plot, building or apartment, or real estate project, in an efficient and transparent manner;

-    To establish a tribunal to hear appeals from decisions, directions or orders of Real Estate Regulatory Authority and adjudicating officer;

When is this Act expected to commence? Is there any specific date?

The RERA Act was assented by the president of India on 25th March, 2016 and was notified in Gazette of India for public information on 26th March, 2016. However, commencement of specific sections of the ACT will be done in step by step manner. The entire process will take around 12 to 18 months.

What are the key terms that have been defined in the Act?

A number of key terms have been defined. Some of them are:

Advertisement, Agreement for Sale, Allottee, Apartment, Architect, Building, Carpet Area, Commencement Certificate, Common Areas, Completion Certificate, Development, Development Works, Engineer, Estimated Cost of Real Estate Project, External Development Works, Family, Garage, Immovable Property, Interest, Internal Development Works, Local Authority, Occupancy Certificate, Person, planning area, Project, Promoter, Prospectus, Real Estate Agent, Real Estate Project, Sanctioned Plan

What are all situations in which registration of Real Estate Project is not required?

There are three situations:

-   Where area of land proposed to be developed does not exceed 500 sq m or number of apartments proposed to be developed does not exceed 8 inclusive of all phases

-  Where promoter has received completion certificate for Real Estate Project prior to commencement of Act

-         For purpose of renovation or repair or re-development which does not involve

marketing, advertising, selling or new allotment of any apartment, plot or building, under real estate project

How does a promoter make an application – manual or electronic form?

It is stated that RERA shall operationalise a web based online system for submitting applications for registration of projects within a period of 1 year from date of its establishment. RERA is yet to be established. Until a web based online system is established, all applications shall be made in paper format.

Important information to be enclosed by the promoter while making an application to RERA:

-        Details of the company

-      Detail of projects launched by developer in the past five years whether already completed or being developed, including current status of said projects, any delay in its completion, details of cases pending, details of type of land and payments pending

-      Authenticated copy of approvals and commencement certificate from competent authority for real estate project mentioned in application

-      Sanctioned plan, layout plan and specifications of proposed project or phase, and whole project as sanctioned by competent authority

-     Plan of development works to be executed in proposed project and proposed facilities to be provided including fire fighting facilities, drinking water facilities, emergency evacuation services, use of renewable energy

-        Location details of project, with clear demarcation of land dedicated for project along with its boundaries including latitude and longitude of end points of project

-        Pro-forma of allotment letter, agreement for sale, and conveyance deed proposed to be signed with allottees

-     Number, type and carpet area of apartments for sale in project along with area of exclusive balcony or verandah areas and exclusive open terrace areas apartment with apartment

-        Names and addresses of his real estate agents for proposed project

-        Names and addresses of contractors, architect, structural engineer and other persons concerned with development of proposed project

-      a declaration, supported by an affidavit, which shall be signed by the promoter or any person authorized by the promoter, stating:—

·    that he has a legal title to the land on which the development is proposed along with legally valid documents with authentication of such title, if such land is owned by another person;

· that the land is free from all encumbrances, or as the case may be details of the encumbrances on such land including any rights, title, interest or name of any party in or over such land along with details;

·    the time period within which he undertakes to complete the project or phase thereof, as the case may be;

·    that seventy per cent. of the amounts realized for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose:

-      Declaration to be provided by the promoter in his affidavit while making an application to RERA.

What percentage of amounts for real estate project from allottees should be deposited in a separate account?

The developer shall deposit 70% of amounts realized for real estate project from allottees, in a separate account to be maintained in a scheduled bank to cover cost of construction and land cost and shall be used only for that purpose.

What are the rules for withdrawal by developer from such account?

The developer shall withdraw amounts from separate account, to cover cost of project, in proportion to percentage of completion of project

What is the time limit for grant of registration by RERA?

Registration by RERA shall be granted within 30 days from date of application. RERA shall also provide registration number, Login ID and password to applicant for accessing website of Authority and to create his/her web page and to fill details of proposed project.

What is the time limit for rejection of application by RERA?

RERA shall communicate in writing the reasons for rejection of application within 30 days from date of application.

What if RERA fails to grant registration or reject application?

If RERA fails to grant registration or reject application, project shall be deemed to have been registered. RERA shall also within 7 days (from expiry of 30 days) provide registration number, Login ID and password to applicant for accessing website of Authority and to create his web page and to fill details of proposed project.

What is the validity of the registration granted by RERA?

Registration shall be valid for a period declared by promoter for completion of project or phase.

Is the Real Estate Act applicable to Ongoing/Existing Real Estate projects?

Yes, as per section 3(1) of the Act, ongoing / existing projects, which have not received completion certificate are covered under the Act. The said section is reproduced below:

“……Provided that projects that are ongoing on the date of commencement of this Act and for which the completion certificate has not been issued, the promoter shall make an application to the Authority for registration of the said project within a period of three months from the date of commencement of this Act……” (RERA ACT & LAW)

Can the registration once granted by RERA be revoked?

Yes, RERA can revoke registration on receipt of a complaint or on recommendation of competent authority.

What acts lead to revocation of registration by RERA?

The following four acts are lead to revocation of registration by RERA:

1.  Promoter makes default in doing anything under Act / Rules / Regulations

2.  Promoter violates any terms or conditions of approval given by competent authority

3.  Promoter is involved in any kind of unfair practice or irregularities
Promoter indulges in any fraudulent practices

What is the role of RERA after revocation of registration?

-      RERA shall debar promoter from accessing its website in relation to that project and specify his name in list of defaulters and display his photograph on its website and also inform other Real Estate Regulatory Authority in other States and Union territories about such revocation or registration

-    RERA shall facilitate remaining development works to be carried out in accordance with provisions of section 8

-    RERA shall direct the bank holding the project back account, to freeze account, and take necessary actions, including consequent de-freezing of said account, towards facilitating remaining development works in accordance with provisions of section 8

-       RERA may, to protect interest of allottees or in public interest, issue such directions as it may deem necessary

If the registration is revoked, it is the allottees who will suffer? How does RERA tackle such a situation?

RERA may, instead of revoking registration, permit registration to remain in force subject to such further terms and conditions as it thinks fit to impose in interest of allottees and any such terms and conditions so imposed shall be binding upon promoter.

What is the obligation of RERA consequent upon lapse of or on revocation of registration?

-        Upon lapse of or on revocation of registration, RERA may consult Appropriate Government to carry out remaining development works by competent authority or by association of allottees or in any other manner, as may be determined by RERA

-      In case of revocation of registration of a project, who shall have the first right of refusal for carrying out of remaining development works?

-        In case of revocation of registration of a project, association of allottees shall have first right of refusal for carrying out of remaining development works

Does the Act impose restriction on period of extension to be granted by RERA?

Yes, RERA may in reasonable circumstances, without default on part of promoter, based on facts of each case, extend registration granted to a project for such time as it considers necessary, which shall, in aggregate, not exceed a period of 1 year.

Does this Act need consent / ratification from State Governments to be applicable in states?

No, as RERA is not a Constitutional Amendment Act affecting the States, no consent / ratification, by whatever name called is required. States are bound to implement the Act according to the timelines provided therein.

What if the promoter is unable to complete the project as stipulated in the affidavit? Does the promoter have to file a fresh application for registration?

Registration granted may be extended by RERA on an application made by promoter due to force majeure. Also, RERA may in reasonable circumstances, without default on part of promoter, based on facts of each case, extend registration granted to a project for such time as it considers necessary, which shall, in aggregate, not exceed a period of 1 year.

Is there a time limit imposed under the Act for getting the accounts of promoter audited?

Yes, the promoter shall get his accounts audited within 6 months after end of every financial year by a chartered accountant in practice, and shall produce a statement of accounts duly certified and signed by such chartered accountant and it shall be verified during audit that amounts collected for a particular project have been utilized for project and withdrawal has been in compliance with proportion to percentage of completion of project.

I am a promoter and I have an existing project on date of commencement of this Act but completion certificate has not been issued. Is registration still mandatory?

Yes, the promoter shall make an application to RERA within 3 months from date of commencement of Act.

When can Developers Advertise their Project

“Unless the promoters do not register their projects they cannot advertise, whether ongoing or future.” This is in line with Section 3 & 4 of the Act which mandates registration of projects by developers comes into effect from 1st May. These are discussed in more detail below. Section 3 deals with Registration of real estate projects and agents. It states that:

No promoter shall advertise, market, book, sell or offer for sale, or invite persons to purchase in any manner any plot, apartment or building, as the case may be, in any real estate project or part of it, in any planning area, without registering the real estate project with the Real Estate Regulatory Authority established under this Act:

However, if they have projects that have already obtained completion and occupancy certificates, those can continue to be advertised and sold.

Rigidity in Change of a plan 

He can now only change a project’s plan that has been registered with a two-third majority of the buyers of that project.

Functions of a Promoter

The functions of a promoter have been increased as they now have to give the buyer every document that a buyer should have while signing an agreement. He has to take the responsibility of the services he provides until a local body is formed with the society. He will also have to get two-third majority in case he thinks to transfer the project to someone else.

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