GST chink likely to increase input tax credit of real estate companies

A recent clarification by the indirect tax department may leave a loophole in the goods and services tax (GST) system by enabling the real estate companies to claim higher input tax credit than they are entitled to.

In a set of frequently asked questions (FAQs), the Central Board of Indirect Taxes and Customs (CBIC) on Wednesday cleared the air on GST rates on under-construction houses.

This followed the GST Council’s decision to allow the real estate companies to choose between the lower rate of 5 per cent without input tax credit or a higher rate of 12 per cent but with input tax credit for houses whose construction did not finish by March 31, 2019.

There is no GST for constructed houses whose occupancy certificate (OC) has already been given.

The GST Council on Thursday extended the deadline for developers to opt for old GST rates or shift to new lower tax rates. The deadline was extended by 10 days — till May 20.

The CBIC had made it clear that the real estate companies can choose differently for different towers even in the same complex, provided these are registered separately under the Real Estate (Regulation and Development) Act.

That being the case, builders can charge 12 per cent rate on one tower and claim input tax credit, and 5 per cent on the other tower while claiming no input tax credit, explains an expert.

However, inputs supplied to them would be against the name of one builder and not against different towers. That would enable them to report the use of more raw materials on the tower on which they are charging 12 per cent tax rate and claim higher input tax credit, he said. 

Even in the same tower, the real estate companies can charge different rates, depending on the completion of work. 

For instance, if a tower has 20 floors and only 10 of them are completed, the builder concerned can take partial OC for the tower. That would mean the builder would not charge GST till the 10th floor since this tax is not there on the completed projects. On the other hand, the builder can charge GST from 11th to the 20th floor, depending on the option they have chosen.

“Buyers will now need to evaluate between a nil GST on buildings that have already got an OC, five or 12 per cent on under construction depending on the option selected by the builder,” said M S Mani, partner, Deloitte India.