Are you a builder and planning to build a residential real estate project? This blog will help you out.
Here, we explain you the implication with regards to Income tax and GST.
A. GST Implication
Before understanding the tax part first understand the type of supplies involved in Real estate project. To make it more complex let’s take an E.g., of Joint Development Project (JDP).
Supplies:
1. Transfer of Development rights by the land owner to the developer.
2. Transfer of Development service by the developer to the landowner and other buyers
Note: Sale of the flats post the Completion certificate (CC) is received is not a supply.
1. With regards to the supply of Development rights by the land owner to the developer:
a. Value of Supply
1. If paid in cash, then the value is as per the cash paid
2. If paid via number of flats, the value is the value of flat during the time JDA was done.
b. Rate of Supply
The same will be taxable at 18% but the same has exemption.
The tax will be paid as lower of:
1. Value = GST payable on developmental rights * carpet area of apartments unbooked as of the date of the completion certificate / total area of the apartment.
2. The payable tax should not exceed 0.5% or 2.5% of the value of remaining unbooked apartments.
Note: The tax has to be paid via RCM.
c. ITC eligibility
No ITC for the same will be available.
d. Time of supply
The time will be earlier of the CC is received or First occupancy is done.
2. With regards to the supply of Developmental service by the developer to the landlord and other costumers:
a. Value of Supply
In case of the land lord, the value will be value of other flats sold, and in case of any other costumer the value will be price so charged.
b. Rate of Supply
1.5% (Less: 1/3 deduction for land area), net 1% for Affordable homes and
7.5% (Less: 1/3 deduction for land area), net 5% for non-affordable homes and commercial area, if any.
c. ITC eligibility
1. No ITC is available.
2. 80% Purchase has to be done via registered taxpayer else the GST has to be discharged via RCM.
3. Cement and capital goods have to be purchased via registered taxpayer else the GST has to be discharged via RCM.
d. Time of supply
As per the agreement.
B. Income tax Implication
For Builder, the same will be treated as income from Profits and Gain of Business or profession and shall be taxed accordingly.
For Landowner, the same will be taxed under the head Capital gain. The same will be calculated as below
a. Value
“FVC = Stamp duty value of the property you received as on the date of issue of Completion Certificate + cash received, if any.
Less: Cost of acquisition = Purchase Price of the land. If the land is held for more than 2 years, the cost must be indexed up to the year in which land is transferred to the developer (this is done to account for the inflation over the years)”
b. Year of transfer
Year of transfer is the year in which land is transferred under JDA.
c. Year of taxability i.e. the year in which owner has to pay tax
The gains you make by receiving flats in exchange of land is known as capital gains. As per the provisions of Section 45(5A), you will have to pay tax on these capital gains in the year in which the certificate of completion is issued for the whole or part of the property. This means you will have to pay tax in the year in which the building project is completed.
However, this provision shall not apply if such property is transferred by the owner before such completion certificate is issued.
d. Liability to deduct TDS on payment made under Joint Development Agreement (Section 194-IC)
Under JDA, where the real estate developer pays any monetary consideration in form of cash or any other mode in addition to the share in the project, then the developer shall be liable to deduct TDS @10% on such payment. However, if the PAN of the owner is not available, then, such TDS shall be done @20%.
We hope, that the above elaboration makes you understand the complex law in easy terms. For more consultancy, you can reach us out.
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CA Umang Jain
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umang@caumang.com
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