Several real estate developers have reached out to the government for clarity and concessions on the issue of double GST payment in redevelopment projects, a factor that has led to cost escalation at a time when margins are already under pressure.
The economics of redevelopment projects, a type of an urban real estate renewal method where realty players takeover old buildings and rebuild them, has gone awry in the last few years following implementation of GST in 2017, say industry trackers.
The problem arises due to the way GST is computed on these projects.
“The GST is paid firstly on cost of construction without input tax credit, and secondly, when the area is delivered to existing residents at market price. Both GST payments are absorbed by a developer, which often becomes a huge cost,” said Rohit Jain, partner at law firm ELP.
Tax experts say all the redevelopment projects are now facing problems due to higher GST costs.
Top real estate developers have now approached the government for lenience in the way GST is levied.
Real estate players say they have seen disruption during the Covid-19 pandemic in the last two years with increasing costs, falling revenues and other problems such as labour shortage.
In a typical redevelopment project, a real estate developer takes over a project, and rebuilds it with additional space and apartments.
In most cases, the original residents return to their apartments with some extra space, or bigger apartments.
The GST regulation mandates that the tax has first to be paid when the developer undertakes construction and there is no input tax credit available on that development.
Input tax credit is a mechanism where part of the GST paid on raw materials can be set off against future tax liabilities.
Industry trackers say the bigger problem for realty players is when they return the apartments to the original residents.
As per the current regulations, even in cases when original residents do not pay anything when they get the bigger apartments back, GST at 5% has to be paid.
The GST has to be paid as per the market price on these apartments.
Since the original buyer is not paying anything, this cost in most cases will have to be absorbed by the real estate developer, say tax experts.
Industry trackers say some of the largest redevelopment markets including Mumbai have seen real estate developers walking away from redevelopment projects.
This is not the first time that the real estate sector is at odds with the taxman.
Earlier, the real estate sector had faced issues following a government notification around joint development agreements.
Joint development agreements are a common feature in the real estate sector wherein the land owner transfers the land to the real estate developer and gets apartments, a certain amount of revenue or a combination of both, in return.
As per a notification issued in January 2018, GST was payable by both the land owner and the developer.
The GST notification sought to levy tax even on land owners, which was later challenged in the court.
Real estate developers had dragged the GST Council, central and state governments to court over bringing such transactions under the gamut of the GST framework.
