The GST Council, in its 34th meeting on Tuesday, decided to allow builders of properties under construction up to March 31, 2019, to choose between the old GST rate of 12% with input tax credits (ITC) and the lower rate without ITC announced in the previous meeting. New constructions on and after April 1 will be taxed at the new rate.

The council had, in its previous meeting, said that the GST rate for under-construction properties would be reduced and the option of availing input tax credit would be removed.

As such, it set the tax rate for normal under-construction residential properties at 5% without ITC, and the rate for affordable housing under-construction projects at 1% without ITC.

Developers, however, pointed out that the problem was how to treat the input tax credit already availed. The Council said it would deliberate on the issue, and Tuesday’s decision was an attempt to address that.

“The GST Council has decided that for under-construction properties up to March 31, 2019, the developer will have the option of going for the old rate or the new rate,” Revenue Secretary Ajay Bhushan Pandey said at a press conference following the video-conference meeting.

“They will have to make this choice within a set time-frame, which will be decided over the next few days in consultation with the States.”

Decision on window

“The decision will be on whether this window will be 15 days or 30 days,” Mr. Pandey added. “New construction on April 1 [and] onwards will have to be at the new rate.”

The council also said that these lower GST rates would be applicable for developers who sourced 80% of their inputs and input services from registered suppliers.

“On shortfall of purchases from 80%, tax shall be paid by the builder at the rate of 18% on RCM [Reverse Charge Mechanism] basis,” the government said in a press release. “However, tax on cement purchased from unregistered persons shall be paid at the rate of 28% under RCM, and on capital goods under RCM at applicable rates.”

“The pragmatic move to segregate under construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit,” M.S. Mani, partner at Deloitte India said.

“This would also enable them to price the loss of input tax credits in the new projects.”

The GST Council also prescribed a formula for the reversal of the ITC by those developers who have under-construction properties as of March 31, 2019, but choose the new tax rate. The new formula basically calculates the total ITC of the project by extrapolating, based on the ITC taken for the percentage of the project that is completed as of that date. This number would also incorporate the proportion of flats booked and invoiced.

“Reversal of input tax credit on a proportionate basis would entail significant computational issues for builders as each project would be in various stages of construction and have differing pre and post-completion sale patterns,” Mr. Mani added.