21.11.2023: GST net widens for real estate firms

The Directorate General of GST Intelligence (DGGI) is understood to be sending notices to various real estate companies, demanding that GST be paid for a clutch of transactions among group companies or joint venture partners.

The move is seen as part of a strategy to widen the tax net for the sector.

Fees for management services and royalty charged for use of brand names are among the services that the DGGI finds taxable at 18%, the GST slab for most services.

These intra-group and intra-JV transactions are common among large real estate firms, as part of their operational strategies, and cash management and joint venture arrangements. Tax experts are divided on the legal tenability of the current set of tax demands.

Managing director a top Mumba-based real estate company told FE on condition of anonymity:

“In a 50:50 JV (joint venture), many charge 7-8 % management fee (for managing construction and approvals). These may be subjected to GST. The DGGI is learnt to be studying it, and we may get notices soon.”

Such fees including royalty paid for brands add up to 12-15% of cost for developers, the source said. Cost of such payments are built into the formation of JVs and the shareholding.

While sale of land or units in completed real estate projects are still out of the ambit of the GST – these are subject to state-level imposts like stamp duty and registration fees -, the applicability of GST with respect to the sector is broadly restricted to work contract services. Home-buyers also pay GST on purchase of under-construction properties – at a benign 1% for the affordable segment, for other properties, at 5%, both without input tax credit.

The DGGI is also studying the matter of royalty charged by parent companies to their SPVs (special purpose vehicles) for using the brand name of the former and could ask developers to pay GST on it. “If they (real estate companies) charge a fee, they have to pay GST .. that is the rule. If they haven’t been paying, they have to pay now,” one of the expert said.

Under the GST law, transactions between related persons attract tax even when there is no consideration, tax experts said. There are ongoing inquiries and notices that have been issued by DGGI to several real estate players where GST is sought to be recovered for alleged supply of right to use the brands.

Real estate companies typically operate on an SPV model wherein each project is undertaken in a separate SPV. The authorities have taken a position that the use of the brand (name and logo of the flagship company) by the SPVs should be subject to GST, the experts explained.

Source: The Financial Express

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