Choose GST rate for incomplete projects, builders told
In a big relief to builders, the GST Council on Tuesday approved transition rules on new tax rates for residential property and offered an option to builders with under-construction buildings to shift to the new rates without input tax credit (ITC) or continue with the old rates with it.
 
Experts said this was a key demand for the realty industry as a lot of buildings had purchased inputs like raw material and suddenly going out of ITC would have made those projects unviable and would have created a further inventory. Builders also would have been forced to raise prices to make up for losses.
 
The GST rates for new real estate projects will be mandatory from April 1, 2019.
 
Currently, the goods and services tax (GST) is levied at 12 per cent with ITC on payments made for under-construction property or ready-to-move-in flats where the completion certificate is not issued at the time of sale. For affordable housing units, the existing tax rate is 8 per cent. 
 
In the previous meeting on February 24, the Council slashed tax rates for under-construction flats to 5 per cent and affordable homes to 1 per cent, effective April 1.
 
"Today's meeting was to approve the transition rules. The builders of the incomplete residential projects as on March 31, 2019, will have the option to either choose the old rate of 12 per cent or 8 per cent or the new rates of 5 per cent or 1 per cent without input tax credit. 
 
"But the new buildings... those that will start after after April 1, the new rates of (5 or 1 per cent without ITC) will apply," Revenue Secretary Ajay Bhushan Pandey told media persons here.
 
The option will have to be exercised within a time limit for transition to the new rates and will be subsequently decided in consultations with the states, he said.
 
Those builders with under-construction buildings who will opt for the new rates of 5 per cent and 1 per cent will have to reverse the ITC as per a given formula, proportionate to the area space.
 
"The choice of tax rates in case of buildings that are not completed, as on April 1, has to be exercised within a specified time, which will be notified later. For new projects beginning 1 April, lower tax rates will apply," Pandey said.
 
As much as 80 per cent of the procurement of the material should be from GST registered dealers and up to 15 per cent of the commercial space is to be treated as residential property for GST calculations.
 
The transition plan, Pandey, said, is revenue neutral even after giving an option to the incomplete buildings.
 
Niranjan Hiranandani, National President, NAREDCO said, "The GST Council addresses the transition issues on input tax credit for the ongoing projects with making it flexible for the developers to choose between the old GST v/s New GST schemes. This will allow the developers to opt between two GST schemes available i.e old GST rate with ITC or apply a reduced rate of GST without ITC for the under-construction projects in order to avoid operational hassles."
 
M.S. Mani, Partner, Deloitte India, said, "The move to segregate under-construction projects from new projects would provide relief to builders who were worried about the loss of input tax credit. This would also enable them to price the loss of input tax credits in the new projects. Reversal of ITC 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. Protecting existing input tax credits and mandating the new rates only in respect of new projects would benefit both builders and consumers. "
 
Abhishek Jain, Tax Partner, EY said: "The approval of the scheme as an optional one for construction projects underway was one of the key asks of the real estate industry. It's go ahead by the GST Council brings quite a relief for this sector in handling transition issues in specific."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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    No 'beneficial decisions' by GST Council till polls on
    The GST Council will not announce any "beneficial decisions" like rate cuts or extensions of time period for any schemes or compliance to GST rules at its meeting scheduled on March 19.
     
    Sources said that the Council does not want that its decisions are seen as clashing with the Model Code of Conduct (MCC) that came into force post the announcement of the dates of the Lok Sabha election last Sunday.
     
    With this, the Council has also received permission from the Election Commission to hold its next meeting - the 34th - on the scheduled date.
     
    "The Council will desist from announcing any beneficial decisions including rate cuts and extension of time period for any compliance of rules of GST till elections are over to abide with the Model Code of Conduct. 
     
    "We have received Election Commission of India's approval to hold the March 19th meeting on discussion and announcement of various issues including implementation of lower GST rates for the real estate sector as the decisions were already announced in the last meeting when the MCC was not in place," sources said.
     
    At its 33rd meeting, the Council had slashed tax rates for under-construction flats to 5 per cent and affordable homes to 1 per cent, effective April 1.
     
    As far as further lowering of rates are concerned under GST with an eye on on polls, after the Council's 31st meeting in December where it was announced that rates were being rationalised on a number of products and services, there are only 28 items left now in top 28 per cent tax bracket.
     
    Among the items consumed/used by the common man, only cement continues to remain, along with luxury and 'sin' goods, in the top bracket. This major tax rationalisation, ahead of the 2019 general elections, had come after Prime Minister Narendra Modi promised to bring 99 per cent of the goods under the 18 per cent or lower GST slab.
     
    But all the rate cuts have had their impact on GST collections, which in February dropped to Rs 97,247 crore from Rs 1.02 lakh crore in the previous month. The government has lowered the GST collection target for the current fiscal to Rs 11.47 lakh crore in the Revised Estimates, from Rs 13.71 lakh crore budgeted initially.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    CBDT Widens Tax Dragnet on Notional Income through Section 56(2), but Loopholes Remain
    The abolition of Gift Tax Act in the year 1998 paved the way for one of the most dynamic sections of the Income Tax Act, 1961, namely, Section 56(2). Under this Section, all kinds of incomes and gains, which were from sources other than the sources mentioned in the Act at that time, were brought under the purview of income-tax (I-T). Now, incomes and gains arising out of such transactions, which were structured to pass on assets to some other party without any consideration or with inadequate consideration, are subject to be taxed under this Section.
     
    While Section 56(2) gave the authorities a tool to keep a check on the transactions structured to merely launder unaccounted income, it also brought in many questions. The Central Board of Direct Taxes (CBDT) has, since, been releasing clarifications to address questions as well as making changes to the Section to cover all loose ends of laundering unaccounted incomes.
     

    Recently, CBDT, in its circular dated 31 December 2018, came up with a clarification to address the question: 

     
    Does the terms 'receives' with regards to Section 56 (2)(vii a) include receiving shares of companies (where the public are not substantially interested) by way of issues of shares by way of fresh issue/ bonus issue/ issue of rights shares/ transaction of a similar nature?
     
    Before we get to the clarification, let's first analyse the Sections - 56(2)(vii), 56(2)(vii a) , 56(2)(vii b) & 56(2)(x)
     
    Analysis of Section 56(2)(vii) Section 56(2)(vii a) Section 56(2)(vii b) & Section 56(2)(x)
     
     
    Section 56(2)(vii a) of the IT Act, 1961 was inserted by Finance Act, 2010. Referring to the memorandum of Finance Act, 2010  clause (vii a) was incorporated in Section 56 to prevent the practice of transferring unlisted shares at a price which was different from the fair market value (i.e., inadequate consideration or none) of the shares and also to include within its ambit transactions undertaken in shares of the company (not being a company in which the public are substantially interested) either for inadequate consideration or without consideration where recipient is a firm or a company (not being a company in which the public are substantially interested).
     
    In layman’s terms, the act of receiving means to receive something which was already in existence and the act of creation of that particular thing.
     
    Similarly, receipt of shares, by way of fresh issue/ bonus issue/ issue of rights shares/ transaction of similar nature, is an act of creation of securities and not transfer of the same. The CBDT, in its circular dated 31 December 2018, has clarified the same. Section 56(2)(vii a) is applicable to transactions involving subsequent transfer of shares form the initial receiver to some third party, and not the time of issuance of such shares.
    It is palpable that the shares would be treated as goods only when they come into existence and issuance of shares is the act of bringing the shares into existence. The word 'receives' with respect to section 56(2)(vii a) would not include issuance of shares within its ambit. 
     
    The intent of insertion of clause (vii a) to Section 56 was to apply the anti-abuse provision, i.e., transfer of shares for no consideration or an inadequate one, it is hereby clarified by the CBDT circular that Section 56(2)(vii a) of the Act shall apply in cases where a company (not being a company in which the public are substantially interested)  or a firm receives the shares  of the company (not being a company in which the public are substantially interested) through transfer for no consideration or an in adequate one. Hence Section 56(2)(vii a) of the Act shall not be applicable on fresh issue of shares by the specified company. 
     
    Taxation of fresh issue of shares comes under the purview of Section 56(2)(vii b). 
     
    The Subhodh Menon Case in the Context of Section 56
     
    Recently, the Income Tax Appellate Tribunal (ITAT) in the case of The Assistant Commissioner of Income Tax Vs. Shri Subhodh Menon, order dated 7 December 2018 held that a shareholder cannot be taxed under Section 56(2)(vii)(c) of the IT Act, 1961, so long as the shares are allotted to the holder on a proportionate basis (right shares), even if such shares are allotted at a value lower than the fair market value.
     
    Drawing from the above case law, right shares issued at a value below the fair market value to an individual/ HUF where allotment is disproportionate will not be taxable under Section 56(2)(vii)(c) of the IT Act, 1961. Shares issued higher than the proportion offered (based on shareholding) shall attract tax provisions. 
     
    Conclusion
     
    The Union Budget 2017  introduced Section 56(2)(x) of the IT Act, 1961 widening the scope of income from other sources and also clubbing together Sections 56(2)(vii) & Section 56(2)(vii a).  I-T shall not be chargeable at the normal rate for a fresh issue of shares for closely held companies.
     
    Since the offence that Section 56(2)(vii a) was trying to curb is the same as Section 56(2)(x), the question still remains as to whether the term 'receives' clarified in the CBDT circular, shall have the same analogy for Section 56(2)(x)? Simply put, whether Section 56(2)(x) of the Act will also be limited to transfer of existing shares and not cover fresh issue of shares?
     
    (Yutika Lohia works at Vinod Kothari Consultants Pvt Ltd)
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