GST Council Exempts RERA Collections: A Boost for Real Estate Compliance and Affordability

Introduction

To acknowledge the long-standing demand of the stakeholders of the real estate industry, the Goods and Services Tax (GST) Council, in its 53rd meeting, exempted statutory collections made by the Real Estate Regulatory Authority (RERA) from GST, clarifying that they fall within the scope of entry 4 of No.12/2017-CTR dated 28.06.2017. This decision has far-reaching implications for the real estate industry, regulatory bodies, and homebuyers.

Understanding the Exemption

Entry 4 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, provides an exemption to services provided by the Central Government, State Government, Union territory, or local authority where the consideration for such services does not exceed Rs. 5,000. RERA, a regulatory authority established under the Real Estate (Regulation and Development) Act, 2016, collects fees and charges from real estate developers and agents. These collections are statutory in nature, meaning they are mandated by law and not in the form of commercial transactions.

The GST Council's decision to exempt these statutory collections acknowledges RERA's role as a regulatory body, rather than a commercial entity. This exemption aligns with the broader intent of the GST framework to exclude statutory payments from the purview of GST, thereby preventing additional tax burdens on regulated entities.

Implications for Real Estate Developers and Agents

1. Reduction in Compliance Burden: Real estate developers and agents are required to make several payments to RERA, including registration fees, project extension fees, and penalties for non-compliance. Exempting these payments from GST reduces the compliance burden on developers and agents. They no longer need to account for GST on these transactions, simplifying their accounting processes and reducing administrative overheads.
2. Cost Savings: The exemption leads to direct cost savings for real estate developers and agents. The overall financial outlay towards regulatory compliance is reduced without the added GST. This can result in more competitive project pricing and potentially lower end-cons' costs.
3. Encouragement for Regulatory Compliance: By exempting statutory collections from GST, the GST Council has provided a financial incentive for real estate developers and agents to adhere to regulatory requirements. This move can foster greater compliance with RERA regulations, leading to a more transparent and accountable real estate sector.

Impact on RERA Operations

1. Streamlined Revenue Collection: RERA authorities across states can now collect statutory fees without the need to manage GST implications. This simplifies the revenue collection process, allowing RERA to focus on its primary mandate of regulating and promoting the real estate sector.
2. Enhanced Regulatory Efficiency: With the administrative burden of GST compliance removed, RERA can allocate more resources toward monitoring and enforcement activities. This can lead to more efficient regulation of the real estate sector, ensuring better protection for homebuyers and promoting fair practices among developers.

Benefits for Homebuyers

1. Potential Reduction in Project Costs: The exemption of GST on RERA collections can translate into lower costs for real estate developers, who may pass on these savings to homebuyers. Reduced regulatory costs can contribute to more affordable housing options, benefiting potential homeowners.
2. Increased Transparency and Accountability: The GST exemption encourages developers to comply with RERA regulations, fostering greater project approvals and transparency in timelines. Homebuyers can benefit from increased accountability in the real estate sector, reducing the risk of project delays and ensuring timely delivery of properties.
3. Improved Regulatory Environment: A more efficient and well-funded RERA can better protect the interests of homebuyers. The exemption allows RERA to focus on its regulatory duties without the distraction of managing GST collections, resulting in a more robust regulatory environment.

Challenges and Considerations

1. Clarification on Scope: While the exemption is a positive step, there may be a need for further clarification on the specific types of collections covered. RERA collects various fees, and a clear definition of statutory collections is essential to avoid ambiguity and ensure consistent exemption application.
2. Monitoring and Enforcement: Ensuring the exemption is not misused requires robust monitoring and enforcement mechanisms. Authorities must remain vigilant to prevent attempts to circumvent the exemption by misclassifying commercial transactions as statutory collections.
3. State-Level Variations: RERA operates at the state level, and the implementation of the exemption may vary across states. Ensuring uniform exemption application across different jurisdictions is crucial to maintaining consistency and fairness in the real estate sector.
4. Other tax obligations: Despite the exemption of RERA collections from GST, the real estate sector in India still has to pay various other taxes. these include Stamp Duty, Income Tax (on the profits earned by developers and builders), Property Tax (levied annually by local municipal authorities on owners based on the assessed value of the property), Capital Gains Tax (on the profit earned from the sale of property), Development Charges (levied by local authorities for providing infrastructure and services), Labor Cess, GST on Construction Services, TDS (Tax Deducted at Source) on Property Transactions, Municipal Taxes, Registration Fees, Environmental Clearance Fees.

Disparity in treatment of Government Fees under GST

Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017, Entry 5, provides that where the services have been provided by the government bodies to a business entity, the recipient (business entity) is liable to pay GST under Reverse Charge Mechanism (RCM). Pursuant to this notification, the department initiated the recovery of GST on services like approvals and licenses provided to body corporates, including the license fees for availing benefit under government schemes like Advance Authorisation and Export Promotion for Capital Goods (EPCG). These demands also extend to the real estate industry where the developers are mandatorily required to obtain various approvals and permissions from local bodies in relation to construction of real estate projects and are required to pay the statutory fees for the same. Notices have been issued by the Directorate General of Goods and Services Tax Intelligence (DGGI) for recovery of GST under RCM on these charges paid by developer to the local government entities.

The nature of these fees is similar to the statutory collections by RERA. However, the exemption of GST on the statutory collections by RERA paid by the corporate bodies creates an unreasonable classification by creating a different class without any reasonable nexus. While this move by the GST Council is commendable, it highlights differential treatment of different statutory fees by government bodies. The creation of this unreasonable difference of category of class for other statutory fees collected by the government bodies from the business entities thus leads to violation of Article 14 of the Constitution of India.

This recent exemption of GST on statutory collections by RERA might set a precedent for other sectors and regulatory authorities to seek a similar exemption, as other statutory levies, such as license fees for telecom spectrum, mining activities, and operating casinos, remain subject to GST. It will be interesting here to see if the other taxpayers will take inspiration from the RERA exemption and dispute their demand on the similar grounds in their own cases. But, ultimately one may expect that the dockets of the Courts would be increased in case of GST demands on other statutory fees / charges.

Conclusion

The exemption of statutory collections made by RERA from GST, as announced in the 53rd GST Council Meeting, is a significant development for the real estate sector. It reduces the compliance burden on developers, encourages regulatory compliance, and promotes a more transparent and accountable industry. Homebuyers stand to benefit from potential cost savings and a more robust regulatory environment.

While the decision is a positive step, it requires careful implementation and monitoring to realise its intended benefits fully. The GST Council's move aligns with the broader goal of fostering a transparent and efficient real estate sector, ultimately contributing to the growth and development of the industry.

By exempting RERA collections from GST, the GST Council has demonstrated its commitment to supporting regulatory bodies and promoting fair practices in the real estate sector. This decision paves the way for a more streamlined and efficient regulatory framework, benefiting all stakeholders involved. In light of this exemption, future relaxation for municipal and other taxes is anticipated that will further ease the Real Estate sector.