The GST Council allowed builders an option to choose between old tax rates and the new ones for under-construction residential projects to help resolve input tax credit issues.

The council, headed by Finance Minister Arun Jaitley and including representatives of all states, at its 34th meeting in New Delhi on March 19 laid out transition rules for the implementation of new tax rates for the real estate sector.

Builders will get a one-time option to continue paying tax at the old rates (effective rate of 8 per cent or 12 per cent with input tax credit or ITC) on ongoing projects (buildings where construction and actual booking have both started before April 1, 2019, but which will not be completed by March 31, 2019), said revenue secretary A.B. Pandey. The new tax rate of 1 per cent for affordable houses and 5 per cent for others, without ITC, will apply on new projects.

The move will help address apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits and pricing that were bound to arise on account of the change.

“GST Council has approved transition plan for the new rate structure for real estate residential projects. From April 1, builders have to choose either of the options for which they will get time,” said Pandey.

On the time-frame for transition, Pandey said the council has agreed on providing reasonable time to developers. The matter would be decided in a next few days in consultation with the states, he said, adding that it could be 15 days or one month.

The council also clarified that projects with up to 15 per cent commercial space will be treated as residential property. This will resolve issues faced in cases where buildings have commercial amenities such as clubs and restaurants as well as in case of residential-cum-commercial projects. Additionally, a condition has also been imposed that 80 per cent procurement by developers should be from registered dealers to avail the composition scheme.

The new tax rates of 1 per cent (on the construction of affordable houses) and 5 per cent (on other than affordable houses) shall be available subject to the condition that ITC shall not be available and that 80 per cent of inputs and input services shall be purchased from registered persons.

Any shortfall in purchases according to these norms would be levied a tax of 18 per cent. Tax on cement purchased from unregistered person shall attract a 28 per cent duty. The council approved the formula for calculating ITC.

“ITC rules shall be amended to bring greater clarity on a monthly and final determination of ITC and reversal thereof in real estate projects. The change would clearly provide a procedure for availing input tax credit in relation to commercial units as such units would continue to be eligible for input tax credit in a mixed project,” said an official statement.

Pandey further said that the decision will help the builders in clearing inventories. On apprehensions being raised on possible price rise due to new tax structure, Pandey said if prices escalate, the National Anti-profiteering Authority will take appropriate action.