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THE IMPACT OF GST CHANGE ON REAL ESTATE

The Goods and Services Tax (GST) Council on February 24, 2019 had slashed the rate on under-construction residential properties to 5% for normal category and 1 % for the affordable housing category from April 1, 2019. In both the cases, no input tax credit (ITC) can be claimed by the developers. However most developers did not react positively to this announcement because they were worried about its impact on the input stock they had already bought before as a part of their long-term purchases. This resulted in most developers charging an incremental basic sale price from the buyers. This in turn negated the very basic purpose of reducing the GST to help reduce the cost of property to the buyer as well as augment the sales for the developers.

To address these apprehensions the GST Council has now permitted real estate developers to exercise a one-time option to choose between the Old GST rates and the New GST one for their under-construction residential projects to help them resolve issues pertaining to input tax credit. Real estate experts believe that this will provide flexibility to real estate developers to go for the best possible and most suitable tax option. So developers now get a one-time option to continue paying tax at the old rates (effective rate of 8 percent or 12 percent with Input Tax Credit or ITC) on their on-going projects, that is for buildings where construction and actual booking both started before and which will not be completed by March 31, 2019. This will help address the apprehensions as well as potential disputes on various computational and transitional issues such as the loss of input credits.  

However, the choice between the two rates for ongoing real estate projects is not going to be an easy one with concerns over how the over-used credit will be calculated and adjusted in case the new rate is taken by the developer and what the customer reaction will be if the builder chooses to stay with the old rate and there is no reduction in the prices. Dr Niranjan Hiranandani, co-founder and MD of Hiranandani Group and President of the Industry Association NAREDCO, feels that the problem is only transitional in nature. “This is a transition issue and once newer projects take over, this problem will go away. But the transition will take some time.”

This is however a very smart move by the government as now the developer will choose an option which is most suitable and beneficial for him. This will ultimately benefit the home buyers as the developer cannot charge any incremental basic sale price from the buyers due to the flexibility offered to them for ongoing projects and bookings before April 1, 2019. This realistically practical move will enable the realtors to segregate under-construction projects from new projects and 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.

Of course the choice of selecting the GST regime would depend on the dynamics of the respective project. The ones with healthy sales traction are likely to continue with the earlier regime to maintain their profitability. On the other hand the consumers will expect the developers to charge them lower GST rates in line with the new tax regime, which might affect the developer’s profit margins. However, for projects with slower sales, the developers may choose to change course as the stimulation of demand will far outweigh the adverse impact of ITC withdrawal on his margins.

The GST council has also clarified that 15 percent commercial space within a residential project will be treated as residential property. This means projects with up to 15 per cent commercial space such as office, shops etc. will be given the same tax treatment as residential property. This has been done to 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.              

However to avail of the lower GST rate a pre-condition has been imposed that 80 per cent procurement by developers should be from GST Registered Vendors.

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 only subject to the condition that the input tax credit shall not be available and that 80 per cent of inputs and input services shall be purchased from GST registered vendors only.

Any shortfall in purchases according to these norms would be levied a reverse tax of 18 per cent. Tax on cement purchased from unregistered vendor shall attract a 28 per cent duty.

Making it mandatory for developers to purchase raw material from registered vendors is an attempt made by the government to organize one of the most unorganized sectors in the country. Experts believe that this has been done to ensure that more vendors will be forced to get registered in the future and instances of black money transactions may also come down with this.

The GST Council has also further clarified that all transfer on development rights (TDR), FSI and long term leases will not be liable to tax provided the 1 percent and 5 percent GST have been paid for as per the rules for the houses that have been constructed within the residential complex.

Experts are sure that all these measures will have positive effects that will change the overall sentiments of the real estate market for the better.

Source: www.thehindubusinessline.com

Purchase of Immovable Property

(Updated as on May 07, 2018) Part I. Purchase of immovable property outside India by Resident Individuals These FAQs attempt to put in place the common queries that users have on the subject in easy to understand language. However, for conducting a transaction, the Foreign Exchange Management Act, 1999 (FEMA) and the regulations made or directions issued thereunder may be referred to. The relevant principal regulations are the Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015 issued vide Notification No. FEMA 7(R)/2015-RB dated January 21, 2016. The directions issued are consolidated in Part I of the Master Direction No 12 on Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999. Amendments, if any, to the principal regulations are appended. Q.1 Can a resident continue to hold immovable property outside India which was acquired by him when he was a non-resident? Q.2 Can a resident individual send remittances and purchase property outside India? Q.3 To whom do the restrictions of transferring property outside India not apply? Q.4 How can immovable property be acquired outside India by a resident? Q.1 Can a resident continue to hold immovable property outside India which was acquired by him when he was a non-resident? Answer: According to section 6(4) of the FEMA, a person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India. Q.2 Can a resident individual send remittances and purchase property outside India? Answer: A resident individual can send remittances under the Liberalised Remittance Scheme (LRS) for purchasing immovable property outside India. In case members of a family pool their remittances to purchase a property, then the said property should be in the name of all the members who make the remittances. Q.3 To whom do the restrictions of transferring property outside India not apply? Answer: The prohibition of a resident acquiring property outside India is not applicable if: The resident is a foreign national; or The property was acquired before July 8, 1947 and continued to be held after obtaining permission; or If it is acquired on a lease not exceeding five years Q.4 How can immovable property be acquired outside India by a resident? Answer: Immovable property can be acquired outside India: Under section 6(4) of FEMA. As an inheritance/ gift from a person (i) referred to in sec 6(4) of FEMA; or (ii) who has acquired it prior to July 8, 1947 (iii) who has acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition. Purchased with balances in the Resident Foreign Currency (RFC) account of the resident. As a gift from persons at (b) & (c) above, provided he is a relative of such persons. Purchased with remittances made under the Liberalised Remittance Scheme (LRS). Jointly with a relative provided there are no outflow of funds from India. By an Indian company having overseas offices, for housing its business or for residence of staff. Part II. Purchase of immovable property in India by Non-Resident Individuals These FAQs attempt to put in place the common queries that users have on the subject in easy to understand language. However, for conducting a transaction, the Foreign Exchange Management Act, 1999 (FEMA) and the regulations made or directions issued thereunder may be referred to. The relevant principal regulations are the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2018 issued vide Notification No. FEMA 21(R)/2018-RB dated March 26, 2018. The directions issued are consolidated in Part II of the Master Direction No 12 on Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999. Amendments, if any, to the principal regulations are appended. Q.1 How can Non-resident Indians (NRIs) / Overseas Citizens of India (OCIs) acquire immovable property in India? Q.2 What are the accepted modes of payment for property acquired in India? Q.3 Can Foreign Embassies/ Diplomats/ Consulate Generals acquire property in India? Q.4 Can foreign nationals acquire property in India? Q.5 How can a Long Term Visa (LTV) holder acquire property in India? Q.6 Can a spouse of an NRI/ OCI who is not a NRI/ OCI acquire property in India? Q.7 Can a non-resident repatriate the sale proceeds of immovable property in India? Q.8 What is the meaning of transfer? Q.1 How can a Non-resident Indian (NRI)i and an Overseas Citizen of India (OCI)ii acquire immovable property in India? Particulars NRI/ OCI (regulation of FEMA 20(R)) Purchase (other than agricultural land/ farmhouse/ plantation etc) from Resident/ NRI/ OCI [3(a)] Acquire as gift (other than agricultural land/ farmhouse/ plantation etc) from Resident/ NRI/ OCI [3(b)] who is a relativeiii Acquire (any IP) as inheritance from a. Any person who has acquired it under laws in force [3(c)]; b. Resident [3(c)] Sell (other than agricultural land/ farmhouse/ plantation etc) to Resident/ NRI/ OCI [3(e)] Sell (agricultural land) to Resident [3(d)] Gift (other than agricultural land) to Resident/ NRI/ OCI [3(e)] Gift (agricultural land) to Resident [3(d)] Gift residential/ commercial property Resident/ NRI/ OCI [3(e)] Q.2 What are the accepted modes of payment for property acquired in India? Answer: Payment for immovable property has to be received in India through banking channels and is subject to payment of all taxes and other duties/ levies in India. The payment can also be made out of funds held in NRE/ FCNR(B)/ NRO accounts of the NRIs/ OCIs. Payments should not be made through travellers’ cheque and foreign currency notes. Q.3 Can Foreign Embassies/ Diplomats/ Consulate Generals acquire property in India? Answer: Foreign Embassy/ Diplomat/ Consulate General, can purchase/ sell immovable property (other than agricultural land/ plantation property/ farm house) in India provided – Clearance from the Government of India, Ministry of External Affairs is obtained for such purchase/sale, and The consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through banking channels. Q.4 Can foreign nationals acquire property in India? Answer: Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong or Democratic People’s Republic of Korea (DPRK), irrespective of their residential status, cannot, without prior permission of the Reserve Bank, acquire or transfer immovable property in India, other than on lease, not exceeding five years. This prohibition shall not be applicable to an OCI. Foreign nationals of non-Indian origin resident in India (except 11 countries listed at (a) above) can acquire immovable property in India. Foreign nationals of non-Indian origin resident outside India can acquire/ transfer immovable property in India, on lease not exceeding five years and can acquire immovable property in India by way of inheritance from a resident. All other acquisitions/ transfers by foreign nationals will require the prior permission of RBI Q.5 How can a Long Term Visa (LTV) holder acquire property in India? Answer: Citizen of Pakistan, Bangladesh or Afghanistan belonging to minority community (Hindu, Christian, Sikh, Parsi, Buddhist, Jain) in that country and residing in India who has been granted an LTV by the Central government can purchase only one residential immovable property in India as dwelling unit for self-occupation and only one immovable property for carrying out self-employment. However, such acquisition is subject to the conditions as specified under Regulation 7 of Notification No. FEMA 20 (R)/2018-RB dated March 26, 2018. Q.6 Can a spouse of an NRI/ OCI who is not a NRI/ OCI acquire property in India? Answer: A person resident outside India, not being a Non-Resident Indian or an Overseas Citizen of India, who is a spouse of a Non-Resident Indian or an Overseas Citizen of India may acquire one immovable property (other than agricultural land/ farm house/ plantation property), jointly with his/ her NRI/ OCI spouse subject to the conditions laid down in regulation 6 of FEMA 21(R). Q.7 Can a non-resident repatriate the sale proceeds of immovable property in India? Answer: (a) A person who has acquired the property U/s 6(5)iv of FEMA or his successor cannot repatriate the sale proceeds of such property without RBI approval. (b) Repatriation up to USD 1 million per financial year is allowed, along with other assets under (Foreign Exchange Management (Remittance of Assets) Regulations, 2016) for NRIs/ PIOs and a foreign citizen (except Nepal/ Bhutan/ PIO) who has (i) inherited from a person referred to in section 6(5) of FEMA, or (ii) retired from employment in India or(c) is a non-resident widow/ widower and has inherited assets from her/ his deceased spouse who was an Indian national resident in India. (c) NRIs/ PIOs can remit the sale proceeds of immovable property (other than agricultural land/ farm house/ plantation property) in India subject to the following conditions: The immovable property was acquired in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations 2018; The amount for acquisition of the property was paid in foreign exchange received through banking channels or out of the funds held in foreign currency non-resident account or out of the funds held in non-resident external account; In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties. Q.8 What is the meaning of transfer? Answer: As per section 2(ze) of FEMA transfer means, sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. The Principal Regulations Notification No. FEMA 7(R)/2015-RB dated January 21, 2016 Notification No. FEMA 21(R)/2018-RB dated March 26, 2018 iNRI refers to a person resident outside India who is a citizen of India iiOverseas Citizen of India (OCI) is a person resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955; iiiRelative is as defined in section 2(77) of the Companies Act, 2013 ivSection 6(5) of FEMA states that a person resident outside India may hold, own, transfer or invest in any immovable property situated in India if such property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. Source: www.rbi.org.in

Guidelines for purchase and sale of property by NRIs and repatriation of sale proceeds 

It is not that complicated for Non-Resident Indians (NRI) to buy or sell immovable property in India and remittance of sale proceeds, but there are certain rules and regulations to be followed during such transactions. The Reserve Bank of India governs them and they fall under the purview of the Foreign Exchange Management Act (FEMA). In this article we will cover the rules regarding purchase and sale of property by NRIs and repatriation of sale proceeds respectively under separate headings.

Purchase of Property by NRIs

An NRI or a Person of Indian Origin (PIO) is legally entitled to buy residential and commercial properties in India without prior permission from RBI and there is no restriction on the number of immovable properties they can buy. The only stipulation is that the purchase amount must be paid in Indian Rupees through normal banking channels, or through NRI bank accounts under FEMA and RBI regulations.

NRIs and PIOs can also legally inherit property from a person resident in India and can hold it. They cannot buy agricultural land, plantation property or farm house. However, they can inherit such property from a person resident of India and can hold it.

Sale of Property by NRIs

An NRI can sell their residential or commercial property in India that they have bought or inherited to a person resident in India, NRI or a PIO. However, in case of selling agricultural land, plantation property or farm house, the property must be sold to a person who is a resident in India. After the selling comes the repatriation of sale proceeds to the country of residence. And here you have to follow certain guidelines laid down by RBI under FEMA.

Repatriation of sale proceeds of the property by NRIs, bought as a resident of India

If you are selling the property bought before moving abroad that is while you were a resident of India, then sale proceeds must be credited to the NRO account. You are entitled to repatriate up to USD 1 million including all other capital transactions per financial year (April-March), given you have paid all your tax dues.  Repatriation is restricted to sale of two residential properties only.

You can do this repatriation if you held the property for at least 10 years. If you have kept the property for less than 10 years, you can’t repatriate the money immediately. You need to keep the money in your NRO account till it completes 10 year period and then you can transfer.

For example, you are selling a property after holding it for 8 years. Then you need to keep the sale proceeds in NRO account for 2 years. After this 2 year period you can repatriate.

Repatriation of sale proceeds of the property by NRIs bought as a Non-resident of India

The sale proceeds of the property purchased after you become an NRI can be remitted outside India only after certain conditions are met:

The property must be purchased in compliance with the foreign exchange laws prevalent at the time of the purchase.

The repatriation cannot exceed the amount of foreign exchange remitted by the NRI to India via normal banking channels for the purchase of the said property.

The remittance cannot exceed the funds paid through Foreign Currency Non Resident (FCNR) Account in buying the property.

The repatriation cannot exceed the amount of loan repayment made using foreign inward remittance or debit to Non Resident External (NRE) or FCNR accounts.

The remittance cannot exceed the amount paid through NRE account at the time of purchase.

In all cases, the amount of sale proceeds must be credited to NRO account and only then up to USD 1 million per financial year can be repatriated. Such repatriation is allowed for only two properties.

‘Waiting for 10 years to complete for repatriation’ doesn’t apply for properties bought buy NRIs from their foreign money.

Repatriation of sale proceeds of inherited property by NRIs

NRIs or PIOs are allowed to repatriate the sale proceeds of immovable property inherited from a person resident in India given they produce documentary evidence in support of their inheritance and necessary tax clearance certificates from the Income-Tax authority. The amount should not exceed USD 1 million per financial year.

Taxation on sale of property by NRIs

If NRIs sell the property after three years from date of purchase, they will incur long term capital gains of 20%. The gains are calculated as difference between indexed cost of purchase and sale value.

Indexed cost of purchase is the cost of purchase adjusted to inflation. In case of inherited property, the date and cost of purchase for the purpose of calculating the period of holding and cost of purchase is taken to be the date and cost to original owner. As per laws, NRIs are subject to a TDS of 20%.

If they sell the property within three years from the date of purchase, they are liable for short term capital gains of a TDS of 30% irrespective of tax slab. Short term capital gains are calculated as difference between the sale value and cost of purchase. No indexation benefit is applicable on short term capital gains.

Tax Exemption  on sale of Property by NRIs

Definitely, NRIs are eligible for tax exemption in certain instance. If they sell their property after three years of purchase and reinvest the sale proceeds into another residential property within two years of sale, gains will be exempt to the extent of the cost of new property.

Another instance of exemption is investment in capital gain bonds. If NRIs sell their property after three years of purchase and reinvest the proceeds in bonds of National Highways Authority of India and Rural Electrification Corp. of India within six months of sale, they will be exempt from paying capital gains tax. The bonds are going to be locked in for a period of three years.

The above mentioned facts are to illustrate the due procedure involved with purchase and sale of property by NRIs and repatriation of sale proceeds. It is advisable to consult a professional to look into finer details of such transactions.

Buying a property could be your dream. To achieve all your financial dreams an easy way out is to create a workable financial plan. If you are looking out to create a financial plan for yourself, then you may want to check our financial planning process.

Source: www.taxguru.in