Tax on real estate firms -A real state


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 royalties charged for the 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.

The 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 learned to be studying it, and we may get notices soon.”

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

While the 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 the purchase of under-construction properties – at a benign 1% for the affordable segment, for other properties, at 5%, both without the 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,” said Shobhit Agarwal, managing director of Anarock Capital.

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 the alleged supply of a 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.

Harsh Shah, partner, of Economic Laws Practice, said, “The principle of stewardship is a well-established and accepted one wherein the holding companies perform certain activities for their own benefit. For instance, the use of logo and brand by the SPV is clearly for the benefit of the flagship company,” Shah said.

He, however, added that it is highly likely that the real estate companies will file an appeal against the decision of the authorities to levy GST on royalties from the subsidiaries.

To overcome this issue, some developers started using parents’ names in all SPVs, said a CEO of a real estate firm.

And many are getting a valuation done by external valuers to assess the value of the brand name.

Mayank Jain, Partner, Khaitan & Co said the GST notices have also been sent to real-estate companies who have projects in other states as well, for the same purpose. “Any demand of GST would be a cost to the builders as input tax credit is unavailable (at least, for residential projects). Most real estate companies are already facing an investigation and demand notices are expected. As to the manner of determination of the value of royalty – the law is silent and one would have to see the best judgment route being adopted,” Jain said.

Vishal Lahoti, Partner, SGCO & Co. LLP said that how to charge GST when a parent charges a royalty fee to the subsidiary is an open question.” Valuation of the brand, the impact of brand on consumers etc. are the issues which should be sorted out,” he said.

Source:  Financial Express