GST net expands for Real Estate Enterprises

The Directorate General of GST Intelligence (DGGI) is said to have sent notices to a number of real estate enterprises, demanding that GST be paid for a number of transactions involving group companies or joint venture partners.

The move is considered as part of an attempt to broaden the sector’s revenue base.

Fees for management services and royalties payable for the use of brand names are among the services deemed taxable by the DGGI at 18%, the GST slab applicable to the majority of services.

Large real estate organisations frequently use intra-group and intra-JV transactions as part of their operating strategy, cash management, and joint venture agreements. Tax experts disagree on the legality of the present set of tax demands.

On the condition of anonymity, the managing director of a leading Mumba-based real estate company stated: “In a 50:50 JV (joint venture), many charge 7-8% management fee (for managing construction and approvals). These could be subject to GST. The DGGI is said to be looking into it, and we may hear something soon.”

According to the source, such costs, which include brand royalties, amount to 12-15% of the cost for developers. The cost of such payments is factored into the creation of JVs and shareholding.

While the sale of land or units in completed real estate developments is still exempt from GST – these are subject to state-level imposts such as stamp duty and registration fees — the sector’s GST applicability is broadly limited to work contract services. Homebuyers must additionally pay GST on the purchase of under-construction properties, which is 1% for the affordable sector and 5% for other properties, both without an input tax credit.

The DGGI is also investigating the royalties charged by parent firms to their SPVs (special purpose vehicles) for utilising the former’s brand name and may require developers to pay GST on it. “They (real estate companies) must pay GST if they charge a fee… that is the rule. If they haven’t been paying, they must now,” said Anarock Capital managing director Shobhit Agarwal.

As per tax experts, transactions between related persons are subject to GST even when there is no consideration. The DGGI is conducting investigations and issuing letters to many real estate operators in which GST is sought to be recovered for the suspected supply of the right to use the brands.

Real estate firms often use an SPV model, in which each project is undertaken in a separate SPV. According to the experts, the authorities have decided that the use of the brand (the name and logo of the flagship firm) by SPVs should be subject to GST.

The stewardship idea is a well-established and acknowledged one in which holding businesses execute specific operations for their own benefit. For example, the SPV’s use of the logo and trademark is plainly for the profit of the flagship firm.

It is also quite possible that real estate corporations would submit an appeal against the government’s decision to collect GST on royalties from subsidiaries.

To address this issue, some developers began using their parents’ names in all SPVs, according to a top manager at a real estate firm.

Many are also hiring external valuers to estimate the worth of their brand name.

Because input tax credit is unavailable (at least for residential buildings), any GST demand would be a cost to the builders. Most real estate firms are already under investigation, and demand letters are on their way. As for the method of determining the value of royalties, the law is silent, and the best judgment path must be used, according to a company executive.

Another top-level official of the company said, “The valuation of the brand, the impact of the brand on consumers, and other issues must be addressed.”