Mumbai: Mumbai Metropolitan Region (MMR) realtors are facing GST heat with tax demand notices to top real estate companies to pay GST for financial transactions among group companies and joint venture partners.
The Directorate General of GST Intelligence (DGGI) has decided to widen the tax net in the real estate sector. Tax officials are investigating major real estate companies for GST evasion on royalty charged by parent company to subsidiaries and Joint Venture partners.
“Fees for management services and royalty charged for use of brand names are among the services that are taxable at 18%, under GST slab for most services,” a senior GST official told the FPJ on Tuesday.
Intra-group and intra-JV transactions too under DGGI's scanner
The DGGI has identified royalty charged by parent companies to their SPVs (special purpose vehicles) for using the brand name of the former liable which are taxable under GST. The intra-group and intra-JV transactions common among large real estate firms for operational strategies and cash management in joint venture arrangements are also under the DGGI's scanner. The DGGI investigation on 50:50 JV (joint venture) revealed 7-8 % management fee charged by major developers for managing construction and approvals and such fees ,including royalty paid for brands , which add up to 12 to 15% of cost for developers.
The GST demand would push up the already high real estate prices in MMR with the developer passing the tax burden on home buyers as demand of GST would be a cost to the builders as input tax credit is unavailable for residential projects.
SPV model
According to leading real estate developer Vivek Abrol with multiple projects in Malad and Vasai - Virar region, real estate companies typically operate on an SPV model wherein each project is undertaken in a separate SPV. “GST department has taken the position that royalty charged for name and logo of the flagship company by the SPVs is subject to GST,” said Mr Abrol. He further explained that home buyers pay GST without input tax credit on purchase of under-construction properties at a nominal 1% for the affordable segment and 5% for premium properties.
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