Category: Real Estate News

Risk Involvements In Auctioned Home Purchase

There’s no myth in the selling of repossessed properties. These properties are sold through physical or e-auctions. Though these auctioned properties offer ample scopes to the bargainers, it’s a slightly riskier investment zone and needs to be gingerly invested. A lender legally repossesses a property, when a buyer fails his/her repayment.

The bank claims only the base price against such property put up for auction, commonly known as the base price the price gets determined by the total outstanding loan amount of the defaulter to the lender. The decided base price somehow remains lower than the current market appreciation by at the most 30% in some cases. The auction process has become transparent since the online platform was made available for the bidders. These properties are auctioned on an “as is, where is” basis. It’s worthwhile mentioning that more than retail investors, high net-worth real estate investors shine on these deals with their nexus with bank managers and agents.

Banks recoups its dues from the bid amount of the auction. Seeing as these auctioned properties come with an “as is, where is” clause, banks don’t hold any responsibility. From a buyer’s perspective, they need to ensure whether the risk is as good as the discount they are getting from the lender. Before one chooses to invest in such auctioned properties here some precautions that you need to watch for-

Loans from other lenders
Sometimes auctioned properties have their other dues. Mostly this happens in the case of land parcels than that of constructed flats. In such cases, the property might be mortgaged to other lenders too. Most of the lenders work on original sale agreement, share certificates and NOC from the housing society. One needs to diligently verify other co-related documents such as documents provided by the bank, the civic body and, the tax authorities. In case of joint-ownership property make sure owners are the co-borrowers in the loan agreements for avoiding future troubles.
Other outstanding dues
The winning bidder has to bear other all other pending co-related liabilities such as- pending society dues, electricity bill, outstanding tax dues. All these additional dues will cost added to the buyer. In case the earlier owner has projected less value during the time of registration and the department has raised any claim on that can put an investor in troubles in the coming days. Thus, the previous circle rate should always be verified. For under-construction projects, verify from the builder whether there is any outstanding.

Property titles
In most the cases banks provide loan against a clear title. Yet, some instances are there, where banks sanctioned loans for properties that don’t have occupancy certificates. Thus, there is no place for guesswork while investing in an auctioned property. Checking all due diligence of the property has become easier with RERA execution. Now legal diligence of any ongoing and under construction property, including builders’ info along with his previous track record will be available on the state RERA website. But when it comes to an auctioned project, it’s beyond RERA purview. Hiring a real estate lawyer for scanning all transactions for a reasonable time period (at least for the last 30 years) is highly recommended. Make sure that property doesn’t involve any tenancy records.

Physical condition of the construction
Since the property has been repossessed by the bank, there is high chance of the low-maintenance of the asset. Even before the auction banks hardly pay any heed regarding the physical condition of the property. Thus, before diving in the process, you should visit the property and its surrounding locality to have a fair assessment of the property condition. If possible, assign a civil engineer for this task for bringing the present property condition and prospective valuation under the radar.
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Realtors are warned over GST contrivance

Construction companies and realtors could be punished by the Goods and Sales Tax (GST) authorities if they don’t disseminate input tax credit to the end-users by cutting off the property price. Now property buyers, especially buyers of the apartments won’t have to bear any additional hidden price in name of tax payments.

Reportedly, the Central Board of Excise and Customs at Delhi and its offices in other states have received several complaints from homebuyers who have booked apartments or made part payments after July 01, 2017. According to the filed complaints, these people were asked to pay a higher tax for instalments paid after the afore-mentioned date.

Explaining which GST commissioner, Vizag, N Srujan Kumar said, “This is against the GST law. Action will be initiated under profiteering section 171 of the Good and Services Tax Act against developers who collect higher tax on instalments of flats under construction. Therefore, the developers are advised to pass on the benefits of input tax credit to the buyers by reducing the price of the flat.”

The profiteering sector of the unified tax regime says, the registration of the errant developers can be cancelled and the developers are also asked to refund extra money collected from the home buyers in name of tax collection. The Act also necessitates the authorities to pass order asking developers to cut down property price and pass on the tax credits to the buyers in the future. Realtors pass on the tax benefit to the end-users, while they are refilling this breach with oversized installment money taken from the home buyers.

As per the GST commissioner GST levied on the construction of flats, buildings and complexes are somehow undersized than some central and state indirect taxes payable by the developer under the pre-GST regime which includes- central excise duty, VAT, entry tax and taxes on construction materials which initially were paid by the developers and they ended up passing those on to the home buyers. As under GST the full input credit is available for the developers, they shouldn’t pass on the taxes on construction materials to the customers; rather they should pass on the tax benefits by lowering the property price or installments.

The complaints being received by the GST offices across the country narrates some other story where developers are continuing to pass on the 2.5% input tax to the buyers. Again, they are charging higher tax or instalments from the buyers in several states. On their defence, developers are saying passing on the tax benefit to the buyers and ascending price of raw materials of the construction are two different subjects to be considered and somewhere the government is mixing up these two. While transferring 12% GST to the government, the input tax credit benefit ranging from 4.5-5% is too being passed on to the buyers. Developers affirmed that they have to wait until the end of this financial year for input tax credit calculation purpose and only then they can reach any conclusive decision on the same. The constant problem which has been bothersome to the developers is increased price of construction raw materials such as- cement and steel.

However, it’s worthwhile mentioning that apartments that are ready for possession along with occupancy certificates are exempted from GST ambit. Consumers are asked to pay 12% of GST for apartments without occupancy certificates.

 

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NHB Approaches For GST Rate Reduction On Affordable Housing

National Housing Bank is in conversation with the GST Council and the other authorities to cut down the effective Goods & Services Tax rate 12% after measuring out the lowering of the land prices that could smooth over the tax burden and advance the residential property sale.
Being the regulator of the housing finance companies NHB is expected to recommend lower GST rates for affordable housing category in particular even if the general category is under consideration at an effective rate of 6%, confirmed 2 people familiar with the development.

Realtors had conversation with the finance and housing ministry officials where they put forward a similar change in the existing GST rate. Presently, under-construction projects are under 18% tax slab of GST and while it allows abatement of one-third of the total apartment cost towards land purchase cost counting the effective tax rate at 12%.

Experts say that reducing tax level on under-construction properties will reflect in sales figures as it will likely to boost market demand for under-construction projects. As projected, the government might earn better revenue if the tax rates are dropped to 6%. Nevertheless, government will consider and audit its revenue size before reaching any conclusive decision. Again, chances are there of adverse possibility in respect to lowering tax rate i.e. – excess credit in builder’s hand which would be converted to an additional tax and ultimately passed on to the end-users.

Real estate developers also are in for of lowering the tax rates on under construction projects. According to them enquiry for under-construction projects has drastically dropped ever since it was set under 18% tax slab of GST. A rate-cut will definitely motivate them towards investing in under-construction projects than waiting for those to be completed. As per the current market scenario buyers have shifted towards ready-to-move projects for saving the additional tax amount.

Additionally, the gap between the tax rates for on-hand and up-coming projects has weakened the market demand for under-construction projects. Presently, there is no additional tax burden for under construction projects and for under-construction projects it’s 12%.

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Key Facts To Know About GST For Real Estate Developers/Builders

1st July 2017- was the date of India’s biggest tax reform. Till date the disorientation regarding this rule has been observed in the current market. Initially, it was stated that the real estate sector wouldn’t be there under GST ambit. Hence, by far it’s clear that on-hand residential constructions will attract 12% taxation and under-constructions will be under 18% tax slab. Still, there are brimming bewilderment regarding input tax credit, taxable supplies, earlier Service tax issues and many more. Here we will have a close look at the laws and provisions under GST and inspect its actual eventuality on real estate market.
Credit of duties and taxes paid on the inputs lying in stock as on the introduction day of GST, under-construction residential/commercial properties on the very day of implementation of the unified tax regime-
As per Section 140(3) of the CGST Act, 2017, credit of eligible duties is granted to the suppliers of the construction services (builders/developers who were availing abatement in terms of Notification. No. 26/2012-ST dated 20thJune, 2012) referring to the inputs displaying as on 1.7.2017 which stand for-
a. Such inputs are meant to be used for making taxable supplies;
b. Only registered person is entitled for input tax credit on such inputs;
c. The mentioned registered person is in possession of invoice or other approved documents confirming payment of duty under CENVAT credit rules, 2004 referring such inputs;
d. Such invoices or other approved documents were issued previous to 12 months directly prior to the appointed selected day i.e.-1.07.2017.
Those who have already paid the construction service tax as per previous law– If already the service tax is paid, then there is no further GST paying in terms of Section 142 (11) (b) of the CGST Act, 2017 under the provisions of chapter-V of the Finance Act, 1994.
GST can’t be collected as additional charges by the builders– One thing needs to be remembered that builder/developer can charge GST in lieu of additional amenities, customerized facilities or interior/exterior modification suggested by the buyers. If such additional facilities provided before the first occupation or before the receipt of the OC, then this additional charge will be included to the transactional value or total consideration for the supply of the construction service and GST will be paid on such transaction is 18% on 2/3rd of the total consideration and 1/3rd being the redemption permissible.
In case buyer demands any external/internal alteration such as- wood work, sanitary fittings, power back up etc. undertaken after first occupation or receipt of the OC, then it will not be treated as part of the construction service, rather will be treated as independent works contract service, which is not a part of initial construction service. Such charges will be taxable under 18% GST slab without any abatement value. Other charges such as- parking lot, preferable location, firefighting installation, Gen-set facility also are supplied in addition to the construction service. Consequently, GST at the rate of 18% on 2/3rd of the Value for such naturally bundled services is to be paid on the said charges also.
Construction service eligible for “Composition Scheme” or not– Provisions of composition levy are considered under Section 10 of CGST act, 2017 are not relevant to the supply of services. (Except restaurant services)
GST on projects which have received neither OC nor receipt of first occupation– The Sec. 142(10) and 142(11) of the CGST Act, 2017 deal with the taxability of on-going projects. Here the rules have been discussed in details-
1. When the total consideration was received before 30.06.2017 from the customers for an under construction property which is neither occupied nor has received the OC Service tax payable on the consideration received at 15% on 1/4th of the consideration and there would be no GST on the same says ( Sec. 142(11)(b)- refers).
2. In case a part of consideration was received prior to 30.06.2017 for any under construction property which is neither occupied nor has received OC service tax is to be paid on the consideration prior to 1.07.2017 and there would be no GST to the amount against which the ST is payable. For the resting consideration paid after 1.07.2017, GST is to be paid as the date of payment of the balance amount or the date on which the invoice was issued by the developer, whichever in advance.
3. For on-going construction builder/developer who have raised the invoice within 30 days from the same earlier than 30.06.2017 but the payment received from the customers after 1.07.2017, ST is payable on the consideration so received at 15%, 1/4th of the consideration and there would be no GST for the duration. On the balance amount payable w.r.t the following payment act falling on or later than 1.07.2017, GST is to be paid accordingly (ii) rule.
4. For the consideration received after 1.07.2017 from the consumers in respect of the under-construction properties GST will be charged at 18% rate on 2/3rd of the consideration.
GST on the owner’s share of the apartment constructed by builder/developer and given to the land owner as per the rule and the about the calculation of such payment– On the share of the land owners builders/developers have to bear the GST, despite the land received for the development, apart from the GST on the builder’s/developer’s share of the construction.
Under this transaction builder receives consideration for the construction service given by him, from two categories of service receivers:
1. From landowner: As per the land development rights. 2. From the other buyers- Normally in cash transactions, thereby paying GST not only on his portion of the building but also the part of the landowner.
If the builder is liable to pay this entire amount of both his and the land owner’s share then GST is payable when the possession or the right of property is transferred to the land owner by entering into a ‘conveyance deed’ or related instrument. The value of the flats/portion of the building supplied to the land owner is determined in the provisions of Section 15 of the CGST Act, 2017 read with Rules governing Valuation as envisaged under Rules 27 to 35 of the CGST Rules, 2017.
According to the rule the supply of such goods or services is for a consideration not entirely in money, the value of the supply will be-
i) The open market value.
ii) In case that open market value is not available under the clause (a), be the aggregate of consideration in money and any such additional amount in money corresponding to the consideration not in money, if such amount is known at the time of supply.
iii) If the value of supply is not resolved under clause (a)/ (b) then the value of supply of goods or services or both will be conforming kind and quality.
If something happens like the above mentioned then the value of supply of the flats will be calculated as the similar set of projects charged from the buyers. For some reason if there is any correction in the price range of such apartments during the period of sale, then the other flats will be sold nearer to the date on which the land is given for the construction purpose.
Lay out charges/Plotting charges/ Development charges/ Conversion charges collected by the competent local civic bodies whether entire reverse GST charge-
As per the entry at Sl. No. 4 of notification no.12/2017-CT(R) the services which the central government, state governments, UTs or even local authority offer in the terms of any activity related to any purpose authorized to a municipality under Article 243 W of the Constitution, are not liable. “Regulation of land-use and construction of buildings” is one of such functions entrusted by the municipality at Sl.No. (b) of 12th schedule under Art. 243W of the Constitution. In view of the subject Lay out charges/ Plotting/Development and Land conversation charges are collected under State legislation are exempted from GST. 243W, the said charges for the concerned services are let off under sl.no.4 of Notification No. 12/2017-CT (R) dtd: 28.06.2017. Thus, such charges are collected by municipal authorities/ town planning/ Revenue authorities including VUDA/ HMDA won’t attract any GST. Thus, such charges are collected for the services in relation to the functions under Art. 243W of the Indian Constitution.
Disclaimer– The above mentioned information doesn’t include any legal advice. This is just a simplified concept in order to provide lucid GST solution to the real estate stake holders. For detailed legal information regarding central/state GST visit- www.cbec.gov.in.
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Centre Expands Carpet Area Under PMAY- Urban

Now Middle Income Group (MIG) apartments are going to have additional carpet area under the Pradhan Mantri Awas Yojana (PMAY) – Urban. Cabinet has approved the enhancement of carpet area under the MIG-I category. The carpet area has been enhanced from 90 sq mtr-120 sq mtr, while under MIG-II segment; it has been increased from 110 mtr to 150 mtr.

Carpet area is the area enclosed within the walls. This keeps out the width of the inside walls. Earlier builders used to charge for the super built-up area, which includes area of outer walls, balcony and lobbies, stairs and even lifts. Now that RERA is against the practice of super built up area and will set the measurement on the basis of the carpet area. Nevertheless, under PMAY, the area of the house is different for all the available categories and it’s the carpet area and not the super area on which the buyers will be charged for.

Union minister Ravi Shankar Prasad declared this revised measurements on a press conference. Briefing about the cabinet decision the union minister confirmed that under the MIG-I category, a 4% interest subsidy has been allotted for the beneficiaries with an annual income ranging in Rs. 6-12lacs, on a borrowed loan amount of 9 lac. Government’s decision to increase home size under Credit Linked Subsidy (CLSS) scheme will clear up unsold inventories, following by boosting up fresh market demand. Similarly, under the MIG-II category, the beneficiaries with annual income of Rs. 12 lac to 18 lac, get interest subsidy of 3% on a loan up to 12 lac.

Realtors’ bodies like CREDAI and NAREDCO are happy with this initiative taken by the government as they find the move quite favourable for the middle income group to emerge as an important investor class. Mahesh Somani, Head- East Zone, National Association of Realtors India (NAR) said, “Good news for property buyers who want to buy apartments with PMAY benefits. This is an incredible move by the government not only to push the affordable housing sector, but also to get the market a steady liquidity pool. Now, more developers will plunge into the market which would definitely usher new project launches in the current market.”

“Launch of new projects will definitely render the shortage of development under prime minister’s ambitious project –Housing for All by 2022,”- He added.

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