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Real estate companies are raising concerns about new Goods and Services Tax (GST) rules impacting project costs. The issue stems from notices sent by authorities to several developers regarding taxes on two specific practices.
The first one is that authorities are asking developers to pay 18% GST on royalty payments made to their parent companies for using their brand names in special purpose vehicles (SPVs) set up for individual projects.
The second one is that developers are also facing notices for not paying GST on corporate guarantees provided by their main companies to subsidiaries. These guarantees also attract an 18% GST charge.
Developers argue that the SPV model is essential for attracting joint venture partners for various projects. Each project has its own set of risks and financial requirements. SPVs help developers isolate risk and manage finances for each project independently, making them more attractive to investors and joint venture partners. SPVs ensure transparency and accountability, as separate financial statements are maintained for each project. This promotes responsible financial management and protects the interests of all stakeholders. Additionally, they claim that levying 18% GST on these transactions will significantly increase project costs and reduce their profit margins.
The Finance Ministry has acknowledged receiving representations from real estate companies and is currently reviewing their concerns. The issue may be referred to the Group of Ministers on real estate for further discussion at the next GST Council meeting. Finding a solution that balances tax compliance with the industry's needs and protects the interests of homebuyers will be crucial.
The Directorate General of GST Intelligence (DGGI) views the use of brand names and logos by SPVs as a service, and therefore, subject to 18% GST. They claim to have detected potential tax evasion of INR 3,500 crore solely from the real estate sector related to this practice.
This disagreement between developers and the government highlights the ongoing challenges associated with implementing the GST regime. While the DGGI aims to ensure tax compliance, developers are concerned about the financial impact of these new regulations on their businesses and ultimately, on homebuyers. It remains to be seen how this issue will be resolved in the upcoming GST Council meeting.
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