RCM Under Real Estate Sector

RCM Under Real Estate Sector



A reverse charge is a tax mechanism by which the supplier of goods or services (i.e., the vendor) will be held accountable for collecting the applicable taxes from their customers, instead of vice versa. In the Indian context, reverse charge refers to a situation when one entity has to pay tax on behalf of another. The Reverse Charge Mechanism RCM on real estate was introduced by the Finance Act 2017 and came into effect on 1st June 2018 with an objective to reduce tax avoidance in Real Estate Industry and improve compliance. The objective of RCM is to bring routine transactions within the scope of GST and make all related entities jointly accountable. With this new law, now buyers will have to take responsibility for paying taxes on new constructions, rather than suppliers such as vendors or contractors.


What is Reverse Charge Mechanism RCM Real Estate?

The real estate sector is one of the major sectors for generating black money and for avoiding taxes in India. The RCM for real estate was introduced by the Finance Act of 2017 with the objective to reduce tax avoidance in Real Estate Industry and improve compliance. The objective of RCM is to bring routine transactions within the scope of GST and make all related entities jointly accountable. With this new law, now buyers will have to take responsibility for paying taxes on new constructions, rather than suppliers such as vendors or contractors. The RCM mechanism requires a buyer to pay GST on the value of construction services provided by a contractor. In contrast, the contractor will have to pay IGST on the acquisition of raw materials and other input services such as labor services.


Who is liable for RCM?

The person who is responsible for paying GST under the RCM will be called the ‘assessee’ in the GST parlance. When the assessee is a buyer (a person who buys goods or services), the supplier will be called the reverse charging supplier. A reverse charging supplier is a person who will be liable for paying GST on behalf of an assessee. There are 2 conditions for implementing the RCM: The first condition is that the transaction must be a ‘Routine’ transaction. If the transaction is not a routine one, the RCM mechanism will not be applicable. The second condition is that the assessee (the buyer) must have paid the GST on the transaction.


Reverse Charge on Real Estate Transactions

While the buyer has to pay GST on the value of construction services provided by a contractor, the contractor will have to pay IGST on the acquisition of raw materials and other input services such as labor services. There is a difference between the Reverse Charge and Reverse Credit Mechanism! The major difference between the two is that: Under the reverse charge mechanism, a buyer has to pay GST on the value of construction services provided by a contractor. While the reverse credit mechanism allows a taxpayer to claim GST paid on inputs while filing a GST return.


How to calculate the reverse charges on real estate?

Let’s assume that a buyer has purchased a commercial property worth INR 100 Cr. The buyer has paid IGST on the purchase of the commercial property. Now, the buyer has to pay RCM on the value of construction services provided by a contractor. The RCM on residential property will be 5%. According to the formula given below, the RCM on commercial property will be 5% of INR 100 Cr. RCM on commercial property = 5% of Rs. 100 Cr. = 5000 Cr.


Will there be any benefit of RCM?

Yes, there are several benefits of implementing the RCM. One of the major benefits of implementing the RCM is that it will bring all real estate transactions within the GST ambit. This will lead to more transparency in the real estate sector and will help the government in bringing more people under the tax net. Another major benefit is that it will lead to improved compliance in the real estate sector. With the introduction of RCM, vendors will be held responsible for paying taxes on behalf of the buyer.


Conclusion

The RCM will be applicable to all real estate transactions which are not considered ‘Routine’ transactions. The RCM will help the government in bringing more people under the tax net as all real estate transactions will come within the GST ambit. It will also help in generating more GST revenue for the government. The RCM mechanism requires a buyer to pay GST on the value of construction services provided by a contractor. In contrast, the contractor will have to pay IGST on the acquisition of raw materials and other input services such as labor services.

If you want to know more about the RCM on real estate then you need the right Chartered Accountant who will help you in all this. Click on the link to visit the Chartered Accountant in Mumbai

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