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GST is applicable on purchase of second house

H. P. Ranina/Dubai
Filed on January 26, 2020
GST is applicable on purchase of second house


Question: I wish to own a house in Hyderabad. I may either purchase a plot of land and build a house thereon or enter into an agreement with a builder for constructing a building of my specifications on a plot of land owned by him. I am worried about levy of the Goods and Services Tax (GST). Please advise.

Answer: When you purchase the plot of land under the first option, no amount is payable by way of GST. However, if you go for the second option and purchase the house from a developer, it would attract GST. This issue has been decided by the Authority for Advance Rulings. According to the AAR, development of a plot of land and constructing a building with amenities amounts to rendering of services. The core activity of the builder is development of land and not its sale.

The provision of Rule 31 of the CGST Rules would be applicable to ascertain the value of the land and supply of services. This rule prescribes the residual method for determination of value of goods and supply of services. In view of this ruling and many others, it is necessary to draft the agreement with the developer under which the scope of the work to be done by him is clearly and unambiguously set out.

Q: I have invested in shares and debentures of several listed companies. Some of these companies have delayed or defaulted in repaying loans taken by them from banks and financial institutions. As an investor, I am greatly concerned that this information of delay or default is not readily available. If investors are aware of these defaults, they would immediately take remedial action and pull out their investments before the share prices drop substantially. Is there any means of getting this information? I am taking full advantage of the portfolio management scheme.

A: The regulator, Securities & Exchange Board of India, has recently tightened the guidelines for listed companies on disclosure of loan defaults. As per the new norms, when a default is committed by a listed company in repaying the principal amount on schedule, the company has to disclose the fact of such default to the stock exchanges. This requirement is applicable where the delay in repayment of the principal amount and interest is beyond thirty days from the agreed payment date. The notice of such delay or default is required to be given within 24 hours from such thirtieth day.

This will provide transparency and protect the interest of investors so that they can act appropriately in the shortest possible time. These disclosure norms have been formulated by SEBI in consultation with the Reserve Bank of India. Since you are availing of the portfolio management scheme, you may note that SEBI has decided to increase the net worth requirement of portfolio managers from Rs.20 million to Rs.50 million. This will ensure that the managers have a stronger financial base.

Q: I have served on the board of several companies in the Gulf during the past fifteen years. On returning to India for good, I would like to serve as an independent director on the board of reputed companies if invited to do so, as I believe that there is a substantial shortage of independent directors. What are the consequences of taking up such assignments?

A: Independent directors perform functions which are critical to good corporate governance. However, the liability framework governing such directors casts an onerous burden and the liability-related risks faced by independent directors are disproportionate to the remuneration which they may earn. The Companies Act, 2013 seeks to limit the liability of non-executive directors by providing for certain safe harbour rules designed specially for them. However, the directors have to initially face investigative or legal proceedings before they are exonerated.

Further, you need to know that all independent directors with less than ten years experience of acting as such, will have to take an online proficiency self assessment test before they can be appointed on boards of companies. The test will be conducted by the Indian Institute of Corporate Affairs. This Institute will create and maintain a data bank with names, addresses and qualifications of people who are eligible to be appointed as independent directors. Boards of companies will have to disclose the results of these tests in their annual report.

- H. P. Ranina is a practicing lawyer, specializing in tax and exchange management laws of India.

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