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Construction Services Under Gst – a Detailed Information

 

Food, clothing, and shelter are three basic needs of any human being. Construction activity not only provides homes by virtue of building houses but also provides food and clothing by giving them employment. It was the construction activity only, which turned out to be the saviour of the Indian economy because of its unique characteristics, at the time of the global depression in 2008. This activity is the germane reason for the flow of liquidity from the upper echelons of the society to the subaltern strata. The Indian construction industry employs over 30 million people and creates assets worth over ₹ 200 billion each year. More than 16 percent of the nation’s working population depends on construction for its livelihood. It contributes more than 8 percent to the nation’s GDP and 78 percent to the gross capital formation. 

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GST Audit Checklist

Construction activity under the GST act is governed by the concept of a Works contract.

What is a works contract? (In general Parlance)

As the name suggests, it is a contract undertaken for doing the agreed work. The raw product and the other raw materials to be used on that product to convert it into the desired form, may or may not be provided by the client. In general parlance, a works contract is necessarily a contract of service which may also involve the supply of goods in its execution. Consequently, it can be described as a composite supply of both services and goods, with the service component being dominant in such a contract.

In the usual day-to-day life, a works contract may relate to both immovable and movable property. E.g. if a subcontractor undertakes a sub-contract for the building work, it would be a works contract in relation to immovable property. 

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Similarly, if a contract of a composite supply such as fabrication/painting/annual maintenance contract etc. in relation to the movable property such as a bus or a truck is undertaken, the same would also be covered in the ambit of the broad definition of a works contract.

Construction Services Under GST - A Detailed Information

Taxability of Works contract under VAT and Service tax both, before the implementation of GST

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A works contract had the elements of supply of both goods and services and were therefore taxable under both the laws.

VAT

The dispute that a works contract is a supply of goods or service was put to rest by the judgement of The Supreme Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., 1959 SCR 379, where it was held that in a building contract which was one and entirely indivisible, there was no sale of goods and it was not within the competence of the State Provincial Legislature to impose a tax on the supply of materials used in such a contract, treating it as a sale.

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This judgement became the semblance around which most of the other cases of composite supply were judged. It had become amply clear that in the case of a works contract, the dominant intention of the contract is the execution of works, which is a service and there is no element of sale of goods involved. 

This decision led the Government to amend the Constitution of India and insert Article 366(29A) (b) which enabled the State Governments to levy a tax (VAT) on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.

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SERVICE TAX

Before the introduction of Service Tax in 1994, the tax was levied only on sales of goods (VAT). According to the erstwhile Service Tax, the value of the gross supply of the works contract was to be divided into two portions;

  • Supply of goods- To be taxed under VAT
  • Supply of services- To be taxed under Service tax

By virtue of Section 66E of Finance Act, 1994, the service portion involved in the execution of the works contract was a declared service. Hence Service Tax could be levied only on the service component of the works contract. The principles of segregation of the value of goods were provided in Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

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Determination of Value of Supply (Under GST)

According to Service Tax, Works contract had been defined in section 65B of the Finance Act, 1994 as,” a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.”

Thus the goods portion was to be taxed under the sales of goods act i.e. VAT

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Works contract under GST act

According to the GST Act, this previous ambiguity regarding works contract with respect to goods or service / immovable or movable has been permanently done away with. Now Works contract under the GST act is unequivocally a service contract and that too on an immovable property only.

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We are quoting some of the definitions and sections from the CGST Act 2017, which are necessary for you to know, for a better understanding of this topic.

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Definitions

As per the CGST Act, 2017

Sec2(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply; 

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Sec2(102)  “services” means anything other than goods, money, and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; Explanation.

For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities; 

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Sec2(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply; 

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport, and insurance is a composite supply and supply of goods is a principal supply;

Sec2(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

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Sec 7 pertains to supply. We are quoting only sec 7(3)

Sec7(3) Subject to the provisions of sub-sections (1),(1A) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as— 

(a) a supply of goods and not as a supply of services; or 

(b) a supply of services and not as a supply of goods.

Sec 17(5) deals with blocked credit (Nonavailability of ITC, Input tax credit)

On the following services, the recipient will not be able to avail of ITC

Sec 17(5)(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; 

Sec 17(5)(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Explanation.––For the purposes of clauses (c) and (d), the expression;

“construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

“Plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— 

(i) land, building, or any other civil structures; 

(ii) telecommunication towers; and 

(iii) pipelines laid outside the factory premises. 

SCHEDULE II

Activities to be treated, As the supply of Goods, Or Supply of services. 

Entry 2. Land and Building 

(a) any lease, tenancy, easement, license to occupy land is a supply of services; 

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services. 

Entry 5. Supply of services 

The following shall be treated as supply of services, namely:— 

5(a) renting of immovable property;

5(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

the expression “construction” includes additions, alterations, replacements, or remodelling of any existing civil structure;

Entry 6. Composite supply 

The following composite supplies shall be treated as a supply of services, namely:— 

(a) works contract as defined in clause (119) of section 2; 

Schedule III

According to entry 5 of schedule III (Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services) of the CGST act;

Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of a building.

We have quoted all the above definitions from CGST ACT, 2017

Differentiation between Movable and Immovable Property

There is only one definition of goods in the GST Act, which is,” Goods refers to all types of movable property, including actionable claim, growing crops, grass, and things attached to the land that are agreed to be severed before supply or under a contract of supply. Excludes securities and money.”

According to THE GENERAL CLAUSES ACT, 1897

Sec 3(26) “immovable property” shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth;

Sec 3(36) “movable property” shall mean property of every description, except immovable property;

Some Rulings on immovable property

(i) The Authority in advance ruling M/S ABB India Ltd; AAR-West Bengal observed about the immovable property is as under:

 “The essential character of immovable property is that it is attached to the earth, or permanently fastened to anything attached to the earth, or forming a pan of the land and not agreed to be severed before supply or under a contract of supply.”

(ii)“In S/S Triveni N L Ltd [RN – 910, 911 & 912 of 2001 (All)] Allahabad High Court 

It was observed that permanently fastened to anything attached to the earth has to be read in the context for the reason that nothing can be fastened to the earth permanently so that it can never be removed. If the article cannot be used without fastening or attaching it to the earth and is not removed under ordinary circumstances, it may be considered permanently fastened to anything attached to the earth.

Hence, in the context of the GST Act, it has become crystal clear that, if the article attached to the earth is not agreed to be severed before supply or under a contract for the supply, it ceases to be goods and, for that matter, a moveable property.”

Upon reading all these definitions we can come to the conclusion that immovable property is something which can not be moved under ordinary circumstances, which is imbedded in land, land itself, anything attached to the land, benefits of land attached to it, fastened or attached to something which is imbedded in the land (like machinery attached to a platform which is built on land and can not be used without that platform)

For the purpose of works contract Immovable property can be of two types;

  1. Immovable  building (residential or commercial building)
  2. Immovable plant and machinery

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Practical FAQ’s under GST: ICAI

Our understanding after going through all the above sections

  • There is no definition of Construction in sec 2 of the act. Construction is explained under sec 17(5)  (blocked credit) and schedule II ( Activities treated as  Supply of goods or services)
  • Under Schedule II entry 5(b), constituents of construction and objects which are to be constructed are given. The heading is ‘supply of services’. Hence it becomes concrete that construction is a supply of service.
  • In the definition of works contract, sec 2(119), construction is one of its constituents. Therefore Works contract is a broader term, where construction is one of its components.
  • As per schedule II, a works contract has been described as a composite supply of service. In a composite supply, goods or services can become the primary supply. Works contract is a type of composite supply where the primary supply is of service. The supply of goods has been also deemed to be the supply of service by the virtue of sec 7(3) where the government can declare supply of goods as the supply of service and vice versa.
  • According to the GST Act, goods are always considered to be movable. Services are defined as something which is not goods. Hence immovable goods or property have to be necessarily classified as services. We have understood that a works contract deals with only immovable property, therefore it can not be classified as a supply of goods.
  • There are 14 activities (types of services) described in the definition of works contract which will constitute singly or collectively a works contract.
  • It involves Immovable property only for performing these activities. These activities can be performed on any existing immovable property or can be done to create a new immovable property.
  • There should be some portion of transfer in property of goods to be involved in the value of the whole contract along with service. It implies that the contractor must procure some of the raw material in his own name, use it in the execution of such contract and transfer the property in such goods at the time of completion of such works contract.
  • If there is a contract, where the contractor does not procure any of the raw material to be used in the execution of the contract, then such contract would be termed as a pure service contract. In such a contract there will be no element of transferring property in any type of goods, then that contract shall not be treated as a Works Contract under GST. For example, a person provides pure labour service to construct buildings without any transfer of goods, then this contract shall not be treated as a Works Contract. In such a contract the client procures all the raw material which is used in the execution of the contract.
  • Works contract is a hybrid of supply of services and goods both, where the supply of service forms a dominant part, but the supply of goods is an essential element of such a contract. Without the transfer of property in goods, it will not be a works contract
  • The main property on which service is provided has to be immovable, but along with service, the transfer in property of goods can be of movable property. As goods are considered to be movable under GST.
  • There is no definition of Plant and machinery in sec 2. The explanation of Plant and machinery is provided in Sec17(5) only.

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Blocked ITC

As per section 17(5) (c ) and 17(5) (d) of CGST Act, 2017 (quoted above)

The ITC will not be available, to the recipient of services of a works contract or construction services except ;

  • If the services are used for the construction of plants and machinery (explanation above).
  • If the services are used by the recipient as an input for further supply of taxable services.

Examples

  • Mr. A (GST registered person) gives a works contract to M/s XYZ Contractors for constructing an immovable property for him. He cannot claim any ITC on the GST paid by him on that works contract. 
  • Suppose Mr. A has undertaken a contract for constructing a building for Mr. B. He subcontracts a portion of the works contract to M/s XYZ Contractors. Now he can claim ITC on the GST charged by M/s XYZ Contractors since he has used this service for further supply of taxable services
  • R.K. Steel Industries constructs an office building for its headquarters. ITC will not be available.
  • R.K. Steel Industries also constructs a blast furnace to manufacture steel. ITC is available since it is a plant.

Notes

  • ITC will not be available even if these services are used for the furtherance of business.
  • The construction can be done in his own name or a construction/ works contract may be given to a third party. In both cases, ITC will not be available.
  • In the case of plants and machinery, ITC will be available in both the cases of capitalization or revenue expenditure.
  • In the case of any other immovable property (other than plants and machinery), ITC will not be available for the amount that is capitalized. The GST paid will become a cost, and will be capitalized. In the case of revenue expenditure, it will be available.

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Taxability of Works contract and Construction service (On immovable building, residential or commercial)

According to Schedule II, a works contract is a deemed supply of service as per entry 6(a) and construction services is a deemed supply of service as per entry 5(b) [quoted above]

Other sections

For most of the sections, they both have been given the same treatment. Be it 17(5) for blocked credit, or rate of output tax. For all practical purposes, they are treated in the same manner.

We shall mainly focus on the taxability of residential/ commercial units. Their taxability depends upon various factors. We shall first give you the new effective rates as per the amendment dated 1.4.2019 and then give all the relevant explanations.

Valuation u/s 15

(Para 2 of the notification 11/2017 dated 28.06.2017as amended by Not. No. 1/2018-C.T. (Rate), dated 25-1-2018)

In the case when the total amount charged includes the value of land, the tax shall be payable on

The total amount charged – the value of land

Provided that the value of the land shall be taken as 1/3 of the total amount charged.

According to Para 2 of the notification no. 11/2017, the total amount of consideration for the residential/ commercial unit is deemed to include one-third portion of the consideration for the value of land/ undivided share of the land on which that unit has been built. 

According to entry 5 of schedule III (Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services) of the CGST act;

5 Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of the building.

Hence we can see that sale of land will not attract GST (as there is already stamp duty). Therefore the output tax rate is reduced by one-third to give effect to such deduction of output tax on land.

The value of land/undivided share of land transferred is to arrive in terms of deeming provision of Para 2 of Notification no. 11/2017-CT (Rate) dated 28.06.2017, as amended by Not. No. 1/2018-C.T. (Rate), dated 25-1-2018.  Para 2 (Quoted below)

  1. In case of a supply of service specified in column (3), in item [(i), (ia), (ib), (ic), (id), (ie) and (if)] 116, against serial number 3 of the Table above, involving the transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply. Explanation. –For the purposes of this paragraph, “total amount” means the sum total of,- 

(a) Consideration charged for aforesaid service; and 

(b) Amount charged for transfer of land or undivided share of land, as the case may be included by way of lease or sublease.] 

Construction Services Under GST - A Detailed Information

Table showing the effect of date of payment of consideration (due to introduction of GST ) and completion of the project

Project for which completion certificate has been issued. 

Purchaser has bought  the unit after the receiving of completion certificate

Purchased as an Under Construction Project

Where full consideration has been paid to the builder before 1.07.2017

Purchased as an Under Construction Project

Where Part consideration has been paid before 1.07.2017 and balances afterward

The date of purchase or date of entire consideration does not matter. There will be no levy of GST as per  entry No. 5 of Schedule III

 

This transaction will attract Service Tax and not GST. As per Point of Taxation  Rules, 2011 of service tax, any transaction where the invoice has been raised or consideration has been made before the date of enforcement of GST, the point of taxation shall arise before the implementation of GST. Hence such transaction will attract service tax @4.5 % and not GST. As for invoices raised or consideration paid before 1.7.2017, it will attract Service tax @4.50%. 

For the invoices raised or consideration paid on or after 1.7.2017, GST will be levied @12%(effective rate). The builder will be able to take credit Of ITC available. 

Some Important terms we need to know

RREP (Residential Real Estate Project) It means a Real Estate Project (REP) of residential apartments with commercial apartments not more than 15% of the total carpet area of REP.

Affordable Residential Apartment It means an apartment having carpet area not exceeding 60 sq. meters in a metropolitan city and 90 sq. meters in a non-metropolitan city and for which the gross amount charged is not more than 45 lakhs.

Old Scheme before the amendment on 1.4.2019 as per notification 11/2017 dated 28.6.2017

We must know in brief about the old scheme (related to output tax rates ) to understand the new scheme. The following rates of output GST  were applicable:

  • GST at 12% was applicable on ‘supply of real estate before completion i.e Purchased in the under-construction stage.’
  • A concessional rate of 8% was applicable for units qualifying for Affordable Housing

Provided that developer was allowed to take benefit of ITC paid.

Output Tax rates (New Rates) on various types of Real-estate after the amendment in notification 11/2017 dated 1.4.2019

Notes

  • These rates are applicable only for units that have been sold at the time of booking or in the under-construction stage.
  • If any unit has been sold after the project has received a certificate of completion then, it will not attract GST as per entry No. 5 of Schedule III

1) Output GST on the construction of Affordable Housing Apartments

The applicability of GST rates depends upon whether the supply involves the transfer of land/undivided share of land or not (as per para 2 of notification no. 11/2017). Therefore  we shall distribute the applicability of GST rates under two heads:

(I) Where the supply involves the transfer of land or undivided share of land:

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

0.75 0.75 1.5 1.5- (1.5*1/3) 1

 

(II) Where the supply does not involve the transfer of land or undivided share of land:

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

0.75 0.75 1.5 Nil 1.5

 

2) Output GST On Construction of Other than affordable residential apartments

The Real estate sector is regulated in India as per RERA Act. There are many other types of projects built under the RERA Act, like Residential Real Estate Projects (RREP) or Real Estate Projects(REP)(Other than affordable residential housing). The output GST rate depends upon whether the supply involves the transfer of land/undivided share of land or not.

(I) Where the supply involves the transfer of land or undivided share of land:

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

3.75 3.75 7.5 7.5- (7.5*1/3) 5

 

(II) Where the supply does not involve the transfer of land or undivided share of land:

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

3.75 3.75 7.5 Nil 7.5

 

Note

  1. a) If a person has bought an apartment under PMAY (Prime minister Awaas yojana) and taken the benefit of CLSS (Credit linked subsidy scheme), even if the carpet area is more than 60 sq. mts., Then also it will be considered as affordable housing and he will be applicable for output GST @1%, provided the builder has opted for new rates or he has commenced the project after 1.4.2019.

3) Output GST on the construction of Commercial Apartments  

After the taxability of residential apartments, we shall see the applicability of the output GST rate on commercial apartments. There is no affordability criteria, but the distinction will be made for the supply of land/ share of undivided land or not. There is one more point of difference, whether situated in RREP or REP.

(I) Commercial apartments in RREP

  1. Where the supply involves the transfer of land/  undivided share of land:

 

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

3.75 3.75 7.5 7.5- (7.5*1/3) 5

 

  1. Where the supply does not involve the transfer of land or undivided share of land:

 

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

3.75 3.75 7.5 Nil 7.5

 

(II) Commercial apartment in REP. (No change in the old rates, Builders can avail full ITC)

  1. Where supply involves the transfer of land or undivided share of land:

 

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

9 9 18 18 – (18*1/3) 12

 

  1. Where supply does not involve the transfer of land or undivided share of land:

 

CGST

(%)

SGST

(%)

IGST

(%)

Effect for consideration of land Eff rate

(%)

9 9 18 Nil 18

 

(III) Some other miscellaneous rates are as following;

 

Description of some other works contracts and construction services Tax rate (No change in the old rates) (%)
Composite supply of works contracts to government agencies/local govt. bodies 12
Composite supply of works contract (other than government agencies/local govt. bodies/ affordable housing) 18
Works Contract (other than govt. bodies) 18

 

We have given here a few prominent rates, for the complete list you can refer to Notification No. 11/2017 dated 28.6.2017 amended up to 1.4.2019

Notes

  • The new tax rates have been changed to only affordable residential housing, Other than affordable residential housing, and Commercial apartments in RREP.
  • There is no change in tax rates of commercial apartments in REP. Therefore builders of commercial apartments in REP can claim full ITC on their purchases.

GST is not applicable to the following construction-related transactions/activities:

  • Sale of ready-to-move-in flats, where completion certificate has been received by the builder.
  • Resale of property (Not bought directly from the builder, but from a previous owner.)
  • Sale/purchase of land

Expected Benefits of the GST Rate cut on Residential Properties

  • The simple tax structure will lead to greater compliance from builders.
  • The buyer will get their dream home at a lesser and affordable price, since the output GST has been reduced to 1% only, in the affordable residential housing segment.
  • The problem earlier faced by the buyers, that ITC benefits are not getting passed to them by the builder and still they have to pay a high output tax rate. Hence, the interest of buyers gets protected by reducing the tax rate.
  • Better and uniform pricing of residential properties as the problem of reversed ITC being added to the project cost afterward (after receiving completion certificate and output GST being Nil) is eliminated. Now it is known beforehand that ITC is not available. It has removed disparity among builders as they all are on the same footing. For e.g (in the previous tax rates) –
  • A builder of a residential project of 1000 units has been able to sell only 800 units till the construction is going on. On these units, he will charge output GST (@12% or 8%, whichever is applicable) and get the benefit of ITC. But once he gets the completion certificate, he would be unable to charge output tax on the remaining 200 units, and the proportionate ITC has to be reversed. Therefore it would increase his cost, and cause disparity among various builders. Now in the new tax structure, he already knows that ITC will not be available, and will make his pricing accordingly. He will not be worried about the unsold inventory after receiving the certificate of completion as no ITC has to be reversed (it is already a part of the cost)

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Taxability of Plots Under GST

Option and conditions for the builder to choose old or new tax rates after 1.4.2019

Any builder of an ongoing project has to choose from the following two options;

(i) To apply the old output tax rates (as per notification 11/2017 dated 28.6.2017) applicable before 1.4.2019) @12% and 8% ( for affordable housing) and avail the benefit of ITC on purchases.

(ii) To apply for the new output tax rates (applicable from 1.4.2019) he has to compulsorily comply with the following conditions; 

Conditions attached with the new tax rates

  1. No ITC-: ITC for the purchases made by him cannot be claimed. i.e Total output tax has to be paid by the cash register.
  2. Purchase of inputs from registered persons:  Among total purchases, at least 80% of the total value of inputs and input services should be purchased from registered suppliers.
  3. The value of these services will not be eligible purchases for calculating the 80% purchase criteria. They have to be excluded while calculating the amount of eligible purchases.

a. Grant of developmental rights

b. Long-term lease of land

c. Floor space index

d. Value of electricity

e. Value of high-speed diesel

f. Motor spirit and natural gas

  • If the purchases (inward supplies) which qualify for the 80% criteria fall short of the required amount, then the promoter has to pay GST at 18% on a reverse charge basis on the balance amount to reach the compulsory limit of 80%.
  • This provision has been added to discourage the builders from purchasing from unregistered dealers, otherwise, the builders would have purchased most of their input supplies from unregistered dealers to avoid payment of GST.
  • If the cement has been purchased from an unregistered dealer, and the amount of GST paid purchase is short in reaching 80%, then a reverse charge of 28% will be charged on cement and it will be taken first to reach the required limit. i.e cement cannot be purchased without payment of output tax.
  • This 80% limit shall be calculated at the end of the financial year and any tax payments on shortfall shall be paid by end of the quarter following the financial year.
  • The excess ITC availed under the old scheme has to be reversed in the ratio of output supply in the new scheme (output supply with new rates) and Total output supply of all the units under the old scheme.
  • If a promoter has a large unsold inventory, then he should remain with the old scheme because he would be able to collect more output tax at old rates and ITC will be available. If most of the units are sold then he can shift to the new tax rates, because reversal of ITC will be minimal.

Communication of the chosen option 

  • In the case of an ongoing project, a promoter or builder has to choose, one-time option to pay tax at old rates. He must communicate his option to the Jurisdictional Commissioner by 20th May 2019 in the prescribed form. 
  • If it is not communicated, then it would be deemed that he has opted for making tax payments at new rates. Also, modification of options is not allowed, once submitted.
  • Hence new rates are the default option and to choose old rates, he has to exercise his choice.
  • This option is on a project basis. It is needed to be exercised for each ongoing project separately. Thus, promoters may exercise different options for different ongoing projects undertaken by him.
  • This option is also available for specific schemes like PMAY, Housing For All, RAY(Rajiv Gandhi Awaas yojana), or any other housing schemes of the Central or state government.
  • This option can be exercised by a promoter or a builder and not the buyer. The buyer of the under-construction unit has no say in this decision of the promoter.

Classification of Projects

(1) New project

  • A project whose commencement is on or after 1.4.2019 would be called a new project.
  • Moreover, a project where bookings have not started yet, but the construction has started on or before 31st March 2019, the same will not be considered as an ‘ongoing project’. It will be deemed to be a new project and the new tax rates will apply. Hence the main criteria is the first taxable event which is the sales or booking.
  • For a new project, new tax rates will apply compulsorily.

(2) Ongoing project

A project is considered as an ongoing project if the following conditions are satisfied: 

(I)The project should have commenced on or before 31.3.2019

Commencement

  • Definition-The earthwork for site preparation should have been completed and excavation for the foundation has started.
  • If the date of commencement is on or before 31st March 2019, a construction project shall be considered to have been started on or before 31st March 2019.
  • The situation where;

a. Commencement Certificate is required and has been issued by the competent authority on or before 31st March 2019

b. The same is certified by a registered architect, chartered engineer, or a licensed surveyor then the construction of the project has started on or before 31st March 2019.

c. For example- When a builder is building a single tower comprising 50 floors and it is registered as a single project, then separate commencement certificates may be issued by the competent authority. If even one or two certificates are received on or before 31st March 2019 and some later, the project will still be considered as an ongoing project. 

  • In case a Commencement Certificate is not required to be issued by the competent authority, then the same shall be issued by a registered architect, chartered engineer or a licensed surveyor that the construction of the project started on or before 31st March 2019.

(II) The completion certificate should not have been issued till 31.3.2019

The completion Certificate should not have been issued on or before 31st March 2019. For example, if a project has three blocks and a completion certificate is received for one block prior to 1st April 2019 and the rest are received after this date. 

In such a case, the project is deemed to be an ongoing project because as per the Notification issued by Government, a project is considered complete only if the Completion Certificate is issued for the entire project and not a part thereof.

(III) The first occupation of the project has not taken place before 31st March 2019. For example, if a huge project has multiple towers, and has received an occupation certificate only for a part of the premises (up to 31st March 2019) and not for the entire project, the same is considered as an ongoing project. 

(IV) Apartments are partly or wholly booked on or before 31st March 2019. 

Note- These conditions are not applicable for the redevelopment of slum rehabilitation projects as the beneficiaries, in this case, are not required to pay any monetary consideration for flats allotted to them

Maintenance of records:

As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing works contract shall keep separate accounts for works contract showing – 

(a) the names and addresses of the persons on whose behalf the works contract is executed; 

(b) description, value, and quantity (wherever applicable) of goods or services received for the execution of works contract; 

(c) description, value, and quantity (wherever applicable) of goods or services utilized in the execution of works contract; 

(d) the details of payment received in respect of each work contract; and 

(e) the names and addresses of suppliers from whom he received goods or services.

It implies that the contractor who has undertaken the works contract should keep a proper and separate record of the goods or services provided to him by the client, and the goods or services procured by him, to be used in the execution of the project, whose property will be transferred by him to the client (recipient).

Construction Services Under GST - A Detailed Information

 

Place of Supply in respect of Works Contract

GST is a destination-based tax. Hence the place of supply of goods or services will be deemed to be the place of the recipient. As we have already understood, a Works Contract under GST would necessarily involve immovable property. Considering the same, the place of supply would be governed by Section 12(3) of the IGST Act, 2017.

  • In the case where both the supplier and recipient are located in India, and the location of immovable property is also in India, then the place of supply would be where the immovable property is located.
  • If multiple immovable properties are under works contract in different states in India, then their locations will be considered as, a place of supply, of a separate service in that state.
  • In the situation where the immovable property is located outside India, and the supplier, as well as the recipient both, are located in India, the place of supply would be the location of the recipient as per proviso to Section 12(3) of the IGST Act, 2017.
  • As per Section 13(4) of the IGST Act, 2017, in cases where either the Supplier or the Recipient are located outside India, the place of supply shall be the place where the immovable property is located or intended to be located.
  • Where the service is provided in more than one location including a location in taxable territory its place of supply shall be the location in the taxable territory, as per Section 13(6) of IGST Act, 2017. 

GST on maintenance charges for housing societies

Maharashtra AAR ruling

Recently, there was a ruling in the case of Andheri-based Emerald Cooperative Housing Society in which the Maharashtra Authority for Advance Rulings (AAR) took the cognizance of a retrospective amendment made in the Finance Act 2021. This amendment would be applicable from 1.7.2017. It stated that,” ‘a cooperative housing society’ and ‘its members’  are Distinct persons”. Therefore Maharashtra AAR has ruled that GST is chargeable against the maintenance charges collected by a cooperative housing society (CHS) from its members, as this amount is in the form of consideration for services provided by the CHS. The CHS had contended that they were just the agents of the members and the amount received was the reimbursement of expenses made by them on the behalf of the members. Their contention was overruled by that retrospective amendment.

  • If the amount of maintenance charge per unit exceeds Rs 7,500 per month, then GST @ 18% was levied. This condition was applicable only on those CHS whose annual turnover exceeded 20 lakhs. For the GST to be applicable, both the conditions should apply – i.e., each member should pay more than Rs 7,500 per month as maintenance charge and the annual turnover of the RWA should be higher than Rs 20 lakhs.
  • This ruling also clarified that the entire amount is taxable, in case the charges exceed Rs 7,500 per month per member. For example, if the maintenance charges are Rs 9,000 per month per member, the 18% GST will be payable on the entire amount of Rs 9,000 and not on Rs 1,500 (Rs 9,000-Rs 7,500). Moreover, owners with multiple flats in the same housing society will be taxed for each unit separately.
  • On the other hand, RWAs are entitled to claim ITC on tax paid by them on capital goods (generators, water pumps, lawn furniture, etc.), goods (taps, pipes, other sanitary/hardware fittings, etc.) and input services such as repair and maintenance services.

Madras high court judgement

But this was not the end of the story. After this ruling came to the judgement from Madras high court.

  • CBEC in a notification dated July 22, 2019, had said that if RWA members contribute less than ₹7500 a month each, the said RWA is exempt from paying GST, irrespective of the annual turnover. 
  • According to a GST Notification 12/2017-CT (Rate), it exempted maintenance charges ‘upto’ an amount of Rs 7500 per member per month from the levy of GST. The GST Authorities erroneously interpreted this in a way that GST would be applicable on the whole amount of maintenance charge if the maintenance charges per month per flat exceeded 7500.
  • Ergo, the Madras High Court has ruled that the GST is applicable to monthly maintenance amount exceeding Rs 7,500 only and not on the full amount. This verdict by the Madras HC overturns 2019 circular issued by the CBEC and the Maharashtra AAR ruling.
  • We can conclude that, GST is levied only on amount exceeding 7500 per month per flat and the annual turnover of CHS should exceed 20 lakhs.

Related Topic:

Compliances of GST in Banking Sector: ICAI

Other Case Laws

1). Orissa HC judgment on ITC of works contract in M/S Safari Retreats P Ltd. Vs Chief commissioner of CGST [W.P. (C) 20463 of 2018]

Facts of the case

The petitioner was engaged in the construction of large shopping malls and giving them on rent. It had accumulated large amounts of ITC (around 34 crores) on the purchase of various goods and services consumed in the construction of these malls. When it approached the authorities regarding its adjustment against its output tax liability, it was outrightly denied due to sec 17(5). Then it approached the Orissa high court and filed a writ petition.

Submissions made by the petitioner

It contended that sec 17(5)(d) was a hindrance in the seamless flow of availing ITC against the output tax liability. It averred that the construction activity was an essential part in the furtherance of its business of giving the premises on rent, and the resultant consideration of rent was a direct outcome of such construction.

Verdict

The honorable court held the following;

  • The narrow interpretation of Section 17(5)(d) of the CGST Act, is frustrating the moot objective of the CGST Act. i.e. it is envisaged to remove the cascading effect of taxes.
  • It emphasized that, if the petitioner is liable to pay output tax on its main business activity i.e collection of rent, then it is also entitled to avail the ITC for the inputs and input services consumed by it. It is onerous on the department to facilitate such adjustment in upkeeping the spirit of the GST law.
  • Upon considering the facts, the Hon’ble High Court of Orissa allowed ITC on goods and services used for construction of immovable property meant for letting out for commercial purposes (in the course or furtherance of business) to be adjusted against the output tax liability.

Comments

  • The Hon’ble High Court of Orissa has again paraphrased section 17(5)(d) and opened a pandora’s box for a lot of litigations in the coming period.
  • A similar petition has been filed in the case of Bamboo Hotel and Global Centre (Delhi) Pvt. Ltd [W.P.(C) 5457/2019] where the Hon’ble High Court of Delhi had issued notices to the Union of India and other Respondents.
  • Even if the petitioner has won the right to adjust ITC against its output liability, he would be unable to do so for the f/y 2017-18 because of sec16(4), since the date of adjusting such ITC has been already lapsed.

2). Gujarat AAR on Karma Buildcon P Ltd.

Facts of the case

The petitioner is a real estate developer and it purchases land for the development of apartments, to sell them further. It contended that the value of the land transferred by it to the customers is more than one-third of the consideration received by it according to the contracts it has already entered. It wanted to deduct more than one-third of consideration as the value of the land. Therefore it sought advance ruling regarding the amount of consideration to be considered as the value of the land.

The ruling of the AAR

  • It ruled that the value to be arrived at, should be in accordance with the deeming provision of Para 2 of Notification no. 11/2017-CT (Rate) dated June 28, 2017, as amended by Notification No. 1/2018-C.T. (Rate), dated January 25, 2018.
  • Hence the actual value of land had no bearing on the aforesaid deeming provision. The deeming provision remains afoot and the petitioner has to deduct only one-third of consideration as the value of the land.

3). Madhya Pradesh AAR on Jabalpur Hotels Pvt Ltd.

Facts of the case

The company was incorporated for building a hotel and running it as the main revenue-generating activity. It was in the advanced stage of the construction of the hotel and installed lifts. It sought an advance ruling regarding the adjustment of GST paid by it on the purchase of the lifts.

Ruling by the AAR

AAR held that input tax credit of tax paid on Lifts procured and installed in the hotel building shall not be available to the applicant as the same is blocked in terms of Section 17(5)(d) of the CGST Act 2017. It further added that the lifts had become an integral part of the building and they have no separate identity apart from the building.

Conclusion

As you can see, conflicting verdicts have been given by the Hon’ble High Court of Orissa and Madhya Pradesh AAR. This sector is still riddled with many problems and confusions on fronts of taxation and deliverability and needs more reforms and accountability.

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