Are you a Builder? Know the GST on Construction Services

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Construction is a complex process involving planning, design, and financing and continues until the structure is ready for occupancy. Far from being a single activity, large-scale construction is a feat of human multitasking.  The process of managing the complexities of Goods and Services Tax (GST) is a difficult task for developers, contractors, and property owners alike.

The implementation of GST in the construction industry has significantly impacted the ecosystem. It is important to understand the GST on construction work to ensure seamless operations and financial prudence.

The GST rate on construction services is generally 18%. However, there are a few exceptions to this rule. For example, the GST rate on affordable housing projects is 1%, and the GST rate on the construction of certain infrastructure projects, such as roads and bridges, is 5%. The GST rate on construction materials varies depending on the type of material. For example, the GST rate on cement is 28%, the GST rate on bricks is 12%, and the GST rate on sand is 5%.

GST Rates in Construction

GST is known as the Goods and Services Tax which is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.

The Goods and Services Tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.

                          Service/MaterialGST Rate
Construction GST Rate (General)18%
Affordable Housing Apartment GST on construction services (from April 1, 2019)               1%*
GST on Building Non-affordable Housing Apartments (from April 1, 2019)               5%*
Commercial Apartments in REP (except RREP)   12%*
Works Contract GST Rate (Material supplied by the contractor)Works Contract GST Rate (Material supplied by the contractor)
Works Contract GST Rate (Material supplied by the contractor) Works Contract Services HSN Code and GST Rate (Only labour supplied by the contractor)18%
Composite Supply of Works Contract and Goods (Goods < 25% of total contract value)    18%
Composite Supply of Works Contract and Goods (Goods ≥ 25% of total contract value)  12%

Affordable housing projects are designed to provide cost-effective housing solutions to the economically weaker sections of society. The government to encourage affordable housing initiatives, has reduced the GST rate to 1% (without Input Tax Credit). Specific criteria, such as the maximum carpet area and property value thresholds, are used to define what constitutes affordable housing.

Non-affordable housing projects are having higher GST rates. Among this type of Project, residential properties attract a GST rate of 5%, while commercial properties are subject to a GST rate of 18% with Input Tax Credit.

Input Tax Credit (ITC) in Construction

Input Tax Credit is a fundamental concept under GST that allows businesses to claim a credit for the tax paid on inputs used in the production or provision of goods and services. It can make an impact on both developers and the overall cost structure of a project.

The ITC can be availed by the developers to offset the GST paid on various expenses related to construction, such as raw materials, services, and other inputs. This credit can significantly reduce the tax liability on the final product, thereby potentially leading to cost savings.

 Judicial Decisions

In Re: M/s M/s. llaycr Vapi P l-td ,2023 TAXSCAN (AAR) 320, the AAR clarified that the recipient of services was not entitled to claim ITC on the CGST and SGST paid on the services received from VEL for the transfer of leasehold rights. This decision was based on the application of Section 17(5)(d) of the CGST Act, which restricts ITC when services are used for the construction of an immovable property, other than plant and machinery, for one’s account or business purposes.

In Re: M/s.B.G Shirke Constructions Technology Private Limited, 2021 TAXSCAN (AAR) 272, the Karnataka Authority of Advance Ruling (AAR) ruled that 12% GST on Construction of Airport Authority of India residential colony for self use or for staff/employees. The Airport Authority of India being the recipient of service fulfils the parameters as mentioned in the Notification No.31/2017-CT(R) dated 13.10.2017 vide paragraph (iii) item number (ix) as “Governmental Authority”. The said authority is a statutory body set up by an Act of Parliament vide Airport Authority of India Act, 1994. Section 12 of the said Act provides for functions of the authority. The said activity of the construction of residential colony for the staff and employees of Airport authority of India at Devanahalli, Near Kempegowda International Airport is covered under article 243 W of the Constitution

In Moraj Building Concepts Pvt Ltd vs DCIT , 2023 TAXSCAN (ITAT) 802, the Income Tax Appellate Tribunal (ITAT), Mumbai bench has directed the income tax department to compute income tax on the rental income based on municipal ratable value for computing the notional rent towards the vacant unsold flats kept by the assessee, Builder.

Whether you are a pioneering developer sculpting innovative projects, or a fervent homebuyer pursuing the abode of your dreams, you must be aware that the comprehension of GST stands as a cornerstone for sound decision-making in your business.

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