From April 1, 2019, on housing projects that do not fall in the affordable housing category, GST is levied at 5% without input tax credit (ITC). For ongoing projects the builder has the option to pay GST at the old rate of 12% with ITC, which means taxes paid on inputs can be set off.
A CA said advance rulings favourable to the tax department are inevitably followed during assessment. If the taxpayer (say, builder) takes a different approach, litigation results.
The agreement for sale, drawn by the residential construction company Puranik Builders of Thane, was typical of most builder agreements with two components separately shown. These were charges for the main construction activity and “other charges”.
The latter included charges for installation of electric meters, water connections, advance maintenance and club-house maintenance (till the time a society was formed), legal fees and such. These charges were collected from the buyers at the time of entering into the agreement or at the time of giving possession of the flats.
While the builder was collecting GST at 18% on such “other charges”, it approached the AAR for a ruling on the applicable rate.
It submitted that the services underlying the “other charges” should be treated as a composite supply (bundled with the supply of the main construction activity). Thus, GST rate on the main supply (currently 5% for new projects) should apply.
The AAR noted that the consideration is charged separately for different services. It added that it was ironical that while stamp duty was paid on the value of the sale of the flat (excluding the value of “other charges”), which translated into a lower stamp duty; when it came to GST payments, the builder submitted that the other charges were part of the main construction activity. The AAR held that GST at 18% will apply on services underlying the other charges. The builder will have to pay GST on the entire amount received as “other charges” without any rebate.
An advocate specialising in indirect taxes said: “No one will buy a flat without an electricity or water connection. Buyers expect common amenities to be maintained by the builder till a society is formed. Thus, treating such charges as non-composite will add to complexities and costs for real estate sector.”