GST on Building Construction
Applicability of GST on Building Construction
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.
Applicability of GST on Construction
GST is applicable to construction activities in India, whether it is private construction, commercial construction, or construction of flats/society. In other words, any property under construction which is intended for sale is considered a supply of service and, therefore, liable for GST. The ready-for-sale properties do not attract any GST. GST is only payable on under-construction properties. However, the applicability of GST on construction work depends on various factors such as the type of construction, the nature of the transaction, and the status of the parties involved in the transaction.
As per para (5b) of Schedule II of the CGST Act, supply of services is defined as the construction of a complex, building, civil structure, or a part of it, which is meant for sale wholly or in part. However, if full consideration is received after the issuance of the certificate of completion, it is not considered a supply of services and is exempt from GST. In other words, GST is applicable only on under-construction properties.
However, there are certain exemptions/concessions given under the GST law for taxation in the construction sector-
GST on the construction work of affordable apartment housing projects is levied at a reduced rate of 1%. Affordable housing is defined as residential properties with a carpet area of up to 60 square meters in metropolitan cities and up to 90 square meters in non-metropolitan cities, with a value equal to or less than Rs. 45 lakhs.
GST is not applicable to the construction of properties in the case of property resale, buying and selling apartments to be used as a residence, and the buying or selling of land.
The construction services or enhancement services provided through pure labor contracts under the Pradhan Mantri Awas Yojana (PMAY) are exempt from GST.
Construction services through pure labor contracts for a single residential unit or a part of a residential complex are also exempt from GST.
e-Way bills are required for the transportation of building materials such as cement, steel, etc only where the consignment value exceeds Rs.50,000.
The businesses involved in the supply of construction services are required to raise invoices wherever they are registered under GST.
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/Material & GST 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) - 8%
Composite Supply of Works Contract and Goods (Goods ≥ 25% of total contract value) - 12%
|
Construction Activity |
Total GST Rate |
HSN Code |
|
Affordable housing apartment construction for projects beginning on or after 1st April 2019 |
1%* |
9954 |
|
Non-affordable housing apartment construction for projects beginning on or after 1st April 2019 |
5%* |
9954 |
|
Construction of commercial apartments in REP except RREP. |
12%* |
9954 |
|
Works contract services (where the material is supplied by the contractor) |
12% |
9954 |
|
Works contract services (where only labor is supplied by the contractor) |
18% |
9987 |
|
Composite supply of works contract and goods (where the value of goods is less than 25% of the total contract value) |
18% |
9954 |
|
Composite supply of works contract and goods (where the value of goods is 25% or more of the total contract value) |
12% |
9954 |
The GST on construction materials depends on specific items -
|
Material |
GST Rates |
|
Sand |
|
|
Mica |
12% |
|
Brick |
5% - 28% |
|
Cement |
28% |
|
Crushed stones, pebbles, gravel |
5% |
|
Granite and marble |
|
|
Steel and Iron |
18% |
|
Building stones |
5% |
|
Tiles |
5% - 28% |
|
Coal |
5% |
|
Wallpaper |
28% |
|
Varnish and Paint |
28% |
|
Bathroom interiors and appliances |
|
|
Electrical Appliances |
28% |
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.
ITC Availability on GST Paid During Construction as per section 17 (5), clauses (c) and (d) of the CGST Act, ITC is not available in the following cases -
If the expenses are incurred on work contract services for constructing an immovable property except expenses on input services for completing the supply of work contract services, such expenses are not eligible for ITC.
ITC cannot be claimed in the case of renovation or repair of the property.
Note: Construction companies, builders, and promoters can claim ITC for the above expenses.
Question & Answers:
How to calculate GST on the under-construction property with examples?
Here’s an example of the calculation of GST on under construction flat.
Mr. A purchases an under-construction property worth Rs. 80,00,000. The value of the land is Rs. 20,00,000. The construction is 75% complete and the bill was raised for 60,00,000 (80,00,000 * 75%). 75% of the total land value (15,00,000) is deducted from this amount. GST will be applicable only on the remaining value. i.e. (Rs. 60,00,000 - 15,00,000 = Rs. 45,00,000).
GST will be charged as - Rs. 45,00,000 * 5% = Rs. 2,25,000
Note: GST is paid in stages as per the value of the bill.
How to avoid GST on under construction property?
The burden of GST on building construction can be reduced in the following ways:
If you purchase a ready-to-move-in property, then GST is not applicable as it is considered a completed property.
If you purchase a property from the secondary market, then GST is not applicable as it is a resale transaction.
The GST rate for affordable housing is 1% as compared to 5% for other properties. Therefore, purchasing a property under the affordable housing category can reduce the GST burden.
How much GST is charged on under construction flat?
The GST rate on under-construction flats is currently 5%. This rate is applicable to the sale of under-construction or incomplete properties where the possession has not been handed over to the buyer. However, if the property falls under the affordable housing category, GST is charged at 1%.
Can we claim GST on building construction?
Yes, you can claim GST on building construction if you are a construction company, promoter, or builder and are into the resale of buildings after construction. You can also claim ITC for the construction or purchase of plant or machinery.
Case Study:
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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