Government of India
Ministry of Finance
15-June-2017 17:05 IST
Reduced Liability of Tax on complex,
building, flat etc. under GST
The
CBEC and States have received several complaints that in view of the works contract
service tax rate under GST at 12% in respect of under construction flats,
complex etc, the people who have booked flats and made part payment are being
asked to make entire payment before 1st July 2017 or to face higher
tax incidence for payment made after 1st July 2017. This is against
the GST law. The issue is clarified as below:-
1.
Construction of flats, complex,
buildings will have a lower incidence of GST as compared to a plethora of
central and state indirect taxes suffered by them under the existing regime.
2.
Central Excise duty is payable on
most construction material @12.5%. It is higher in case of cement. In addition,
VAT is also payable on construction material @12.5% to 14.5% in most of the
States. In addition, construction material also presently suffer Entry Tax
levied by the States. Input Tax Credit of the above taxes is not currently
allowed for payment of Service Tax. Credit of these taxes is also not available
for payment of VAT on construction of flats etc. under composition scheme.
Thus, there is cascading of input taxes on constructed flats, etc.
3.
As a result, incidence of Central
Excise duty, VAT, Entry Tax, etc. on construction material is also currently
borne by the builders, which they pass on to the customers as part of the price
charged from them. This is not visible to the customer as it forms a part of
the cost of the flat.
4.
The current headline rate of service
tax on construction of flats, residences, offices etc. is 4.5%. Over and above
this, VAT @1% under composition scheme is also charged. The buyer only looks at
the headline rate of 5.5%. In other cities/states, where VAT is levied
under the composition scheme @2% or above, the headline rate visible to the
customer is above 6.5%. What the customer does not see is the embedded taxes on
account of cascading and sticking of input taxes in the cost of the flat, etc.
5.
This will change under GST. Under
GST, full input credit would be available for offsetting the headline rate of
12%. As a result, the input taxes embedded in the flat will not (& should
not) form a part of the cost of the flat. The input credits should take care of
the headline rate of 12% and it is for this reason that refund of overflow of
input tax credits to the builder has been disallowed.
6.
The builders are expected to pass on
the benefits of lower tax burden under the GST regime to the buyers of property
by way of reduced prices/ installments. It is, therefore, advised to all
builders / construction companies that in the flats under construction, they
should not ask customers to pay higher tax rate on instalments to be received
after imposition of GST.
7.
Despite this clarity on law
position, if any builder resorts to such practice, the same can be deemed to
be profiteering under section 171 of GST law.
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