Construction and real estate constitute the major portion of revenue to the government, through taxes and others. Government is clear on the necessity of a basic house for everyone and therefore ensured that there should be affordable homes for every family through welfare schemes and subsidies.
With the increasing price of real estate and the boom in the economy from the year 2000, it had become a nightmare for many of us for owning a home. Apart from direct Govt schemes for the below-poverty group, it has provided schemes such as Pradhan Mantra Awas Yojana.
GST on certain construction services is also exempted with conditions regarding the size of the unit and the completion status of the unit. The act and rules are clear to provide benefits for small residential units, with limitations on the maximum area of residential units, etc.
In case the taxpayer is engaged in the supply of construction services, it is advised to look into every detail regarding the exemption condition, valuation, and rate determination carefully. Construction service is one of the critical services prone to mistakes under if there is a lack of knowledge, it is always advised to take the support of a GST return filing consultant for construction business
Exemption on certain construction activities
Pure Labour contract
- Services provided by way of supplying pure labour contract by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, for alteration of a civil structure or any other original work pertaining to beneficiary-led individual house construction or enhancement under Housing for All Mission (urban)/ Pradhan Mantri Awas yojana are exempt from GST.
- Services by way of pure labour contract for the individual residential unit are exempt from GST, provided the residential unit is for use by one family. There is no restriction on the size of the residential unit, exemption is available as long as the condition of “for the purpose of one family” is satisfied.
Example of pure labour contract
- Mr. Ravi carries on the business of construction services, and he had been awarded the contract for the supply of labour for the construction of 150 units (under Pradhan Mantri Awas Yojana) in the capacity of the subcontractor. Mr. Ravi provides construction services in the nature of pure labour and does not provide the raw material for construction along with it, therefore Mr. Ravi qualifies for exemption for the value of the service provided. The act is clear that the service should be provided in relation to PMAY and does not lay conditions that it should be directly provided by himself by the inclusion of the word “Pertaining”
- Mr.Ravi provides labour contract services for the construction of commercial complex, only pure labour contract for the supply of labour is exempt for a residential unit. In this case, the supply of labour for the construction of commercial complexes is taxable under GST.
- Mr.Ravi engages in the construction of a house for an individual with a ground floor and 1st floor with separate entrances and kitchen in terms of the pure labour contract, even though the construction activity is of a residential unit for the individual the condition of for purpose of one family is not satisfied therefore it is not exempt.
GST on the sale of a flat
- GST is applicable only for the sale of a residential unit that is under construction, sale of a residential unit that is entirely completed is exempt from GST, it should have received a certificate of completion from the prescribed authority as determined by the state government.
- The sale of under construction flat/residential unit is taxable.
- Where the under-construction unit is sold, and it is eligible to be classified as an affordable housing scheme, concessional rates of GST are applicable.
Affordable housing scheme means residential units up to a carpet area of 645 sqft / 60 sq meters for the metropolitan city and up to 695 sqft/ 90 sq meters for other than metro cities shall be satisfied and the sale value of the such property shall be up to Rs.45,00,000 Only.
For the purpose of calculation Rs.45,00,000 limit, stamp duty value payable to the registration department, and charges paid for use of common facilities are not included.
- The project should have commenced on or after 01 April 2019 or the taxpayer should have opted for new rates.
When it is considered as a flat is booked before the date of issue of a certificate of completion
The flat is considered booked prior to the issue of a certificate of completion if all the following conditions are satisfied.
- Part of the supply of construction of the flat service has the time of supply on or before the date of issue of the certificate of completion
- Consideration equal to at least one instalment has been credited to the bank account of the registered person on or before the said date
- An allotment letter or sale agreement or any other similar document evidencing the booking of the flat has been issued on or before the said date.
If even one condition is not satisfied before date of the issue of the completion certificate, the flat shall not be considered booked prior to the issue of a certificate of completion.
Example of an affordable housing project
- Casa Grand launches its flat project in OMR Chennai and gives a special launch offer of Rs.6000 per sqft and the project is yet to be started, in this case, GST is chargeable at the concessional rate if the carpet area of the flat does not cross 645 sqft. GST is chargeable at 1 % if all the above three conditions are satisfied.
- Casa Grand launches luxury flats with a swimming pool, play area, community centre, etc with flat size not more than 645 sqft, charges collected is Rs.40,00,000 for flat and 10,00,000 for other facilities, in this case only charges for flats should be considered the amount of Rs.10,00,000 shall not be included for purpose of calculation of Rs.45,00,000 limit.
Works contract for construction activity
- The concept of a works contract is applicable only when the composite supply of goods and services is provided by the supplier, in simple terms pure labour supply is not termed as a works contract. There should be a transfer of goods along with the service, as per the GST act, a works contract is termed as a service provided on an immovable property only.
- GST is charged at 18 % as there is no transfer of land, on the contrary, if the builder builds and sells the residential unit along with the land abatement 1/3 of the total value of the project is available, so the effective rate will be 12 %.
- The input tax credit is available for suppliers of works contract services as said above.
- In case of work contract service is provided to Pradhan mantri awas yojana the rate of GST shall be 12%
Other important points
- RREP (residential real estate project) means a residential project in which the carpet area of the commercial area is not more than 15 % of the total project carpet area
- REP (real estate project) is a residential project in which the carpet area of total commercial units is more than 15 % of the total area of the project
- Competed project is always exempt from GST
- RREP or REP does not have any relevance in the GST rate determination of residential units.
- As per a recent judicial pronouncement where the value of land and the value of construction services is specifically mentioned, it is not compulsory for the taxpayer to claim abatement on total value, and he can calculate GST on the value of construction.
- GST is not applicable on the resale of the immovable property, so the subsequent sale is not taxable.
- Input credit is blocked for certain supplies under construction contract services.
- For claiming a concessional rate of GST minimum of 80% of purchases should be done through the registered supplier, where it is lower than 80%, the dealer is required to pay tax on supplies from unregistered dealers on a reverse-charge basis, except for cement.
- The same logic of flats is applicable to the sale of individual residential units.
- The composition scheme is not applicable for construction business GST registration
GST rates applicable in the construction sector
|Sl.No||Nature of Service||Rate before reducing the value of land||Effective rate after giving abatement for the value of land|
|1||Affordable residential apartment in an RREP (Commenced on or after 01.04.2019 or ongoing projects opted for new rates) intended for sale||1.5%||1%|
|2||Residential apartments (other affordable residential apartments) in an RREP (commenced on or after 01.04.2019) or ongoing projects opted for new rates) intended for sale||7.5%||5%|
|3||Commercial apartments in REP other than in RREP||18%||12%|
|4||Affordable residential apartment in REP, other than in an RREP (commenced on or after 01.04.2019, or ongoing projects opted for new rates), intended for sale||1.5%||1%|
|5||Residential apartment (other than affordable residential apartments) in REP other than in an RREP (Commenced on or after 01.04.2019, or ongoing projects opted for new rates) intended for sale||7.5%||5%|
|6||Ongoing projects in specified schemes (lower rate of tax) where the promoter has not opted for new rates||12%||8%|
|7||Commercial Apartments in an RREP (commenced on or after 01.04.2019 or ongoing projects opted for new rates) intended for sale||7.5%||5%|
|8||Ongoing Residential apartments as of 31.03.2019, other than affordable residential apartments, where the promoter has not opted for new rates.||18%||12%|