CBEC Clarifies; Flats and Buildings to cost less under GST

GST To Reduce Tax Incidence For Home Buyers
GST To Reduce Tax Incidence For Home Buyers

The Central Board of Excise and Customs (CBEC) has clarified that the construction of flats, complex, buildings will have a lower incidence of GST as compared to a plethora of central and state indirect taxes imposed on them under the existing regime.

"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," CBEC said in an official statement.

Explaining the tax structure at present and the incidence of various taxes on real estate and construction space, CBEC the national agency responsible for administering service tax and taxes like customs and excise said,"Central Excise duty is payable on most construction material at 12.5 per cent. It is higher in case of cement. In addition, VAT is also payable on construction material at 12.5 per cent to 14.5 per cent 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. 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".

The current headline rate of service tax on construction of flats, residences, offices is 4.5 per cent. Over and above this, VAT at 1 per cent under composition scheme is also charged. 

"The buyer only looks at the headline rate of 5.5 per cent. In other cities and states, where VAT is levied under the composition scheme at 2 per cent or above, the headline rate visible to the customer is above 6.5 per cent. 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," CBEC said. 

"Under GST, full input credit would be available for offsetting the headline rate of 12 per cent. 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 per cent and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed," CBEC, the agency under Finance Ministry clarified.

CBEC further stated that 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 or in installments. CBEC has advised all builders and construction companies that in the flats under construction, they should not ask customers to pay higher tax rate on installments to be received after imposition of GST and if any builder resorts to such practice, the same can be deemed to be profiteering under Section 171 of GST law.

"There is no input credit available for land. So for affordable properties say under Rs 3000 per sq ft, there will not be much impact of GST as the component of land is only say 20%, but the component of other inputs on which input credit is available is substantial. But in high price properties say Rs 5000 per sq ft and above the component of land is nearly 40 to 50% and input credit is available only on construction which say 30 to 40% of the total output price, the input credit is not enough to cover the 12% GST on output" Pankaj Bajaj, MD, Eldeco Infrastructure said

The GST Council in its meeting earlier this month, had agreed on the broad principles of anti-profiteering rules. As per the rules agreed upon, a standing committee would be set up to take up cases of companies or traders found making undue profit under the GST regime by not passing on the benefits of lower tax incidence to the buyer because of GST. The Council is working on finalising the penalty and action to be taken against such defaulting companies or traders.

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