GST on Real Estate and works contract

GST on Real Estate and Works Contracts
CA Manindar K
Partner
M/s SBS and Company LLP
manindar@sbsandco.com
+91 9700734609
by
Guntur Branch of SIRC of ICAI
26th November, 2017

manindar@sbsandco.com www.sbsandco.com +91 97007346092
GST on Works Contracts
GST on Real Estate Transactions
Input Tax Credit Aspects relating to them
Miscellaneous Aspects relating to them
Agenda

3
➢ Understanding Supply
➢ Works Contract under Pre GST Regime
➢ Works Contract under GST Regime
➢ GST Rate on Various Works Contract
GST on Works Contract

 GST is levy on Supply of Goods or Services or both
 ‘Supply’ as defined under Section 7(1) of CGST Act, 2017
 All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or
disposal made or agreed to be made for consideration by a person in the course or furtherance of business
 Import of services for a consideration whether or not in the course or furtherance of business
 Activities specified in Schedule I, made or agreed to be made without consideration
 Activities to be treated as supply of goods or supply of services as referred to in Schedule II.
 Section 7(2) provides that activities specified in schedule III are neither supply of goods nor services
Understanding Supply

 Scope and ambit of ‘Works Contract’ under Existing laws
 Definition covers contracts towards movable as well as immovable property
 Requires splitting of contract value between goods and services to levy VAT and Service Tax
Works Contracts under Pre GST Regime
Section 65B(54) of Finance Act, 1994 Section 2(45) of AP VAT Act, 2005
means a contract wherein transfer of property in goods involved
in the execution of such contract is leviable to tax as sale of
goods and such contract is for the purpose of carrying out
construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, alteration of any
movable or immovable property or for carrying out any other
similar activity or a part thereof in relation to such property
includes any agreement for carrying out for cash or for deferred
payment or for any other valuable consideration, the building
construction, manufacture, processing, fabrication, erection,
installation, laying, fitting out, improvement, modification, repair
or commissioning of any movable or immovable property

 ‘Composite Supply’ as defined u/s Section 2(30) CGST Act, 2017:
means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of
goods or services or both, or any combination thereof, which are naturally bundled and supplied in
conjunction with each other in the ordinary course of business, one of which is a principal Supply
 ‘Works Contract’ as defined u/s Section 2(119) of CGST Act, 2017:
“works contract” means a contract for building, construction, fabrication, completion, erection, installation,
fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of
any immovable property wherein transfer of property in goods (whether as goods or in some other form)
is involved in the execution of such contract
Works Contracts under GST Regime

 Works Contracts are a species of composite supply
 Works Contracts towards immovable property are alone considered as works contracts under GST
 Para 6 of Schedule II of CGST Act, 2017 – works contracts as defined shall be treated as supply of services.
 Works Contracts towards movable property are composite supplies and not works contracts under GST.
 Such contracts are subject to GST either as goods or as services on the basis of principle supply.
Works Contracts under GST Regime

Rate of GST on various works Contract
Sl.No Nature of Contract Rate of GST
Works Contracts undertaken to CG, SG, UT, LA,GA or a Government Entity
1 Historical Monument, archeological site or remains of national importance 12
2 Canal, Dam or Other Irrigational Works 12
3 Pipeline, Conduit or Plant for water supply, water treatment or sewerage treatment or disposal 12
4 A civil structure or any other original work for use other than for commerce or industry 12
5 A structure meant pre-dominantly for use as educational, clinical, art or cultural establishment 12
6 A residential complex pre-dominantly for self use of Government or their employees or persons
specified in schedule III
12
7 Contracts predominantly involving earthwork (more than 75% of value) 5%

Rate of GST on various works Contract
Sl.No Nature of Contract Rate of GST
1 A road, bridge, tunnel or terminal for road transportation for use by general public 12
2 A civil structure or any other original works pertaining to BPL housing schemes viz. JNNURM,
Rajiv Awas Yojna, Pradhan Mantri Awas Yojna etc
12
3 A pollution control or effluent treatment plant except located as a part of a factory 12
4 A structure meant for funeral, burial or cremation of deceased 12
5 Railways excluding monorail or metro rail 12
6 A single residential unit otherwise than as part of a residential complex 12
7 Post harvest storage infrastructure for agricultural produce including a cold storage 12
8 mechanized food grain handling system, machinery or equipment for units processing
agricultural produce as food stuff excluding alcoholic beverages
12
9 All other works contract 18

 All construction related labour contracts are subject to GST at 18%
 Entry 11 and of Notification 12/2017-Central Tax (Rate) exempts the following labour contracts:
 Services provided by way of pure labour contracts of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original
works pertaining to the beneficiary-led individual house construction or enhancement under the Housing for All
(Urban) Mission/Pradhan Mantri Awas Yojana.
 Services by way of pure labour contracts of construction, erection, commissioning, or installation of original
works pertaining to a single residential unit otherwise than as a part of a residential complex
Rate of GST on Labour Contracts

 Works contracts in general are subject to GST at 18%
 Specified works contracts are subject to GST at 12%
 Govt related works contracts provided by main contractor are taxable at 12% while sub-contractors are taxable at 18%
 Govt related works contracts having more than 75% of earth work are taxable at 5%
 All construction related labour contracts are subject to GST at 18%
 Labour contracts relating to BPL housing schemes are exempt while the related works contracts are taxable at 12%
 Labour contracts relating to single residential unit are exempt while the related works contracts are taxable at 12%
Summarizing GST Rates on Works Contracts

12
➢ GST Implications on Builder for Sale of flats/villas
➢ GST Implications on Builder for construction towards landlord Share of built-up area
➢ GST Implications on Landlord upon Sale of his share of built-up area
➢ GST Implications on Sale of Plots
GST on Real Estate

 Law relating to levy of VAT and ST on Builders Activity was settled after a decade of litigation
 Taxability under respective taxes was questioned for following reasons;
 Builder acquires land and starts constructing the residential complex
 A prospective customer pays advances to buy the flats after construction is completed.
 Builder enters into agreement to sell with prospective customers before collection of advances
 Such agreements per se does not create SP and SR relation to levy service tax
 Such agreements to buy constructed immovable property may not amount to works contracts to levy
VAT on material used by builder for construction
GST Implications on Builder for Sale of Flats/Villas

 Levy sustained in ST Law in the following manner;
Introduced a legal fiction w.e.f 01.07.2010 to deem that service is involved if builder receives
any amount prior to completion certificate.
Similar fiction retained in Negative List regime also.
Deeming fiction is upheld by Courts

 Levy sustained in VAT law after L&T Ltd vs State of Karnataka, 2014(34)STR481(SC)
 Taxing the sale of goods element in a works contract under Article 366(29A)(b) read with Entry 54 List II is permissible even
after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of
immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the
goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat
purchaser after incorporation of goods. (Para 101)
 It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the
stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the
agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government (Para 115)

 Levy— Key Distinction between Service Tax and Value Added Tax
Service Tax Value Added Tax
Levy is applicable on entire service portion irrespective
of the stage of completion at time of booking a flat by
Customer
Levy is applicable only on value of material
incorporated in the flat after booking of a flat by
customer

 Para 5(b) of Schedule II treats Builder’s Activity as Supply of Service:
construction of a complex, building, civil structure or a part thereof, including a complex or building
intended for sale to a buyer, wholly or partly, except where the entire consideration has been received
after issuance of completion certificate, where required, by the competent authority or after its first
occupation, whichever is earlier
 Para 5 of Schedule III excludes transactions in immovable property from the scope of ‘Supply’
 Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building
 Rate of GST is 18% with 1/3rd deduction towards land value

 It is a works contract involving non-monetary consideration for construction
 Circular 151/2/2012-ST dated 10.02.2012— clarified that ST is applicable
 Rate of GST is 18% on the value of land received towards builder’s share
 Valuation under Service Tax— Two School of Thoughts
GST on Landlord Share of Construction
Aspect Circular 151/2/2012-ST Industry Perspective
Consideration Development Rights Development Rights
Valuation Value of development rights is not ascertainable…
Value shall be determined on the basis of price at
which first sale deed is executed
Value of development rights is
ascertainable.. Nothing but the stamp duty
value of land
Point of Taxation At the time of handing over the built-up area At the time when JDA is entered, area to be
built-up is divided between builder and
landlord

 When consideration is non-monetary— Rule 27 of CGST Rules, 2017 provides that value shall be
determined in the following sequentially manner;
 Open Market Value— it means the money payable by an unrelated person in a transaction where price is sole
consideration to obtain such supply at the time when supply being valued is made
 Money equivalent value of non-monetary consideration— value of non-monetary consideration
 Value of supply of like kind and quality— Value of those supplies made under similar circumstances and having
like characteristics and quality as that of present supply
 110% of the cost of supply

 Possible Valuation Methods under GST:
 Time of supply— Ambiguity as existing under Service Tax continues
Method Comments
Open
Market
Value
1. Similar to first sale deed method prescribed under 151 Circular
2. Value of built-up area towards land lord share shall be determined using the rate at which first sale
deed is executed
3. 18% rate shall be adopted after deducting 1/3rd value towards landlord share
4. Applicability may be questioned on the ground that supply being made is not at the same point of time
Money
equivalent
Value
1. Value of land can be considered
2. 18% rate shall be adopted on value proportionate to builder to arrive at GST
3. Value adopted by this method may be rejected by department
Cost Method 1. Value being 110% of the construction cost
2. 18% rate shall be adopted on value proportionate to builder to arrive at GST
3. Cannot be adopted if time of supply is said to arise at the time of JDA
4. Used to substantiate the adequateness of the land value if any adopted

 Para 5(b) of Schedule II is not only applicable to builder but also to landlord.
 If any money is received from customers prior to completion, the said para is applicable.
 Thus, Landlord is also required to pay GST upon sale of flats/villas to customers
 GST paid to builder can be claimed as ITC for paying the GST collected from customers
GST on Landlord for Sale of Built-up Area

 Para 5 of Schedule III provides that sale of land is neither a supply of goods nor services.
 Therefore, no GST is applicable in general on plot sales.
 If the sale consideration is split between land value and development cost— GST may get attracted on
development
 As this is exempt activity, ITC is required to be reversed…
 Advisable to opt for separate vertical registration if this turnover significantly wipes out the common ITC
GST Implications on Plot Sales

23
Input Tax Credit Aspects Relating to Works
contract and Real Estate Transactions

 Seamless credit is the benefit of GST
 All goods or services used or intended to be used in the course or furtherance of business are eligible for ITC
 Conditions for availment of ITC
 Possession of tax invoice or debit note issued by a supplier registered under this Act.
 Has received the goods or services or both
 Subject to section 41, the tax charged by the corresponding supplier would have been paid
 Has furnished the return under section 39
Input Tax Credit

 ITC claimed on goods or services shall be restricted in the following manner;
 Used partly for business and partly for non-business purpose
 Used partly for effecting taxable supplies including zero-rated supplies and partly for exempt supplies
 Sale of flats/villas after OC— ITC should be restricted proportionately
 In case the builder is also engaged in sale of plots— ITC should be restricted proportionately
Input Tax Credit

 ITC on motor vehicles and other conveyances except—
 When used for transportation of goods
 When used for further supply of such vehicles or conveyances
 When used for transport of passengers or imparting driving, flying, navigating such vehicles or conveyances
 Works contract services when supplied for construction of an immovable property (other than plant and
machinery) except where it is an input service for further supply of works contract service
 Goods or services or both received by a taxable person on his own account for construction of
immovable property other than plant and machinery
 Goods lost, stolen, destroyed, written off or disposed by way of gift or free samples
Blocked Credits

 Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery
except when used to supply same category of outward supply
 Membership of health, club and fitness center
 Rent-a-cab, life and health insurance services except
 when used to supply same category of outward supply where Government notifies the services which are
obligatory for employer to provide its employees under any law
 Where the services are used to supply same category of outward supply
 Travel benefits extended to employees on vacation such as leave or home travel concession
Blocked Credits

 Fly ash bricks rate reduced from 12% to 5%
 Following goods rate got reduced from 28% to 18%
 Wires, cables, electrical plugs, switches, sockets, Fans, lamps, lighting etc
 Particle/fibre boards and ply wood. Article of wood, wooden frame, paving block
 Sanitary ware and parts thereof of all kind
 Floor covering, baths, shower, sinks, washbasins, seats, sanitary ware of plastic
 Slabs of marbles, granite, ceramic tiles
 Doors, windows and aluminum frames
 Bull dozers, excavators, road rollers, land levelling machinery
 Cement, paints, varnishes, wall putty are taxed at 28%
Rates of Inputs used in Construction w.e.f. 15.11.2017

 Overflow of ITC arises due to inverted duty structure
 Such excess credit can be claimed as refund under section 54 of CGST Act, 2017
 Section 54 empowers Government to notify supplies for which refund is not available due to inverted
duty structure
 Builder services are notified— No refund is available on account of excess input
 Contractors undertaking Infra works can claim refund
Overflow of ITC

30
➢ Construction of Row Houses
➢ GST Implications on Splitting the Agreement to Sell
➢ Free supply material
➢ Value includes other duties/taxes
Miscellaneous Aspects

 Contractor constructing a single residential unit is liable to pay GST at 12% (Works Contract)
 Pure labour contracts in this regard are exempt from GST
 Builder constructing villas with common areas and facilities— cannot be considered as single residential
units {CCE vs Gandharva Infrastructure and Projects Ltd, 2017-TIOL-3180-CESTAT-DEL}
 Row houses without common areas and facilities constructed by taking separate approvals for each
house can be considered as single residential unit.
 Whether builder is required to pay GST on Row houses?
Construction of Row Houses

 Para 5(b) of Schedule II treats Builder’s Activity as Supply of Service:
construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale
to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion
certificate, where required, by the competent authority or after its first occupation, whichever is earlier
 Deeming fiction in para 5(b) is applicable only to a complex or building
 Para 5 of Schedule III excludes transactions in immovable property from the scope of ‘Supply’
 ‘Building’ means ‘a structure with a roof and walls, such as a house or factory’ (Oxford Dictionary)
 If the word building is given wide meaning, then deem fiction is also applicable to row house (single unit)
 As the word ‘building’ is preceded by ‘complex’— will its meaning is restricted to multistoried structure
 If it so, deeming fiction is not applicable to single residential unit and will be excluded from ‘Supply’
Construction of Row Houses

 Under Service Tax, the tax on service portion was assessed on presumptive basis (30%/40%)
 The Valuation provisions of ST law requires inclusion of free supply material.
 Under GST, the entire contract is treated as supply of service— there is no scope for presumptive
taxation
 Therefore, there is no need to include material freely supplied by Principle
Free-Supply Material

 Common practice of builders to split the ‘Agreement to Sell’ into ‘Sale Deed’ and ‘Completion Contract’
 Under ST law, effective ST rate on sale deed value is 4.5% while on completion contract is 10.5%
 Under GST regime, completion contract may be treated as works contract liable to tax at 18%
Splitting of Agreement to Sell
Particulars Single Instrument Splitting
Sale Deed Completion
Value 50 30 20
GST 6 3.6 3.6

 Section 15(2)(a) of CGST Act, 2017 provides that the value of supply includes
any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this
Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods
and Services Tax (Compensation to States) Act, if charged separately by the supplier
 Labour cess on works contracts are required to be included in contract value to quantify GST
 Section 15(2)(d) of CGST Act, 2017 provides for inclusion of interest or late fee or penalty for delayed
payment of any consideration for any supply
Value includes other duties/taxes

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Thank you!!!
CA Manindar K
Partner
M/s SBS and Company LLP
manindar@sbsandco.com
9700734609
Guntur Branch of SIRC of
ICAI
26th November, 2017
At
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