gst on real estate and works contracts · requires splitting of contract value between goods and...

GST on Real Estate and Works Contracts

CA Manindar KPartner

M/s SBS and Company [email protected]

+91 9700734609

by

Guntur Branch of SIRC of ICAI26th November, 2017

mailto:[email protected]

[email protected] 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 ContractSl.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 irrespectiveof the stage of completion at time of booking a flat byCustomer

Levy is applicable only on value of materialincorporated in the flat after booking of a flat bycustomer


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 isascertainable.. Nothing but the stamp dutyvalue of land

Point of Taxation At the time of handing over the built-up area At the time when JDA is entered, area to bebuilt-up is divided between builder andlandlord


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 Circular2. Value of built-up area towards land lord share shall be determined using the rate at which first sale

deed is executed3. 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 considered2. 18% rate shall be adopted on value proportionate to builder to arrive at GST3. Value adopted by this method may be rejected by department

Cost Method 1. Value being 110% of the construction cost2. 18% rate shall be adopted on value proportionate to builder to arrive at GST3. Cannot be adopted if time of supply is said to arise at the time of JDA4. 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 KPartner

M/s SBS and Company [email protected]

9700734609

Guntur Branch of SIRC of ICAI

26th November, 2017

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