GST On Construction Sector Hiked To 18%

The government has hiked the Goods and Services Tax (GST) rate for the construction sector to 18 percent from 12 percent. But it also allowed deduction of land value equivalent to one-third of total amount charged by the developer for GST calculation. Hence, the effective GST rate remains unchanged at 12 percent.

While notifying the tax rates for Central GST, Integrated GST and Union Territory GST, the Central Board of Excise and Customs (CBEC) tweaked the tax rate and the mode for calculation on Thursday.

Construction of complex, building, civil structure, including a complex or building intended for sale to a buyer, wholly or partly, will attract a GST rate of 18 percent. GST, however, will not be imposed on fully constructed properties, where completion certificate as been issued by competent authority.

Manish Mishra, partner-indirect tax at BDO India LLP, a tax advisory, told BloombergQuint that no change has been introduced in respect of availing of input tax credit. He explained that the value on which the 18 percent GST would be payable shall be two-third of the total contract value, i.e. total value of contract minus value of land up to one-third of the total contract value.

For example, if the value of a property is Rs 90 lakh, a developer can deduct up to Rs 30 lakh (one-third of Rs 90 lakh) as land cost and compute GST at the rate of 18 percent on the remaining Rs 60 lakh. This is in turn is levying GST on only two-third of the total value.

The changes were effected after builders urged the government to consider accommodating the abatement of land value under the GST regime to ensure home prices don’t rise.

The GST Council had in its meeting in May decided to levy 12 percent GST on construction of a complex, building, civil structure or intended for sale to a buyer, wholly or partly. The value of land was to be included in the amount on which tax was to be calculated.

However, this latest notification has left developers more confused.

“This has been done to avoid future litigation as Centre does not have powers to impose GST on land. Abatement of land with an increase in GST rate has led to more confusion among all stakeholders as we will have to rework on softwares and there is only one day left,” said Rajat Kalra, deputy general m,anager (accounts), Raheja Developers.

Pankaj Bajaj, managing director at Eldeco Infrastructure & Properties Ltd., said that the customer will eventually bear the brunt of this.

“Land rates are drastically different in different locations. Lokhandwala and Lucknow are not the same. It is a ‘one size fits all’ solution, and ultimately. the customer will bear the cost,” said Bajaj.

"The GST rate on our industry remains unchanged at 12 percent. Any conjecture or speculation of a change in incidence of tax on real estate to a rate other than 12 percent is unwarranted," said Jaxay Shah, President, CREDAI.

Industry body Confederation of Real Estate Developers Associations of India (CREDAI) that one-third or 33 percent land abatement is not enough.

“A 33 percent mandatory abatement towards land is not enough. It will not give substantial gains to projects in localities where land value is almost 80-90% of the unit value. This may include all tier 1 cities. Hence, for a substantial growth of the industry which is the second largest contributor to the GDP, we urge the GST council to consider providing a mechanism for reducing the value of land," he added.