Arjuna (Fictional Character): Krishna, some changes have been made in relation to works contract, please tell something about it.
Krishna(Fictional Character): Arjuna, recently the new taxation procedures and rates were notified in relation to real estate industry. These notifications have also brought changes in the construction services provided in relation to real estate, which is made effective from 1st April 2019.
Arjuna: Krishna, what is works contract under GST?
Krishna: Arjuna, Works contract is defined as“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”; u/s 2 (119) of CGST Act 2017.
Arjuna: Krishna, what are the new tax rates applicable to the works contract?
Krishna: Arjuna, as we have seen above works contract service where goods as well as services are provided under one contract.
Earlier to this notification, service of works contract (other than specifically provided) were taxable @ 18%.
Now the new tax rates are as:
- If works contract service is provided in relation to the construction of an affordable residential apartment, then tax rate applicable shall be 12%.
- Works contract service other than for the one above would be liable to tax @ 18%
Arjun: Krishna, What is an Affordable apartment?
Krishna: Arjuna, Affordable residential house/flat are the ones which have a carpet area of upto 90 sqm in non-metropolitan cities/towns or 60 sqm in case of metropolitan cities and having Gross value uptoRs. 45 lakhs (both for metropolitan and non-metropolitan cities).
Metropolitan cities are Bengaluru, Chennai, Delhi MCR, Hyderabad, Kolkata and Mumbai.
Arjuna: Krishna, are there any conditions to be fulfilled?
Krishna: Arjuna, the works contract service in relation to affordable residential project will be taxed at 12% only if- The Carpet area relating to the affordable residential apartments not less than 50 percent of the total carpet area of all the apartments in the project.
Arjun: Krishna, What if the above condition of having at least 50% carpet area in a project for affordable residential apartment is not fulfilled?
Krishna: Arjuna if later,it finally turns out that condition of 50% carpet area mentioned above is not satisfied, then the recipient of the service that is the promoter (builder) shall be liable to pay such amount of tax on reverse charge basis.
Such tax payable on reverse charge basis would be equal to the difference between the tax payable on the service at the applicable rate and the tax actually paid.
Arjuna: Krishna, one of the condition for a project to be an affordable residential project is that the Gross amount charged should be less than 45lakhs. But how can one tell at the time of providing service that the unit shall be sold for an amount less than that specified?
Krishna: Arjuna,correct!one cannot tell at the time of supplying service whether unit would be sold for value less than 45 lakhs.
Therefore, it is provided that for the purpose of determining the value of the apartments, it shall be the value of similar apartments booked nearest to the date of signing of the contract for supply of the service specified.
Arjuna: Krishna, generally landlord provides rights in land to the developer and in return may get some constructed units, would providing constructed units by builder liable to tax?
Krishna: The builder is providing construction service to the landlord by providing the constructed units to the landlord. The rate of tax for this would be 1% in case units given is affordable residential unit, other residential units provided would be taxed @5%.
Arjuna: Krishna, what one should learn from this?
Krishna: Arjuna, The taxability of works contract service calls out for caution by the builders and service providers. After taking into consideration various aspects the tax rate should be properly worked out. As the builder would require to pay tax under RCM if conditions mentioned above is not met. Builder should take care so that the works contract do not become Worst contract for them.