The Works Contract Services (WC) being provided by the builders in the Pre-GST regime were taxed under Service Tax law and also under VAT of respective states. The service tax was charged on the value of services contained in the WC whereas the VAT was charged on the value of land and the value of goods used in the provision of WC service. The customers of flats were also paying stamp duty, transfer fee and registration fee under the respective laws. The total incidence of service tax and VAT on provision of WC was ranging between 16% to 17% which was borne by the home buyers.
The govt. has been announcing time and again that the construction sector will be given a boost in the GST regime and the dwelling units will be comparatively cheaper due to reduction in total incidence of tax payable on inputs and WC services provided by the builders.
After advent of the GST regime as on 01.07.2017, we find that the total incidence of tax is much higher than the total incidence of tax in the Pre-GST regime. Let us examine various provision of GST law in this regard.
The WC services in respect of construction of a complex/building are deemed supply of services as provided in schedule ii to section 7 of CGST Act, 2017 and therefore, these are taxable supplies when supplied by registered supplier.
The construction service under GST regime has been classified in chapter 99, section 5 and chapter heading 9954 of the annexure to notification no. 11/2017-(Central Tax) dated 28.06.2017. The definition of construction services has not been provided under the GST law, however the description of the same has been provided by way of notifications no. 11/2017-Central tax (Rate); No.8/2017 - Integrated Tax (rate) and 11/2017-(UTTAX) all dated 28.06.2017. The description of the construction service, as stated above, reads as under:
'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.
(Provisions of paragraph 2 of this notification shall apply for valuation of this service)
The term 'works contract' has been defined under Section 2(119) of the Central Goods and Services Tax Act, 2017 as:
'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.
It is clear from the description of 'construction services' given in chapter heading 9954 that there is no GST if the entire consideration for the sale of the flat/apartment is received after the issuance of completion certificate by the specified authority OR after its first occupation. That would mean that builders are required to pay tax only when the consideration has been received before issuance of completion certificate. The rate of tax is also clearly provided in all the above mentioned notifications. The supply after the issuance of completion certificate will cease to be supply in terms of schedule iii, para 5.
Now we can examine as to whether the total incidence of tax in the GST regime has come down?
In this regard, first of all, we need to examine the method of valuation of taxable supply of construction services. We find that the valuation, is required to be done in terms of the provisions of section 15 of the CGST Act, 2017 read with Rules for Determination of Value of Supply given in chapter IV of CGST Rules 2017. However, in supply of construction services, as stated above, a special/additional mechanism has been provided vide para 2 of the above mentioned notifications, which has been issued under section 15(5), to arrive at the value of service after deducting the deemed value of undivided share in land involved in the supply of construction service. The para 2 reads as under:
'2. In case of supply of service specified in column (3) of the entry at item (i) against serial no. 3 of the Table above, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.
Explanation.- For the purposes of paragraph 2, 'total amount' means the sum total of,-
(a) Consideration charged for aforesaid service; and
(b) Amount charged for transfer of land or undivided share of land, as the case may be.'
From the mechanism as contained in para 2 mentioned above, we find that the quantum of deductions permitted for valuation of land to the tune of 1/3 value of the total consideration, is totally unjustified and substantially low from what the actual value of land for the purpose of stamp duty and registration as prescribed by the government of NCT of Delhi. This is evidenced from the circle rates notified by Govt. of Delhi with regard to value of land and construction cost for the purpose of stamp duty and registration while conveying the title in the immovable property.
The circle rates prescribed by the GNCT of Delhi for land and construction vide Notification No. F. 1(1953)/Regn.Br./Div.Com./HQ/2014/5943, dated 22.09.2014, also depict a similar structure where the ratio usually is 80:20% i.e. 80% being Cost of Land and 20% being cost of construction. Therefore, the deemed value of land in GST is misplaced.
From the above, it becomes clear that since the mechanism to arrive at the deemed value of land is highly tilted against the builders/home buyers, they will have to pay tax at the 2/3 value of total consideration which is deemed to be the construction cost. Obviously, this amount of tax will be collected from the customer who will have to suffer higher amount of GST. Consequently, the cost of flats in the hands of the customer is going to be higher in the GST regime. We can understand this with an illustration:
A builder enters into an agreement with a customer to sell a flat for Rs. 100/- in the GST regime in Delhi. Since the deduction in respect of land is 1/3, (i.e. Rs.33/-) the total deemed value for tax purposes would be 2/3 of Rs.100/- (i.e. say Rs. 67/-). The builder will charge GST from the customer @ 18% at Rs. 67/- which would be close to Rs.12/-. However, if the land cost is taken as Rs. 80/- as per average cost of land in Delhi, the builder would collect tax @ 18% at Rs. 20/- i.e. construction cost, which would be Rs.3.60/-. Therefore, instead of Rs. 3.60/-, the customer has to shell out Rs.12/- as GST on purchase of home unit.
The present method of deduction of value of land as provided in GST law, is suitable/favourable to the big builders who develop big colonies/townships on the outskirts of big cities because the cost of land is much less than even 1/3 part of the total consideration but the cost of construction remains almost similar to the cost of construction within the city.
The Alternatives/solutions/Suggestions are as under:
1. The council should provide for a proper mechanism to the builder/developer/collaborator/buyer to establish the actual value of land and construction services and then levy tax on the part of construction services, rather than providing for abatement by deeming fiction. The illustration of circle rates given above provides for a proper mechanism to establish the value of land and cost of construction involved in construction activity in NCT of Delhi. The circle rates have been notified by the Government of NCT of Delhi and the same should be taken as the proper basis for computing the taxable value amenable to GST.
2. It is also suggested that alternatively, tax on goods and services, may be calculated on the basis of books of account maintained by the builders and where no such books are maintained, the builder may be made to pay tax after deducting 1/3 from total consideration as provided in the above mentioned notification.
3. The GST Law as of date has not provided for a composition scheme, earlier available both under Delhi Value Added tax and Service Tax and the tax payers were at liberty to opt for this scheme. The scheme, being optional, has withstood the scrutiny of courts also and such scheme has been held to be not a tax on land by the courts. It is suggested that a composition scheme may be provided in GST law whereby the builders may be allowed to opt to pay tax at reasonable rate after including the value of land.
Disclaimer: The views expressed in this article are strictly personal. The content of this document are solely for informational purpose. It doesn't constitute professional advice or recommendation. The Author does not accept any liabilities for any loss or damage of any kind arising out of information in this article and for any actions taken in reliance thereon.