GST on Construction Services: Provisions, Rates & Compliance

Summary: The Article explains the GST treatment of construction services under the CGST Act, 2017 and related notifications for under-construction residential and commercial properties. It states that construction intended for sale before the issuance of a completion certificate or first occupation is treated as a supply of services, while sale after completion certificate or first occupation is outside the purview of GST. It outlines the classification of projects as Real Estate Project (REP) and Residential Real Estate Project (RREP) based on whether commercial carpet area exceeds 15% of the total carpet area, and defines affordable residential apartments by prescribed carpet area and a value not exceeding Rs. 45 lakh. The content summarises effective GST rates of 1% for affordable residential apartments, 5% for other residential apartments and commercial apartments in an RREP, and 12% for commercial apartments in a REP other than an RREP, along with the availability of input tax credit only for commercial apartments taxed at 12%. It also highlights key compliance requirements, including payment through the electronic cash ledger, the 80% procurement requirement from registered suppliers, and reverse charge liability on specified shortfalls and cement procured from unregistered suppliers.

Introduction

The Goods and Services Tax (GST) on real estate has been one of the most debated and evolving areas of indirect taxation in India. Determining the applicable GST rate on under-construction residential and commercial properties requires a clear understanding of the provisions of the CGST Act, 2017, the relevant notifications, and the classification of projects as a Real Estate Project (REP) or a Residential Real Estate Project (RREP). Further, the applicability of concessional GST rates for affordable housing, restrictions on input tax credit (ITC), and compliance with the prescribed conditions add to the complexity for promoters, tax professionals, and homebuyers. This article provides a comprehensive analysis of the GST provisions applicable to construction services, covering the concepts of REP, RREP, affordable residential apartments, applicable GST rates, ITC eligibility, and the key compliance requirements under the GST law.

Quick Reference Table

Legal Background and analysis:

1. Section 7(1) of the CGST Act, 2017 defines “supply” to include “All forms of supply of goods or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made for a consideration in the course or furtherance of business”.

2. Schedule II of the CGST Act, 2017, Entry 5(b) specifically provides, Construction of a complex, building, civil structure or part thereof, including a complex or building intended for sale to a buyer, wholly or partly, is treated as a supply of services, except where the entire consideration is received after issuance of completion certificate or first occupation, whichever is earlier. Thus, under-construction property is treated as supply of services for GST purposes.

3. Thus, sale before the issuance of the completion certificate is considered as taxable supply of services and sale after completion certificate is considered as sale of immovable property and hence outside the purview of GST.

4. Paragraph 5(b) of Schedule II further clarifies that “Construction” includes additions, alterations, replacements or remodeling of any existing civil structure.

5. Section 2(119) of the CGST Act, 2017 defines “works contract” as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation or alteration of any immovable property wherein transfer of property in goods is involved in the execution of such contract. Works contracts relating to immovable property are deemed to be supply of services under Schedule II.

Key Definitions

1. To assess the GST implications, it is essential to first examine the definitions of “Real estate project”, “Residential real estate project” and “Carpet area”.

2. As per section 2(n) of the Real Estate (Regulation and Development) Act, 2016, “Real estate project” means the development of a building or a building consisting of apartments, or converting an existing building or a part thereof into apartments, or the development of land into plots or apartment, as the case may be, for the purpose of selling all or some of the said apartments or plots or building, as the case may be, and includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto;

3. As per definition in Notification No. 03/2019–Central Tax (Rate) dated 29 March 2019, which amended Notification No. 11/2017–Central Tax (Rate), “Residential real estate project (RREP)” means a Real Estate Project (REP) in which the carpet area of the commercial apartments is not more than 15% of the total carpet area of all apartments in the REP.

4. Accordingly, a real estate project wherein the carpet area of commercial apartments does not exceed 15% of the total carpet area qualifies as a Residential Real Estate Project (RREP). Where such threshold is exceeded, the project is classified as a Real Estate Project (REP) other than RREP.

5. As per section 2(k) of the Real Estate (Regulation and Development) Act, 2016 “carpet area” means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.

6. As defined under Notification No. 11/2017–Central Tax (Rate) as amended by Notification No. 03/2019–Central Tax (Rate) “Affordable residential apartment” means a residential apartment in a REP which commences on or after 1 April 2019, or in an ongoing project in respect of which the promoter has not exercised option to pay tax at old rates, having:

(a) carpet area not exceeding 60 sq. meters in metropolitan cities; or

(b) carpet area not exceeding 90 sq. meters in cities or towns other than metropolitan cities; and

(c) gross amount charged not exceeding ₹45 lakhs.

7. Where ‘Gross amount’ includes any other amount charged by promoter from the buyer of the apartment including preferential location charges, development charges, parking charges and common facility charges etc. However, it will not include stamp duty payable to statutory authority, maintenance charges or deposit for maintenance of apartment or maintenance of common infrastructure.

8. For the purpose of clause mentioned in point 15, Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their respective geographical limits prescribed by an order issued by the Central or State Government in this regard;

GST Rates

GST rates prescribed for supply construction services as per Notification no.11/2017 further amended by Notification no.03/2019 dated 29^thMarch 2019 are as follows:

1. The above provisions are summarized in the following table.

 * Limit of carpet area is 90 sq. is for other than metropolitan cities  and 60 sq. meters is for metropolitan cities.

2. The following conditions, as prescribed under the said notification, are required to be complied with.

• The tax at the rate specified shall be paid in cash, that is, by debiting the electronic cash ledger only.
• Credit of input tax charged on goods and services used in supplying the service should not been taken except to the extent as prescribed.
• Eighty percent of value of input and input services, [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas], used in supplying the service shall be received from registered supplier only. It is to be noted that inputs and input services on which tax is paid on reverse charge basis shall be deemed to have been purchased from registered person.
• Where value of input and input services received from registered suppliers during the financial year (or part of the financial year till the date of issuance of completion certificate or first occupation of the project, whichever is earlier) falls short of the said threshold of 80 per cent., tax shall be paid by the promoter on value of input and input services comprising such shortfall at the rate of eighteen percent on reverse charge basis and all the provisions of the Central Goods and Services Tax Act, 2017 (12 of 2017) shall apply to him as if he is the person liable for paying the tax in relation to the supply of such goods or services or both;
• Where cement is received from an unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates on reverse charge basis and all the provisions of the Central Goods and Services Tax Act, 2017 (12 of 2017), shall apply to him as if he is the person liable for paying the tax in relation to such supply of cement;

Conclusion:

The GST treatment of construction services is governed by a combination of statutory provisions, notifications, and specific conditions applicable to real estate projects. The correct GST rate depends not only on whether the apartment is residential or commercial but also on factors such as the classification of the project as REP or RREP, the affordability criteria, the stage of construction, and the timing of consideration received. Promoters must also carefully evaluate the restrictions on input tax credit and comply with the procurement and reverse charge requirements prescribed under the GST law. A sound understanding of these provisions will enable developers, tax professionals, and other stakeholders to determine the correct GST liability, ensure statutory compliance, and minimize the risk of future litigation.

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Disclaimer: The views expressed are based on relevant provisions and notifications applicable as on date and are intended for educational purposes only.

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