The CBEC and States have received many complaints that in view of the works contract service tax rate under GST at 12% in respect of under construction flats, complex etc, the people who have booked flats and made part payment before 1st July, 2017, are being asked to bear higher tax incidence for payments made after 1st July, 2017. This is against the GST law, as explained below.

Construction of flats, complex, buildings have a lower incidence of GST as compared to a plethora of Central and State Indirect Taxes suffered by them under the earlier regime.

1. Central Excise duty was earlier payable on most construction material @12.5%. It was higher in case of cement. In addition, VAT was also payable on construction material @12.5% to 14.5% in most of the States. In addition, construction material also earlier suffered Entry Tax levied by the States. Input Tax Credit of the above taxes was not allowed for payment of Service Tax. Credit of these taxes was also not available for payment of VAT on construction of flats etc. under composition scheme. Thus, there was cascading of input taxes on constructed flats etc.

2. As a result, incidence of Central Excise duty, VAT, Entry Tax, etc. on construction material was earlier being borne by the builders, which they passed on to the customers as part of the price charged from them. This was not visible to the customer as it formed a part of the cost of the flat.

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3. The earlier headline rate of service tax on construction of flats, residences, offices etc. was 4.5%. Over and above this, VAT @1% under composition scheme was also charged. The buyer only looked at the headline rate of 5.5%. In other Cities/States, where VAT was being levied under the composition scheme @2% or above, the headline rate visible to the customer was above 6.5%. What the customer did not see is the embedded taxes on account of cascading and sticking of input taxes in the cost of the flat etc.

4. The situation has changed under GST. Under GST, full input credit is available for offsetting the headline rate of 12%. As a result, the input taxes embedded in the flat will not (& should not) form a part of the cost of the flat. The input credits should take care of the headline rate of 12% and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed.

5. The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/ installments. It is, therefore, advised to all builders /construction companies that in the flats under construction, they should not ask customers to pay higher amount of installments inclusive of all taxes to be received after imposition of GST.

6. Despite this clarity on law position, if any builder resorts to such practice, the same can be deemed to be profiteering under section 171 of GST law. (Source- CBEC)

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9 responses to “Demand of Higher Rate of GST on Flats booked before 1st July, 2017 is against the GST law”

  1. kk says:

    myself kk, i have also purchased an under construction flat in lodha palawa, developers is asking for 18% service tax. my other friends those have invested in other projects, theirs builders have not asked till now for the same. i want to know whether,there is any govt body, which take care of consumers interest and we can seek for further process. please help ,if any body have any idea

  2. kk says:

    myself kk, i have also booked a flat in lodha pallava project,which is under construction,i want to know whether,there is any govt body to look after the consumers interest,how developers can ask for sudden 18% hike

  3. umesh says:

    I purchased under const flat at LODHA palava dombivili in March 2017 and the agreement was registered in June 2017. Now builder is asking for 12% GST on payments after 1 July. When I asked him about transfer of benefits due to input tax credit, they said it will be adjusted in your payment at the time of posession in 2019. Is there any govt policy for GST applicable on under construction flats??

  4. GursharnJit says:

    Do we have any Govt article/ITC stating that the GST cannot be implemented on the flats booked prior to 01st July.

  5. unnikrishnan vasudevan says:

    As regards the ITC under GST, credit of input materials like cement steel etc lying in stock would be eligible.
    In cases where the structure is already built and only finishing works like painting, plumbing electrical wiring flooring etc world be eligible for which the GST rates would b 28%,.
    Another aspect is 18% is GST with deduction of one third value for land out of total cost. I practice majority of buildiers would have adjusted the first payments towards cost of land. In such cases, whether the deductim of deemed land value can be claimed further ?
    In a 60 lakh flat, Ten Lack was shown as land value and already adjusted .Now 30 laks is pending. Can I claim the balance Ten Laks of 20 out of 60 or Ten out of 30 and need pay tax @I8% after Ist july.
    In such cases the impact of ITC is nominal to reflect in cost of flat offered at 60 Lacks in the example quoted…

  6. Vinod Kumar Tyagi says:

    This press release by the CBEC is factually incorrect and misleading since the incidence of GST credit on inputs does not fully negate the impact of the increase in tax rate from 4.5% to 12%. Moreover, it varies from place to place depending on the price of land.
    In the long run, the market will settle the prices and the GST will be borne by the buyer.

  7. R K Gupta says:

    Alternatively the G S T payable by customer should be paid by the builder, if the benefit of previous taxes reimbursement to the builder is not passed to the customer by the builder

  8. CMA ANIL SHARMAa says:

    Position is not clear for construction work yet. In notification 11/2017 (ref para 2 also) construction work in subject to 18% if land value is reduced from total amount charged.
    In Service Tax Rates booklet as released by Council dt 03.07.2017 the said service is subject to 12%.
    any one can reply please…..

    • unnikrishnan.v says:

      The dubious method of implementation of GST council meeting decision that 12% will be the GST rate for builders,if land value is included ‘ has been reflected in the Notification issued that18% rate ,with exemption of one third amount as deemed land value has been issued..This is gross violation of the GST Council recommendation,which I am sure will not stand the test of law,if challenged in Court.

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