Introduction: The Goods and Services Tax (GST) has reshaped taxation structures in several nations, providing a comprehensive approach to indirect taxes. In the construction industry, GST has ushered in significant changes, affecting how businesses manage finances. This article delves into the complexities and opportunities arising from the implementation of GST in the construction sector.
The Goods and Services Tax (GST) is a broad indirect tax that has been imposed in several nations to replace multiple taxes and simplify the taxation structure. GST has resulted in considerable changes in the way businesses operate and manage their finances in the construction industry. This article explores the impact of GST on the construction industry, highlighting both the difficulties and possibilities that have arisen since its implementation.
Let us provide more insight on the impact of GST on the construction industry.
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Most recent update on GST on Construction
On July 28th, the Gujarat High Court granted a big relief to homebuyers by ruling that GST on construction is only applicable to building charges and not land costs. In a case involving GST on construction, the court’s decision underlined that the cost of constructing should be considered when establishing Goods and Services Tax duty, but the cost of land would be excluded from taxation.
The court’s decision establishes that GST on residential property construction is not applicable to the actual land value or the undivided part when commercial plots, villas, or flats are sold. As a result, land used for construction falls outside of the scope of GST. Taxation should only be levied on construction-related expenses. This decision gives significant relief to homeowners who were previously liable to GST levies depending on the value of the land.
GST Rates and Construction Categories
The classification of real estate developments as affordable or non-affordable housing sets the foundation for understanding the applicable rates.
| Service/Material | GST Rate |
| Construction GST Rate (General) | 18% |
| Affordable Housing Apartment GST on construction services (from April 1, 2019) | 1% |
| GST on Building Non-affordable Housing Apartment (from April 1, 2019) | 5% |
| Commercial Apartments in REP (except RREP) | 12% |
| Works Contract GST Rate (Material supplied by the contractor) | 12% |
| Works Contract Services HSN Code and GST Rate (Only labor supplied by the contractor) | 18% |
| Composite Supply of Works Contract and Goods (Goods < 25% of total contract value) | 18% |
| Composite Supply of Works Contract and Goods (Goods ≥ 25% of total contract value) | 12% |
| Cement | 28% |
| Bricks | 12% |
| Sand | 5% |
1. Affordability of Housing
Affordable housing projects have been created to provide low-cost focusing alternatives to the economically weaker sections of society. A reduced GST rate of 1% (without Input Tax Credit) is levied on such projects to support affordable housing initiatives. To define what constitutes affordable housing, specific criteria such as maximum carpet area and property value thresholds are applied.
2. Non-Affordable Housing
Higher GST rates apply to non-affordable housing projects. As of the September 2021 cut-off date, residential properties are subject to a 5% GST rate, whereas commercial assets are subject to an 18% GST rate with Input Tax Credit.
Input Tax Credit (ITC) in Construction: An Important Factor
- Except for plant and machinery, ITC does not apply to works contract services provided for the construction of an immovable property.
- ITC for works contract, on the other hand, can only be received by individuals who work in the same industry and employ such services for the ongoing supply of works contract services.
Availability of ITC for Self-constructed Structures : ITC is not available for goods/services/both obtained by a taxable person for the construction of an immovable property (other than plant or machinery) on his own account, even if such goods or services or both are used in the conduct or furtherance of his business.
The Goods and Services Tax (GST) applies to all stages of the construction industry, including residential, commercial, and infrastructure projects. Understanding the GST consequences is critical whether you are a real estate developer, contractor, or homebuyer
Real Estate Developers: GST is levied on the sale of under-construction homes by real estate developers. The construction service component is subject to GST, not the total property’s worth. Developers can claim an ITC on the GST paid on building goods and services. The actual tax rate, however, varies based on the type of property.
Homebuyers: When purchasing an under-construction property, homebuyers must pay GST. The standard GST rate for residential properties is 5% for non-affordable housing and 1% for affordable housing (those with carpet areas of up to 60 square meters in metros and 90 square meters in non-metros). Homebuyers can receive ITC benefits through the builder, lowering the entire cost.
Contractors: Construction and associated service contractors must follow GST regulations. They must charge GST on their services and are eligible for ITC on taxes paid for construction goods and services utilized in the project. The general tax rate for building services is 18%.
The Effect on the Construction Industry:- Transparency: By eliminating several layers of taxes, GST has made the taxation system more transparent. This limits the opportunity for tax avoidance.
Input Tax Credit (ITC): The provision of ITC allows builders and contractors to seek GST refunds on building supplies and services. This lowers the overall cost of the project.
GST has standardized tax rates across the country, making it easier for enterprises to operate across India without having to worry about varied state taxes.
- High GST Rates: The high GST rate on cement and other materials can have a substantial impact on project prices, making affordable housing difficult to come by.
- Compliance Difficulty: Complying with GST requirements can be difficult, particularly for small and medium-sized construction enterprises. Proper record-keeping and comprehension of GST laws are required.
- Cash Flow: Due to the upfront payment of GST and the following return process, builders and developers may suffer cash flow issues.
In conclusion, the impact of GST on construction is multifaceted and depends on various factors such as the specific rates, ITC availability, government policies, and economic conditions. It is crucial for stakeholders in the construction industry to stay updated on relevant regulations and adapt their strategies accordingly to navigate the dynamic landscape of GST on construction.
We are open for comments and suggestions. The above article has been prepared as by Ms. Laxmi Malge (laxmi.malge@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in)
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