The Indian Economy is characterized as a developing market economy with the real estate sector, as one of its Standing Pillars. Indian Real Estate sector is one the major contributors to the gross domestic product (GDP) of the country and the employment generation. However, this sector has been experiencing a financial slowdown in recent years due to certain economic factors including some tax & regulatory concerns also which led to clutches and combats in the real estate sector. Looking at the increasing slowdown, the H’ble FM, Smt Nirmala Sitharaman came up with few measures this year to liberalize the stagnation in this sector.
Despite the efforts, the issues under GST continue to seem like an albatross around the neck of real estate developers as well as the buyers also. Among them one such issue is the taxability of Preferential Location Charges (PLC). Generally, in a housing Project the developer supplies construction service to home buyers. However at times, the developers also provide some additional services like that of PLC (say directional advantage due to vaastu rituals or scenic beauty etc), car parking space, right to use of common area, recreational facilities etc. For providing these additional services along with constructing the units (flats), the developers bills there customers with additional charges which comes as a part and parcel of a consolidated price being recovered from these home buyers.
In this article we will discuss the abstruseness that surrounds the PLC, but before lets have a recap of the recent GST rate changes applicable from April, 2019 i.r.o construction services.
The GST Council in its 34th GST Council meeting recommended various rate-cuts for the real estate sector in a bid to ease the tax burden on all the concerned stakeholders. As a result of this, Notf. No. 03/2019-Central Tax (Rate) dated 29.03.2019 was issued to bring into existence a new GST rate for real estate sector.
Before the issue of this notification, the GST rate on construction of residential dwelling was 18% (CGST 9% and SGST 9%) on the value arrived at after deducting 1/3 of the consideration amount towards land charges i.e., the effective GST Rate was 12% of the consideration amount. Also, a concessional rate of 12% (CGST 6% and SGST 6%) on the value arrived at after deducting 1/3 of the consideration amount towards land charges, was applicable on affordable residential apartments under notified schemes such as Rajiv Awaas Yojana, Pradhan Mantri Awaas Yojana, etc. Thus, the concessional effective GST Rate was 8% of the consideration amount.
Also, the developers were eligible to claim ITC of the goods and services used in providing the construction services.
After the issue of this notification, the new GST Rate on construction of residential dwelling became 7.5% (CGST 3.75% and SGST 3.75%) on the value arrived at after deducting 1/3 of the consideration amount towards land charges, i.e., the effective GST rate of 5% on the consideration amount was made applicable. As regards affordable residential apartments, the new GST Rate became 1.5% (CGST 0.75% and SGST 0.75%) on the value arrived at after deducting 1/3 of the consideration amount towards land charges, i.e., the concessional effective GST rate of 1% on the consideration amount.
However, the developers were denied the ITC of the goods and services used in providing these services.
As a part of construction activities, certain flats / floors in a complex/ building may have a preferential location. Accordingly, the developer may charge additional amount for the said flats / floors which has a preferential location say on account of pool facing, park facing, corner, first floor, top floor, vaastu desired flat, scenic beauty etc. Under GST, a confusion has aroused with respect to treatment of PLC i.e., whether this constitutes a composite supply with construction service being the principal supply or a mixed supply which is not naturally bundled but supplied as a part and parcel. Due to this, there started an ambiguity as to whether the abatement in form of deduction towards land charges from the consideration amount, shall apply to PLC and other related services (such as car parking space etc.) or not.
The issue was brought forward for obtaining an advance ruling and Hon’ble West Bengal Authority for Advance Ruling (AAR) in the case of M/s. Bengal Peerless Housing Development Company reported in 2019 (5) TMI 311, gave its first ruling for such an issue. The Applicant was engaged in providing construction services and allied services like PLC, right to use car parking space and common area maintenance services for which a single consolidated price for the construction and aforesaid allied services. The Applicant submitted before the learned Advance Ruling Authority (AAR) that PLCs are integral part of the supply of construction service. The said services are provided only once the agreement for sale of the unit is signed and other terms and conditions in the agreement are fulfilled. Accordingly, it was argued that supply of construction service is, therefore, naturally bundled with the supply of the services of directional advantage and benefit of floor rise, and all of them are being supplied in conjunction with one another in the ordinary course of business. It is, therefore, a composite supply with construction service, being the dominant element, as the principal supply.
The AAR held that there is no doubt that the services offered by applicant in a bundle are taxable services with construction service being the dominant element of the bundle. Moreover, the recipient while agreeing to buy these services as a bundle, cannot enjoy the other services unless he agrees to buy the service of constructing the allotted dwelling unit.
Furthermore, developers of residential complexes usually offer these services in a bundle. Although one has the option not to pay for the right to use car parking space, he cannot buy it or for that matter any other service in the bundle, separately. The recipient must buy these services only as a package where the construction service remains the predominant element. Thus, the services are naturally bundled and offered in conjunction with one another in the ordinary course of business and the other services of the bundle are ancillary to the supply of the construction service, which describes the essential character of the bundle of services being supplied.
The Applicant is therefore, providing a composite supply of the bundle of services, construction service being the principal supply. Entire value of the composite supply is, therefore, to be treated, for the purpose of taxation, as the supply of construction service, taxable under Sl No. 3(i) read with Paragraph 2 of the Rate Notification. Accordingly, the entire transaction (including PLC etc.) should be treated as supply of construction services and thus, should be taxable at 12% GST (i.e. 18% after claiming abatement of one third for the value of land).
The said ruling came as a relief to the developers and the homebuyers as it provided clarity in the treatment to be adopted and the tax rate to be applied. However, the joy was short lived.
The AAR ruling was challenged by the respective Commissionerate before West Bengal Appellate Authority for Advance Ruling (‘AAAR’). The Commissioner contended that the respondent i.e., Bengal Peerless Housing Development Company [2019(10) TMI 3] applied for advance ruling for the limited purpose to know whether PLC constitutes composite supply with construction service but the AAR passed the ruling not only for this purpose but also on right to use of car parking space. Further, it contended that the AAR had erred in treating the entire set of services provided by the Respondent (i.e. PLC, car parking services, construction services etc.) as construction service, thereby allowing them to claim the abatement as prescribed for construction service, resulting in loss to the Government as GST would stand effectively discharged @12% instead of 18% on services other than construction services (PLC, car parking etc.).
The learned AAAR, after carefully hearing the contention of both the sides held that for PLC, the builder charges the buyer separately for providing a better location, which may be in relation to the direction in which the flat is constructed, the floor on which it is located, the views from the flat opted by the buyer etc. Thus, the abatement, which is allowed on the value of construction service, as the plot of land on which construction is carried out is not liable to GST, cannot be deemed to be applicable in respect of PLC, which is altogether a separate service having no association with the land.
The AAAR further highlighted that the erstwhile Service tax regime has been imbibed in spirit into the present GST system. Under Service tax regime, there existed a special category of service ‘Builder’s Special Service’ to take care of such services as provided by the builders such as PLC, car parking etc. on which no abatement was available. Accordingly, the same treatment should be applicable to PLC and there should be no abatement on the value of such PLC, which is realized separately from the buyers.
The pronouncement given by ‘WBAAAR’ recoated the debate on taxability of PLC, parking and other charges under GST. It came as a set-back to the home buyers, especially the ones who had filed claims with their builders for refund of excess GST charged on PLC.
The author opines that the interpretation adopted by the AAR that PLC and other charges recovered by builders are naturally bundled and thus qualify as a composite supply, is not a correct and logical interpretation. The AAR may have erred while giving its pronouncement for treating PLC as a composite supply. Accordingly, the AAAR appropriately came up with a right conclusion by reversing the decision of the AAR.
The Government aim to bring out the industry from the economic slowdown by rationalizing the GST rates on residential housing is undoubtedly a welcoming step but the engima regarding GST rate on additional services such as PLC, car parking etc. continues to exist. Whether such services would be taxable at 18% or should be a composite supply with construction service being the principle supply and be eligible for abatement on land with lower GST rate remains a controversial and unanswered issue. It is expected that the Government may soon address the issue and come up with suitable clarifications concerning the matter.
Disclaimer: The views, expressions, opinion is solely an interpretation of the author and does not assures of the correctness of interpretation. The author reserves the right not to be responsible for the topicality, correctness, completeness or quality of the information provided above in this article. The above article has been written only for educational purpose.