GST Issues on Construction of flats by Builders

1. Taxability (indirect taxes) of flats constructed by builders and the like had a chequered history of litigation. Chiefly, the bone of contention was whether sale of immovable property when it is under construction involves any service element. Constitutional competency of enacting sections exacting service tax on construction of flats was challenged largely unsuccessfully and ultimately, it was accepted by all concerned that service tax is imposable on part of consideration constituting sale of flats except where they are transferred after obtaining completion certificate from competent authorities.
2. Section 7 CGST defines supply in an inclusive manner meaning it is a widened and broadened connotation. Essentially, a flat under construction and intended to be sold to a buyer is sale of immovable property, but when it is undergoing construction there is an element of service and consequently, it was necessary to treat construction of flats as a supply of service vide Section 7(1)(d) read with item no 5(b) of Schedule II.
3. Schedule of Goods and Service Tax rates for services approved by GST Council laying down fitment of rates of services states at entry 19 that "Construction of a complex, civil structure or part thereof intended for sale to a buyer wholly or partly" will bear GST at 12.5% with full input tax credit, but no refund of overflow of input tax credit. The entry also explains that the value of land is included in the amount charged from the service recipient. Simultaneously, rate of GST for composite works contract as defined in Section 2(119) vide entry 27 is 18% with full input tax credit. In substance and effect, though construction of flat is treated as a service yet it is akin to a works contract. Drawing such a cue implies that concession of 6% is given to factor in value of land thereby leading to a calculation of 33% of abatement on the total consideration. However, prescription of such a standard rate of abatement [assumed] does not take into realities of cheap, medium, semi-luxury, luxurious and elite segments where composition of land value would considerably vary. Moreover, in semi-rural developing towns, presumed rate of 33% in respect of land value may be on higher side leading to excess input credit over 12% output tax inasmuch as input supplies for builders mostly carry a rate of 18% to 28% which as per schedule of rates as seen above is not refundable. In cases, where input tax credit falls short of GST rate of 12% profits of builders will truncate or lead passing of burden on to consumers. In my opinion, this matters ought to have been formulated by the legislature in a flexible manner through a methodology by way of rules to reckon local factors.
4. Another daunting controversy that may arise is whether the overflow of input tax credit is to be worked per project or on a net basis for all projects put together. Section 16 of CGST provides that every person shall subject to such terms and conditions as may be prescribed and in the manner specified in Section 49 be entitled to the credit of any input tax in respect of any supply of goods and services or both to him which are used or intended to be used in the course or furtherance of his business and the amount shall be credited to the electronic ledger of such person. In my opinion, looking at the wording of Section 16 aforesaid read with Section 17 better view appears to be that an overall picture of all projects will have to be undertaken and not project wise. No guidance is found either in the Act or the relevant rules as what are the implications of GST in a case when a project undertaken by the builder where he has to give flats to the owner of land in discharge of consideration for obtaining development rights. Assuming in a particular case, the developers have to provide 100 flats to owners and there other 200 flats for free sale; in former case he will be a contractor levying GST at 18% with input tax credit, whereas in the latter case, the rate would be 12% with full input tax credit but no refund of overflow credit in a situation where flats are sold before they are fully developed. In the aforementioned example, there can controversy as to how the overflow of input tax credit to be computed being the difference between the rate of GST on input supplies and 18% GST rate more particularly, after considering common input supplies and capital goods employed for both types of flats. Moreover, disputes will arise as to what is time of supply of the 100 units to be allotted to owners more specifically, if land is not parted physically at one go, but in stages. Can we say the supply of flats is complete when possession of land is given despite the fact that flats are yet to be constructed? If the free sale flats are sold in stages question will emanate as to whether input tax credit is to be accumulated or can be claimed while construction is progressing without any sale? It would be best to issue clarifications on these and other potential roadblocks that may lead to avoidable litigation.

Source: July 5, 2017[2017] 83 taxmann.com 87 (Article)