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GSTonRealEstate - Part 1 - Valuation in Real Estate





After much thought and understanding its time to analyse the GST provisions on the real estate. Since the Real Estate sector is vast, we are starting a series of blog dedicated to the real Estate. Series would be name as GSTonRealEstate – Part 1.

Real estate is one of the most tedious sector for discussion of applicability of GST. Various dimensions on which the applicability of GST on real estate can be discussed are as follows:

1) Valuation :

At the very outset it needs to be understood that the construction services provided by the developer shall be construed as services as per Schedule II of the CGST Act 2017. There is no concept of abatement as in the earlier laws. What is taxable is the sale of under construction property and not the one for which completion certificate has been obtained. The intent of the law is very clear, it wants to charge tax on the construction services per se and not the completed buildings. Once the property is complete and sold, it will become subject stamp duty to be charged by local tax authority.

There are various charges which are found as follows:

(a) Interest Free Maintenance Charges (IFMC)
(b)Preferred Location Charges (PLC)
(c)  Club Charges
(d)Sale of Car Parking
(e) Any other Charges

Construction Services - A composite Supply

Although we have discussed each of these charges separately, But one thing needs to be particularly considered i.e. the contract entered by the developer shall be treated as a composite contract. The above charges are incidental to the main construction contract with the client. Even if the developer enters into two separate contracts for construction and the charges incidental to it, even then it shall be classified as composite supply, principal supply being construction services. In various Rulings AAR has held that the contract would not make any difference if two supplies are naturally bundled in the normal course of business. Hence the charges incidental to the construction services shall be charged at the rate of tax leviable on the construction.

The rate of tax on construction services where the land is also transferred along with the building is 12% but where the recipient already owns the land and supplier is merely giving construction services – the rate of tax is 18%.

Now let’s discuss the charges individually and their taxability.

(a) Interest Free Maintenance Charges (IFMC)
IFMC which is paid and is non-refundable shall become part of the consideration chargeable to GST.  Such non-refundable deposit shall form part of the value of supply as per Section 15 of CGST Act 2017.
Where such IFMC charges are refundable, there shall not form part of the value of supply and hence no GST would be charged by the contractor or the builder (as the case may be) on such refundable charges.

(b)Preferred Location Charges (PLC)
Preferred Location Charges are the charges which are levied by the builder/contractor for the locational advantage of the immovable property. Such advantage could be in the form of corner house, sun facing, park facing etc. Such charges are incidental to the construction services rendered by the builder, hence they form part of the composite contract chargeable to GST.

(c)  Club Charges
Club in a project are generally managed by the residential welfare association or society of residents. Although such club charges are paid to the builder at the time of purchase, they do not form part of consideration paid towards the construction services. Contractor/builder merely acts as an intermediary who collects the amount on behalf of the RWA. The real supplier in this case is the Residential Welfare Association. Hence such club charges will be charged to tax in the hands of the RWA and the tax rate in such case would be 18%.

(d)Sale of Parking
Sale of Parking along with the flat/immovable property shall be treated as a part of composite supply of construction contract. Therefore the payment received on account of sale of car parking shall be charged the rate of tax which is charged on the sale of immovable property.

(e) Any other Charges:
Any other charges which may be levied by the builder and are incidental to the rendering of construction services, they shall be charged to tax at the rate at which the Construction services are being charged.

Rest of the issues on real estate shall be discussed in forthcoming parts of our series - GSTonRealEstate. Request you to kindly share your feedback at +91-98880-90008 which will help us improve, innovate and bring out good quality content for our readers. 

Thanks and Regards

Keshav R Garg
(B.Com, FCA, CS, ISA(ICAI))
Author: Bharat's GST Ready Reckoner
            A Handbook on GST
Member: Indirect Tax Committee of CII, 
Founder: MyGst.MyTax Foundation
Adviser: Industries Association of Chandigarh
Adviser: Chambers of Chandigarh Industries

Address: 3328, First Floor, Sector 27 D, Chandigarh, India - 160 019
Phones: +91-172-461-3328, +91-98880-90008
Mail: keshavgarg@kdai.in

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