GST rate of construction will apply to other services in construction

GST rate of construction service shall apply for other services like of construction. A recent order from the Appellate Authority for Advance Rulings (AAAR) in the case of a Thane-based developer could result in reduced costs for purchasers of under-construction properties.

The appellate court ruled that fees collected by the developer, Puranik Builders, for water connection, electric metre installation and deposit for metre, development charges and legal fees are “inextricably linked” to the primary service of construction. These fees will be subject to the Goods and Services Tax (GST) at the rate applicable to construction services, which is 12%. In its August 2021 ruling, the Authority of Advance Ruling determined that all other services provided by the contractor constituted independent services and were therefore subject to 18% GST. This prompted Puranik Builders to file an appeal with the AAAR, resulting in a partial reversal of the earlier order.

For housing developments that do not fall within the affordable housing segment, the revised GST rate for construction services as of April 1, 2019 is 5%, with no input tax credit allowed. For ongoing initiatives, however, the 12% rate with input tax credit is available.

Typically, a contractor provides “other services” for which fees are assessed. These services range from providing a water connection to collecting advance maintenance fees prior to the purchasers forming the housing society. These additional services are specified in the sales agreement between a builder and flat purchasers.

According to experts, even though rulings do not establish a precedent, they are persuasive in similar cases during the assessment process.

“The AAAR emphasised that the perception of the consumer or service recipient is a crucial factor in determining whether or not services are bundled. Charges such as preferential location fees, external and internal development fees, water connection fees, and electric metre fees, among others, are inextricably linked to construction because they cannot be provided separately. Consequently, these should enjoy a reduced construction tax rate,”

The AAAR panel analysed the characteristics of payments made for other services. The appellate court ruled that only those services not included in the bundled supply, such as advance maintenance, club house maintenance, and share application money, will be taxed at 18%.

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