The Goods and Services Tax (GST) rate of 12 percent will be applicable on under-construction properties.
This rate with input tax credit seeks to remove the inefficiencies of dual taxation in the form of value added taxation (VAT), service tax and puts an end to multiple taxes.
The service tax exemptions to be continued in GST as decided by GST Council include services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction/enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY).
The schedule of GST rates for services as approved by the GST Council said that the “construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. The value of land is included in the amount charged from the service recipient.” These will be taxed at 12 percent with full input tax credit.
What this means is that from July 1, GST would be applicable on under construction properties at the rate of 12 percent but not on completed, ready-to-move-in apartments. Real estate experts say that stamp duty and property taxes may continue to be levied on immovable properties.
A property that is under construction is governed by the works contract. The GST Council has announced four rates for services – 5, 12, 18 and 28 percent. While 5 percent rate is mostly for transportation services, rates for restaurant services will vary as per tariffs charged and facilities provided, ranging from 12-18 percent; Gambling and cinema services will fall under 28 percent slab, as entertainment tax merged with service tax under GST while works contract is taxable at 12 percent with full input tax credit.
Under the current tax regime, works contract attracts a service tax rate of 6 percent which is a reduced tax rate under a special scheme known as the abatement scheme and a value added tax or VAT that currently ranges from 1 to 5 percent depending from state to state. While paying these taxes today, developers do not get a deduction of the input tax but under GST they will. This means that on the amount of excise duty and VAT they pay on cement or steel, no set off is available to them but under the new GST regime, developers will be able to get benefits on taxes.
Currently, EMIs for ready-to-move-in apartments do not attract indirect tax. But installments paid to the builder for an under-construction property attracts a service tax of 15 percent on which abatement is provided. The premise here is that a builder is providing a service to a homebuyer by constructing an apartment. The abatement is allowed to take care of the value of the land involved in the construction of apartments, say experts.