The construction industry is the second most largest industry in India. Article briefly talks about GST on construction industry, GST provision along with GST tax applicability the construction industry can be divided into the following three segments –
- Real estate construction – which involves residential construction and commercial construction;
- Industrial construction – which involves the construction of a factory, refinery, pipelines, etc.; and
- Infrastructure building – which involves the construction of roads, bridges, railways, etc.
Tax treatment as applicable to the construction industry has always been complicated both under an erstwhile indirect taxation law and under current GST law.
Originally, under GST effective rate of 12% was introduced and made applicable to construction industry, which was later on rationalized by introducing a concessional effective rate of 8% in the case of affordable housing projects.
In spite of the reduction in the effective rate, continues representations were being made by the builder’s association to reduce the rates under GST to boost the real-estate industry. Accordingly, a new GST tax treatment was introduced and made effective from 1st April 2019.
In the present article, we will try and understand the entire tax structure of GST on construction industry (covering both tax treatment applicable up to 31st March 2019 and new tax treatment applicable from 1st April 2019).
GST on construction industry and its GST provisions
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Firstly, let us go through the definition of ‘works contract’ as covered under section 2(119) of the Central Goods and Services Tax Act, 2017. Works contract means a contract for any of the following relating to immovable property, wherein, the transfer of property in goods is involved in the execution of such contract –
- Construction;
- Completion;
- Fabrication;
- Installation;
- Erection;
- Improvement;
- Fitting out;
- Repair;
- Modification;
- Renovation;
- Maintenance;
- Alteration; or
- Commissioning.
Supply of goods or supply of services
In order to decide the taxability, it is important to understand whether the supply is classified as ‘supply of goods’ or ‘supply of services’. All the relevant entries, as applicable to the construction industry are summed up hereunder
Particulars | Provisions | Supply of goods or supply of services |
|---|---|---|
Works contract | Schedule II para 6(a) | Supply of services |
Construction of complex/ building/ civil structure or part thereof –
| Schedule II para 5(b) | Supply of services |
Sale of land | Schedule II para 5 | Neither supply of goods nor supply of services, accordingly, not taxable under GST. |
Sale of the building when the entire consideration has been received either after the issuance of completion certificate (where required) or after its first occupation | Schedule II para 5 | Neither supply of goods nor supply of services, accordingly, not taxable under GST. |
Thus, in nut-shell, any construction activity is taxable under GST unless the same is specifically excluded.
GST taxability on construction industry
From the inception of GST i.e. 1st July 2017, serial no. 3 of notification no. 11/2017- Central Tax (Rate) dated 28th June 2017 as amended, dealt with the taxability as applicable to the construction industry. The same is simplified and explained hereunder
Particulars | GST rates |
|---|---|
Construction of complex/ building/ civil structure or part thereof | 9% CGST + 9% SGST (i.e., 18%) Notably, where the supply involves the transfer of property in land/ undivided share of land. Then, in such a case – Value of supply = total amount charged for the supply (-) 1/3rd of the total amount being deemed as value of the land. Hence, the effective rate of GST was 12% (instead of 18%) |
Construction of complex/ building intended for sale (wholly or partly) to a buyer except where the entire consideration has been received either after the issuance of completion certificate (where required) or after its first occupation | 9% CGST + 9% SGST (i.e., 18%) Notably, where the supply involves the transfer of property in land/ undivided share of land. Then, in such a case – Value of supply = total amount charged for the supply (-) 1/3rd of the total amount being deemed as value of the land. Hence, the effective rate of GST was 12% (instead of 18%) |
Composite supply of works contract | 9% CGST + 9% SGST (i.e., 18%) |
Any other construction service | 9% CGST + 9% SGST (i.e., 18%) |
Affordable housing project | 6% CGST + 6% SGST (i.e., 12%) Notably, where the supply involves the transfer of property in land/ undivided share of land. Then, in such a case – Value of supply = total amount charged for the supply (-) 1/3rd of the total amount being deemed as value of the land. Hence, the effective rate of GST was 8% (instead of 12%) |
Thus, in nut-shell, any construction activity is taxable under GST unless the same is specifically excluded.
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GST taxability treatment in the construction industry took a curving turn from 1st April 2019. The tax treatment of the same is tabulated hereunder
Particulars | GST rates |
|---|---|
Residential | |
Affordable Residential Apartment | 0.5% CGST + 0.5% SGST i.e. 1% on total consideration (without input tax credit) |
Any other Residential Apartment | 2.5% CGST + 2.5% SGST i.e. 5% on total consideration (without input tax credit) |
Commercial | |
Residential Real Estate Project | 2.5% CGST + 2.5% SGST i.e. 5% on total consideration (without input tax credit) |
Any other Commercial Apartment | 6.0% CGST + 6.0% SGST i.e. 12% on total consideration (with input tax credit) |
Affordable Residential Apartment
The definition of ‘Affordable Residential Apartment’ is covered under notification no. 03/2019- Central Tax (Rate) dated 29th March 2019.
‘Affordable Residential Apartment’ means a residential property satisfying the following conditions
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Particulars | Provisions | Supply of goods or supply of services |
|---|---|---|
Condition 1 – Carpet Area | Carpet area of the residential apartment should not exceed
| Metropolitan cities are –
|
Condition 2 – Gross amount charged | The gross amount charged should not exceed INR 45 Lakhs | The gross amount charged includes all the charges like-
|
GST Rate Structure for Residential Real Estate Project
The definition of ‘Residential Real Estate Project’ is covered under notification no. 03/2019- Central Tax (Rate) dated 29th March 2019.
‘Residential Real Estate Project’ means a real estate project, wherein, the carpet area of the commercial apartments is not more than 15% of the total carpet area of all the apartments in the real estate project.
Important points to be noted –
- Option for paying GST at old rates of 8% and/ or 12% (with input tax credit) is available only to the on going projects as of 31st March 2019.
- Any project commenced after 1st April 2019 is mandatorily required to follow the new GST rate structure of 1% and/ or 5% (without input tax credit).
GST on Construction industry : 1%/ 5% new GST rates applicability
Importantly, for availing of the above concessional rates of 1%/ 5% (as specified in the table above), it is mandatory to satisfy all the below-mentioned conditions
- The input tax credit is not available.
- A minimum of 80% of the inputs/ input services should be received from the registered suppliers only. In case of a shortfall, tax on the shortfall amount is to be payable by the developer under the reverse charge mechanism [notification no. 7/2019- Central Tax (Rate) dated 29th March 2019].
Notably, a project-wise account of receipt of inputs/ input services from the registered and unregistered suppliers is to be maintained. Calculation of shortfall, if any, and tax thereon is to be done at the end of the Financial Year.
Importantly, while calculating the total value of inputs/ input services the value of the following services should be excluded –- Services by way of grant of development rights/ long term lease of land or Floor Space Index (FSI) including additional FSI;
- High speed diesel;
- Natural gas;
- Motor spirit;
- Electricity.
- Cement is to be received only from the registered supplier. In case, cement is received from the unregistered supplier, a tax @ 28% on the same is payable by the developer under the reverse charge mechanism. Such tax is to be paid in the month in which cement is received.
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Applicability of Reverse Charge Mechanism
Vide notification no. 07/2019- Central Tax (Rate) dated 29th March 2019, reverse charge mechanism is applicable under the following situations
- In case of a shortfall of 80% of the value of inputs/ input services received from the registered person;
- In case the cement is purchased from the unregistered person; and
- In case capital goods are purchased from an unregistered person.
The GST rates payable under the reverse charge mechanism are tabulated hereunder –
Particulars | GST Rates for reverse charge mechanism |
|---|---|
Cement | 28% (14% CGST + 14% SGST) |
Other inputs/ input services | 18% (9% CGST + 9% SGST) [Notification no. 08/2019- Central Tax (Rate) dated 29th March 2019] |
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