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AAR: Lower 12% GST for services linked to flat construction

Mumbai, Apr 7, 2023

A recent Appellate Authority for Advance Rulings (AAAR) order in the case of a Thane-based developer will gladden the hearts of buyers of under-construction properties, as it could translate into reduced costs.

The appellate bench held that charges for several services collected by the developer, Puranik Builders, such as for water connection, electric meter installation and deposit for meter, development charges and legal fees are “inextricably linked” to the primary service of construction. These charges will be part of a “composite” or bundled supply and will be subject to Goods and Services Tax (GST) at the rate applicable to construction services — which is a lower rate of 12%. The Authority of Advance Ruling, in its August 2021 ruling, had held that charges for all other services provided by the builder were independent services and thus subject to GST at 18%. This led to Puranik Builders filing an appeal with the AAAR and the earlier order was partly reversed.

From April 1, 2019, the revised GST rate for construction services has been 5% without input tax credit for housing projects that do not fall in the affordable housing segment. For ongoing projects, though, builders can opt for the 12% rate with input tax credit.

Typically, a builder also provides “other services” against which charges are collected. These range from services such as providing a water connection to collection of advance maintenance charges prior to formation of the housing society by the buyers. These other services are listed in the agreement for sale, which a builder entersinto with flat-buyers.

While rulings do not set a judicial precedent, have a persuasive effect in similar cases in the course of assessment, say experts.

“The AAAR emphasised that the perception of the consumer or the services receiver is an important factor in determining whether the services provided are bundled or not. Logically charges such as preferential location charges, external and internal development charges, water connection, electric meter charges etc are all inextricably linked to construction as the same cannot be provided on a stand-alone basis. Hence, these should enjoy the benefit of lower tax rate on construction,” explains Harpreet Singh, indirect tax partner, KPMG India.

The AAAR bench dissected the nature of payments made towards other services. Only those services that are not part of the bundled supply such as advance maintenance, club house maintenance, share application money will be taxable at 18% the appellate bench held.

[The Times of India]

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