MARCH 20, 2018

By Kundan Kumar

"HOUSING for all" is an initiative of our Hon'ble Prime Minister. To provide impetus to the same, the Government targets to provide 20 million affordable houses to the urban poor by 31st March 2022 under Pradhan Mantri Awas Yojana.

"Affordable homes" as a concept has been rolled out to ensure that low cost houses are available to the people belonging to lower income group. Various schemes have been rolled out by the Government to provide impetus to the above objective.

One such incentive introduced by the Government includes provision of interest subsidy, commonly known as Credit Linked Subsidy Scheme ("CLSS") wherein subsidized rate of interest is charged by banks and financial institutions, when such loan is procured for the purpose of purchase, construction, extension and improvement of house. The benefit of such scheme can be availed by Economically Weaker Section (EWS), Lower Income Group (LIG) and Middle-Income Group as defined therein, subject to fulfilment of conditions provided under the above scheme.

Accordingly, the Government has tried to reduce the overall cost of home by providing various incentives, and thereby encouraging people to buy homes.

It may be noted that one of the major components in any transaction which increases the overall cost of a transaction has been tax, and such tax is leviable on construction services provided by developers.

In the earlier regime of Indirect Tax, service tax as well as VAT were leviable on construction service provided to the buyers when the developer used to enter into an agreement with buyer for sale of flat/unit prior to receipt of completion certificate from the authority concerned.

With the introduction of GST, the above taxes got subsumed under GST, and presently, GST is leviable on construction services provided to buyers. Although, the overall impact of GST has been positive for real estate industry still it is finding its feet. At present, the construction services provided by developer attracts levy of GST at the rate of 12% which adds substantial value to the cost of homes.

In order to reduce the cost of flat and incentivize the people to purchase flat, the Government on the recommendation of GST Council has issued Notification for reducing the rate of GST leviable on construction service provided by developer to persons eligible for CLSS scheme.

Accordingly, vide Notification No. 01/2018-Central Tax (Rate) dated 25th January 2018, the Government has amended Notification No. 11/2017-Central Tax (Rate) whereby a new clause (db) has been inserted in item (iv) against serial number 3, in column 3 which has been reproduced below:

"a civil structure or any other original works pertaining to the "houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/ Lower Income Group (LIG)/ Middle Income Group-1 (MlG-1)/ Middle Income Group-2 (MlG-2)" under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban)"

However, the above clause has been introduced under item (iv) against serial number 3 which provides the rate of GST leviable on works contract service provided by the supplier of service. Hence, a doubt may arise whether the said rate of GST is leviable on construction service provided by the developer or on works contract service provided by the contractors.

From the plain reading of the above clause being placed under works contract category, it may be inferred that such rate is applicable for the works contract service provided by the contractors and, therefore, GST at the rate of 12% shall be leviable on the said service. Accordingly, the developer would not be eligible to charge reduced rate of GST at the rate of 8% on the construction service after claiming deduction of 1/3 rd of amount charged from the customers towards the value of land.

However, Paragraph 2 of Notification No. 11/2017-central Tax (Rate) as amended by above Notification inter-alia provides that the value of supply of above service provided to buyers eligible for CLSS scheme which involves transfer of land or undivided share of land, shall be total amount charged for such supply less the value of land which shall be deemed to 1/3 rd of total consideration charged. Effectively, the value of supply shall be taken as 2/3 rd of the consideration charged from the buyers for such supply.

On a conjoint reading of the above clauses, it can be understood that reduced rate of GST is applicable on construction service provided by developer to buyers who are eligible for CLSS scheme.

The same is also substantiated by Press Release dated 22nd January 2018 issued by CBEC wherein it has been clarified that reduced rate of GST at the rate of 8% (after claiming 1/3 rd deduction) shall be leviable on construction service provided to buyers who are eligible to avail benefits under CLSS scheme.

Therefore, GST at the rate of 8% shall be leviable on the entire consideration received from the buyers for provision of construction services subject to a condition that the buyer is eligible to avail benefit of CLSS scheme.

At this juncture, attention may also be invited to recent Press Release dated 7th February 2018 issued by Government wherein it has been advised that developers/builders should not charge GST from the customers of Affordable Group Housing and those availing benefit of CLSS scheme.

However, it may be noted that the press release further stipulates that developer can recover GST from the buyers of flats if he recalibrates the cost of the flat after factoring in the full ITC available in the GST regime and reduces the ex-GST price of flats.

Accordingly, it can be inferred that the above Press Release, per se , does not bar the developer or builder from charging GST, if the developer or builder has passed or intends to pass benefit of input tax credit to the buyers. Further, the GST law itself does not bar recovery of GST from the customer.

In nutshell, it can be said that it is a good initiative of the Government to levy concessional rate of GST on construction services provided to the buyers who are eligible for CLSS scheme, which in turn will reduce the cost of affordable home.

(The author is an Associate with Lakshmikumaran& Sridharan, Attorneys, Gurgaon and the views expressed are strictly personal.)