GST on Construction: Applicability of Tax on Construction Services and Materials
Updated: 5 days ago
The processes for taxing building contracts have been streamlined with the implementation of the Goods and Services Tax. Previously, construction services were subject to a number of levies. VAT, excise charge, and service tax have all been eliminated with the implementation of the GST. You probably have a lot of questions about how the GST applies to building projects. The entire subject of GST on buildings is covered in this article.an, and how can these new changes help in fighting it? Let’s read this article to get more details.
Table of Contents
Latest Update on GST on Construction
As per the most recent update, the Supreme Court has clarified that building projects including rental services for commercial purposes are eligible to obtain GST input tax credit. As to the ruling of the Supreme Court, a building may be exempt from Section 17(5)(d) of the CGST Act if its construction is necessary to provide services like leasing or renting for commercial activity. The CGST Act's Section 17(5)(d) forbids ITC claims on building materials used to construct immovable property, with the exception of machinery and plants.
Basics of GST on Construction
A significant indirect tax reform known as the Goods and Services Tax (GST) was implemented in India with the goal of streamlining and making the tax system simpler. The construction industry is among the key industries impacted by GST. It is imperative that developers, purchasers, and other real estate project stakeholders comprehend the implications of GST on construction.
Applicability of GST on Construction
In India, construction operations including the building of homes, businesses, or societies are subject to Goods and Services Tax (GST). In other words, any property under development meant for sale qualifies as a supply of service and is thus subject to GST. The properties that are available for purchase are GST-free. GST is only due on properties that are still under development. However, there are a number of variables that affect whether GST applies to construction activity. This includes the kind of construction, the nature of the transaction, and the status of the individuals involved.
Paragraph (5b) of Schedule II of the CGST Act defines supply of services as the process of constructing a building, complex or civil structure, or a portion of one, with the intention of selling the whole or a portion of it. It is not regarded as a provision of services and is therefore GST-exempt if full payment is received following the delivery of the certificate of completion. In other words, GST is only applicable to properties that are still under development.
Nonetheless, the GST law grants the following exclusions or concessions from taxation in the construction industry:
A lower rate of 1% GST is applied to the construction of affordable flat housing projects. The term "affordable housing" refers to residential homes that are valued at or below Rs. 45 lakhs and have a carpet area of up to 60 square meters in urban areas and up to 90 square meters in non-metropolitan areas.
The purchase and sale of flats intended for residential use, the development of properties for the purpose of property resale, and the purchase or sale of land are all exempt from the GST.
The Pradhan Mantri Awas Yojana (PMAY) exempts from GST construction services and upgrading services supplied under pure labour contracts.
There is no GST applied to construction services provided under pure labour contracts for a single residential unit or a portion of a residential complex.
Transporting building supplies like steel, cement and other items need e-Way invoices only in cases when the consignment value is more than Rs. 50,000. It is mandatory for companies providing construction services to issue invoices to all locations where they have registered for GST.
HSN Codes and GST Rates on Construction Services
Construction Activity | HSN Code | GST Rate |
Affordable housing apartment construction (projects starting on or after 1st April 2019) | 9954 | 1%* |
Non-affordable housing apartment construction (projects starting on or after 1st April 2019) | 9954 | 5%* |
Construction of commercial apartments in Real Estate Projects REP (except Residential REP) | 9954 | 12%* |
Works contract services (material supplied by the contractor) | 9954 | 12% |
Works contract services (only labor supplied by the contractor) | 9987 | 18% |
Composite supply of works contract and goods (value of goods less than 25% of the total contract value) | 9954 | 18% |
Composite supply of works contract and goods (value of goods 25% or more of the total contract value) | 9954 | 12% |
*After lowering the 1/3rd from 1.5%, 7.5%, and 18% to the land component.
GST on Construction Materials
The construction materials GST is based on certain goods.
Material | GST Rates |
Sand | 18% (Oil shale/bituminous, natural asphaltites, asphaltic rocks, tar sand, asphalt) 5% (Natural sand) |
Mica | 12% |
Cement | 28% |
Brick | 5% - 28% |
Crushed stones, pebbles, gravel | 5% |
Granite and marble | 12% (Blocks) 28% (Not in blocks) |
Steel and Iron | 18% |
Building stones | 5% |
Coal | 5% |
Tiles | 5% - 28% |
Varnish and Paint | 28% |
Wallpaper | 28% |
Bathroom interiors and appliances | 18% (Pipes and tubes, fitting) 28% (Other items) |
Electrical Appliances | 28% |
ITC on GST Paid During Construction
According to the CGST Act's section 17(5), clauses (c) and (d), the following situations prevent ITC from being available:
Expenses incurred on work contract services for building an immovable property are not eligible for an input tax credit (ITC), with the exception of costs incurred on input services for finishing the provision of work contract services or building plants and machines.
When repairing or renovating a property, ITC cannot be claimed.
Note: The above-mentioned charges may be claimed as an ITC by builders, promoters, and construction companies.
The Supreme Court confirms that GST input tax credit can be claimed on construction for rental services for business purposes, according to an update dated October 3, 2024. As to the ruling of the Supreme Court, a building may be exempt from Section 17(5)(d) of the CGST Act if its construction is necessary to provide services like leasing or renting for commercial activity. ITC claims on building materials used to construct immovable property are prohibited by Section 17(5)(d) of the CGST Act, with the exception of equipment and machinery.
GST Exemptions and Concessions
Affordable Housing: A 1% GST rate reduction is available to projects that offer affordable housing. In urban areas, they are residential properties valued at no more than Rs. 45 lakhs, with a maximum carpet area of 60 square meters; in non-metropolitan areas, the maximum carpet area is 90 square meters.
Exemptions: Land purchases and sales, as well as transactions involving finished residential properties, are exempt from GST. Moreover, GST is not applied to improvements or construction works delivered under the Pradhan Mantri Awas Yojana (PMAY) through pure labour contracts.
Pure Labour Contracts: A residential complex or a single unit under construction services performed under pure labour contracts are equally exempt from GST.
e-Way Cheques: Shipping building materials, such as steel and cement, requires an e-Way bill only if the consignment value exceeds Rs. 50,000.
It is necessary for construction service providers who have registered for GST to furnish GST-compliant invoices for their services.
GST Calculation on Under-Construction Property
It is crucial to take into account both the service component (construction services) and the material component (building materials) when figuring out GST on an under-construction home.
Service Component: Depending on the kind of project, different GST rates apply to construction services. The GST rate is 18% for most projects. However, a lower rate of 1% can be advantageous for affordable housing projects.
Material Component: Construction materials' GST rate varies based on the particular components. In general, the GST rate for building materials is 18%.
You must add the GST on the service component and the material component to determine the total GST on the property.
Evolution of GST in Construction and Regulatory Changes
The legislation and policies pertaining to the Goods and Services Tax (GST) are subject to constant change in response to shifting market and industry conditions. Developers, contractors, and other stakeholders must comprehend how regulatory changes have influenced the implementation of GST in the construction setting.
Transitional Phase and Execution: There was a transition phase after the initial introduction of GST in India, during which time ongoing construction projects had to be adjusted to comply with the new tax structure. Contractors and developers had to negotiate the challenges of switching from the old tax structure to the GST framework. Transitional measures were instituted to tackle problems associated with existing initiatives and facilitate a seamless shift.
Modifications and Updates: The government and the GST Council have released updates, changes, and explanations since the introduction of the GST. Aspects of construction such as GST rates, input tax credits, and compliance requirements may be impacted by these modifications. It is imperative to remain current with these modifications to guarantee precise computation, documentation, and adherence.
The Significance of Accessible Housing: The government has prioritised affordable housing, and the GST restrictions are intended to help achieve this objective. One major example of how GST has been crafted to promote the construction of affordable homes is the implementation of a reduced GST rate of 1% for affordable housing projects without Input Tax Credit (ITC). Affordable housing projects require developers and consumers to be aware of the requirements and advantages specific to this category.
Adjusting to GST's Evolution: Developers and contractors need to be diligent in keeping up with any changes to the GST regulations that may have an impact on their projects. It is essential to keep an eye on official notifications, circulars, and updates from the GST Council on a regular basis. Consulting with GST-specialized tax experts or consultants can offer insightful advice on how to successfully navigate the constantly changing regulatory environment.
Conclusion
This in-depth look at GST in construction has given you a deeper understanding of the various ways that GST affects the building sector. You might be a trailblazing developer shaping ground-breaking projects, an ardent buyer seeking the house of your dreams, or a passionate stakeholder committed to the industry's success. Understanding GST is essential to making wise decisions and actively engaging in the game-changing evolution of the real estate market.
FAQ
Q1. How do you determine GST on the under-construction property; explain with an example?
Here is an example of how GST is calculated on a flat that is still under construction. Mr. A pays Rs. 80,00,000 for an under-construction property. The land is worth twenty thousand rupees. Although 75% of the building is finished, the bill was increased to Rs. 60,00,000 (80,00,000 * 75%). This is below 75% of the total land value of Rs. 15,000,000. GST will only be charged on the amount that remains. That is, (60,00,000 - 15,00,000) = 45,00,000 rupees.
The amount of GST to be paid is Rs. 45,00,000 * 5% = Rs. 2,25,000.
Note: Depending on the amount of the bill, GST is paid in installments.
Q2. How to avoid GST on under construction property?
Some strategies to lessen the GST burden on building construction are as follows:
GST is not charged on properties that are ready for occupancy because they are deemed completed at the time of purchase.
Since buying a property on the secondary market is a resale transaction, GST is not applicable.
Affordable housing has a 1% GST charge, while other properties have a 5% GST tax. Consequently, the GST burden may be lowered by buying a house that falls under the affordable housing category.
Q3. Can we claim GST on building construction?
Yes, if you are a builder, promoter, or construction business and you engage in the post-construction sale of structures, you are eligible to collect GST on building construction. It is also possible to claim Input Tax Credits (ITC) for the construction or purchase of equipment or plants.
Q4. What is the GST rate on under-construction properties or flats?
The type of housing project will determine the GST rate on buildings or apartments that are still under development. A lower GST rate of 1% without the Input Tax Credit (ITC) is normally applicable for affordable housing. The GST rate may be 5% for developments including non-affordable housing, such as standard residential apartments.
Q5. What is the GST rate for construction services?
Building services are typically billed at a rate of 18% GST. Both the State GST (SGST) and the Central GST (CGST) are included in this rate. Nonetheless, different GST rates may apply to particular services and projects, such as affordable housing. In order to ensure accuracy, it is crucial to confirm the most recent GST notifications.
Q6. What GST rate is applicable to contractors providing construction services?
For builders who provide labor-and-material-only services, the standard GST rate is 18%. The majority of materials and services related to construction are covered under this tariff. Nevertheless, there may be differences depending on the kind of project and the supplier.
Q7. Is there a separate GST rate for construction work including materials?
Material-related construction work is usually handled as a composite supply. The whole composite supply, which includes the materials, is subject to the same GST rate as the major supply, which is typically labour. As a result, the 18% GST rate for construction services is typically applied to this type of job.
Q8. How is GST applied to the construction of a residential house?
GST is not applied to the building of a residential home for personal use. This exclusion is applicable to self-built properties meant for individual use alone, not for business use or additional supplies.
Q9. Is GST applicable to under-construction flats in residential projects?
Yes, under-construction apartments in housing complexes are subject to GST. The project's classification as affordable or non-affordable housing determines the GST rate. The relevant GST rate (without the input tax credit) for under-construction flats is 1% for affordable housing and 5% for non-affordable housing.
Q10. What is the GST rate on civil construction work for commercial projects?
The GST rate is typically 18% for civil construction work associated with commercial developments, such as commercial buildings and spaces. For the provision of labour and materials for commercial construction projects, this rate is applicable to the supply of construction services.
Q11. What is the GST rate on sand?
According to its kind, sand has different GST rates.
Natural Sand: 5%
Sand that is naturally occurring, both coloured and uncoloured, Asphaltic rocks, natural asphaltites, oil shale/bituminous tar sand, 18% is asphalt.
This differentiation guarantees that various sand kinds and related materials are taxed in accordance with their respective classifications.
Q12. What is the construction labour GST rate?
Both pure labour contracts and works contracts are subject to 18% GST and are regarded as "supply of services" under the G.S.T.
Q13. What is the work contract service HSN code?
Work contract services are covered by the HSN code 9954 and include tasks associated with the building or civil structure's construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration, or restoration.
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