Pointing out that the tax department and states, have received complaints that the people who have booked flats and made part payment, are being asked to make the entire payment before July 1, 2017, or face higher tax incidence for payments made thereafter, the Finance Ministry, on June 15, 2017, warned that this is against the GST law. Construction of flats, complexes and buildings, will have a lower incidence of Goods and Services Tax (GST), as compared to a plethora of central and state indirect taxes suffered by them currently, the ministry said in a statement.
The works contract service tax rate under the GST is 12 per cent for under-construction flats, complexes and buildings. “The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property, by way of reduced prices/installments. It is, therefore, advised to all builders/construction companies that in the flats under construction, they should not ask customers to pay higher tax rate, on instalments to be received after the imposition of the GST,” the ministry said.
It also warned that if any builder resorts to such practices, ‘The same can be deemed as ‘profiteering’, under Section 171 of the GST law’. A committee would be set up to look into the complaints, with regard to the anti-profiteering clause that seeks to prevent companies from making undue gains after the rollout of the GST.
Elaborating further, the ministry pointed out that central excise duty is payable on construction material at the rate of 12.5 per cent. It is higher, in case of cement. In addition, VAT is also payable on construction material in several states. Besides, construction materials also attract other taxes. Credit of these taxes is also not available, for payment of VAT on construction of flats under the composition scheme. Thus, there is cascading of input taxes on constructed flats, the Finance Ministry added.
“As a result, incidence of central excise duty, VAT, entry tax, on construction material is also currently borne by the builders, which they pass on to the customers, as part of the price charged from them. This is not visible to the customer, as it forms a part of the cost of the flat,” it said. Further the current service tax on construction of flats, residences and offices is 4.5 per cent and VAT is 1 per cent. “What the customer does not see, is the embedded taxes, on account of cascading and sticking of input taxes in the cost of the flats,” it said.
This will change under the GST, as full input credit would be available for offsetting the headline rate of 12 per cent. “As a result, the input taxes embedded in the flat will not (and should not) form a part of the cost of the flat. The input credits should take care of the headline rate of 12 per cent,” it said.