‘Other charges’ obtained by the builder will be subject to 18% GST: AAR

A recent judgment issued by the GST-Authority for Advance Rulings (AAR) to Puranik Builders is expected to have a negative impact on both the builders and the consumers, since it may raise expenses. The AAR has ruled that “other charges” received by a builder under a sale agreement are not a composite supply and would be subject to 18% Goods and Services Tax (GST).

From April 1, 2019, GST of 5% will be charged on non-affordable housing developments that do not qualify for Input Tax Credit (ITC). For ongoing projects, the builder can pay GST at the previous rate of 12% with ITC, which implies that taxes paid on inputs can be written off.

According to a CA, favourable advance decisions for the tax department are unavoidably followed throughout the assessment. If the taxpayer (say, a builder) adopts a different strategy, there will be litigation.

The sale agreement, drafted by Thane-based residential building firm Puranik Builders, was typical of most builder agreements, with two components displayed separately. These were charges for the primary construction operation as well as “additional charges.”

Charges for installation of electric meters, water connections, advance maintenance and club-house maintenance (before society was founded), legal costs, and other expenses were included in the latter. These fees were collected from buyers at the time of signing the contract or handing over possession of the units.

While the builder was collecting GST at 18% on such “other charges,” it sought a decision from the AAR on the relevant rate. It claimed that the services underpinning the “other charges” should be regarded as a single supplier (bundled with the supply of the main construction activity). As a result, the GST rate on the primary supply (currently 5% for new projects) should be applied.

According to the AAR, the consideration is charged individually for various services. It went on to say that it was amusing that while stamp duty was paid on the value of the flat’s sale (excluding the value of “other charges”), resulting in reduced stamp duty, when it came to GST payments, the builder claimed that the other costs were part of the primary building activity. The AAR determined that an 18% GST will be levied on the services that are the basis for the other charges. The builder must pay GST on the whole amount received as “other charges,” with no refund.

According to an indirect tax specialist, “no one will buy a flat without an electricity or water connection.” Buyers expect the builder to maintain common amenities until society is created. As a result, considering such charges as non-composite may increase complexity and expenses in the real estate sector.”