What is the tax accountability of a person, who had booked his apartment before the establishment of the Goods and Services Tax? We look at the Good and Services Tax law & the circulars and elucidation issued by the Central Board of Excise and Customs, to simplify the position.
The GST has replaced the prior twin taxes of VAT and service tax imposed from the buyers of an under-construction property, in addition to various taxes paid by the builders on the services and materials used in building activities. However, this has created some confusion, for persons who had booked under-construction apartments. The situations have been further complexed, by calls made by the constructors, asking buyers to pay up the full amount, to avoid the spiked rate of tax. In order to clearify the doubts, the Central Board of Excise and Customs, has issued various clarifications and circulars, from time to time.
The GST is apposite, when the building, complex or flat, is vended before its completion and the consideration, whether in part or in full, is received before its completion. So, even if you reserve a flat, where the builder asks you to pay just 1% or a very small payment & the balance after possession, you will still have to pay the Goods and Service Tax on the full amount. Alternatively, if the entire purchase consideration is paid after the building is done, there is no Goods and Service Tax liability. The present law under the Goods and Service Tax is the same as what existed earlier to the introduction of Goods and Service Tax, under the service tax regime.
What happens when some of the money is paid before the the GST?
In case some of the money is paid to the builder before the introduction of GST, you would have paid VAT as applicable in your state and service tax at 4.50%, on such payments. However, the rate of 4.50% service tax was under the composition scheme, underneath which the developers were not authorized to take any input acknowlegdement on the services and materials used in the construction. So, the entire VAT and service tax was recovered or loaded from the buyers. Hence, for under-construction apartments booked before July 1, 2017, where the payments were made earlier to the GST coming into force, the builder would have already recovered the VAT and service tax. Even if the payment wasn’t made earlier to July 1, 2017, but the constructor had already raised the demand or invoice, for either the part of the balance amount or full consideration, you would have paid the component of VAT and service tax on it, because as per the point of taxation rules 2011 applicable in case of service tax.
The rate of GST on an under-construction property is 18%. However, 1/3rd of the value of the consideration is presumed to be the value toward cost of the land, in cases where the interest in the land is also supposed to be transferred. So, effectively, the Goods and Service Tax rate, in such cases, is 12%, on the entire agreement value. Although the rate of 12% on an under-construction property seems high, the effective cost to the consumer is supposed to be lower, due to various reasons. One of the reasons, is that this will replace various other taxes, including VAT, service tax, entry tax, etc. Secondly, the effect of all these taxes and higher rate of excise on materials and simultaneous levy of services, along with the fact that in the earlier regime of the composition scheme under service tax and VAT, no input credits were available to the builder, meant higher taxes. As the builders/ developers will be able to claim the benefit of input tax credits against the GST liability of 12%, the net impact will probably be lower, under the present GST regime.
In cases where the ownership of land is not involved, the rate of GST applicable is 18%, like in the cases where the builder outsources some of the building activities to some other builder.
So, for the balance consideration, which remained unpaid and for which the builder has not raised an invoice, the builder will recover the Goods and Services Tax at the rate of 12% on the balance amount due. According to the Goods and Services Tax’s rules, the builder will be in a position to claim input credit on the materials and services used and should pass on the benefit of input credits to the flat buyers.
Hence, the builders should not ask the apartment buyers to pay the full 12%, without taking into account the benefits under the GST. However, if a builder does so, the authorities can initiate punitive actions against such builder, under the anti-profiteering provisions of the GST laws.
What happens if the entire consideration has been paid before the implementation of GST but the construction is completed after the introduction of GST?
In case the entire consideration has been paid before the introduction of Goods and Services Tax, has been raised and it has been paid, you would have already paid service tax on the full value of the agreement. So, even if the construction is completed after the date of introduction of Goods and Services Tax (i.e., June 30, 2017), you do not have any further tax liability under the Goods and Services Tax law, as the Goods and Services Tax substitutes the earlier VAT service tax.