Taxability of Construction activity under indirect taxes has always been challenging and prone to litigation. In the pre- Goods and Services tax (‘GST’) regime, the developer and the buyer, both the parties had to deal with issues emerging from multitude of erstwhile taxes such as VAT, Central Excise, Entry Tax, Local Body Taxes, Octroi, Service Tax, etc. Further, state specific rates, concept of deemed sales, different valuation for the purpose of VAT and Service tax, different schemes for payment of tax etc. made contributions to the challenges faced by real estate sector.
Before the introduction of GST, Central Government used to levy excise duty at the rate of 12.5% on most of the items required for construction activities. At the same time, State Governments used to charge value-added tax (‘VAT’) in the range of 12.5% to14.5% on the same items. The real issue was the taxes paid in the form of Excise and VAT on the construction items was not freely available as input tax credit against service tax (4.5%) and State Specific VAT (1% - 2%) levied on the under-construction flat sold to the buyers.
Post implementation of GST from 1 July 2017, there has been a radical change on applicability of Indirect Taxes on the Real Estate Sector. From 1 July 2017 to 31 March 2019, major relief provided to the developers by not only allowing Input tax credit but also by providing single levy i.e. GST at the effective rate of 12% for Residential and commercial projects and 8% for affordable housing projects.
One of the key objectives of introduction of GST is the seamless flow of input credit across the entire supply chain and across the country for supply of Goods or Services. However, with effect of April 1, 2019, Real estate sector separated from Input Tax Credit (‘ITC’) chain and builders and developers have been given the option to either continue in 12 percent GST slab with ITC (8 per cent for affordable housing), or opt for 5 per cent GST rate (1 per cent for affordable housing) without ITC for the ongoing residential projects. Further, such option was not available for new residential projects i.e. new residential projects must follow 5 percent GST rate (1 per cent for affordable housing) without ITC.