Many services linked to flat construction to attract lower 12% GST: AAAR

MUMBAI: A recent Appellate Authority for Advance Rulings (AAAR) order in the case of a Thane-based
developer will gladden the hearts of buyers of under-construction properties, as it could translate into
reduced costs.
The appellate bench held that charges for several services collected by the developer, Puranik Builders,
such as for water connection, electric meter installation and deposit for meter, development charges and
legal fees are “inextricably linked” to the primary service of construction.
These charges will be part of a “composite” or bundled supply and will be subject to GST at the rate
applicable to construction services- which is a lower rate of 12%.
The Authority of Advance Ruling, in its August 2021 ruling, had held that charges for all other services
provided by the builder were independent and thus subject to GST at 18%. This led to the developer filing
an appeal with the AAAR.
Builder ordered to refund excess tax collected to buyers
From April 1, 2019, the revised GST rate for construction services has been 5% without input tax credit
for housing projects that do not fall in the affordable housing segment. For ongoing projects, though,
builders can opt for the 12% rate with input tax credit.
Typically, a builder also provides “other services” against which charges are collected. These range from
services such as providing a water connection to collection of advance maintenance charges prior to
formation of the housing society by the buyers.
These other services are listed in the agreement for sale, which a builder enters into with flatbuyers. While
rulings do not set a judicial precedent, they have a persuasive effect in similar cases in the course of
assessment, say experts.
“The AAAR emphasised that the perception of the consumer or the services receiver is an important
factor in determining whether the services provided are bundled or not. Logically charges such as
preferential location charges, external and internal development charges, water connection, electric meter
charges etc are all inextricably linked to construction as the same cannot be provided on a stand-alone
basis.
Hence, these should enjoy the benefit of lower tax rate on construction,” explains Harpreet Singh, indirect
tax partner, KPMG India. The AAAR bench comprising Rajeev Kumar Mital and D K Srinivas dissected
the nature of payments made towards other services.
Only those services that are not part of the bundled supply such as advance maintenance, club house
maintenance, share application money will be taxable at 18% the appellate bench held.
In this case, Puranik Builders had collected GST at 18% against charges for other services. For those
components of other services that are now part of bundled supply and subject to a lower rate, the builder
has been directed to refund the excess tax collected to the buyers.