Builders told to pass on GST benefits

Dated 16th June, 2017

The Central Board of Excise and Customs on Thursday warned builders to refrain from hoodwinking customers by claiming that the GST rate of 12% that applies to them will be levied on the original cost of the building.

The CBEC said that it has received reports that builders are forcing customers to pay the entire cost of the flat before July 1 and pay the current tax rate of 5.5% or pay 12% on any payments made after July 1, which is when GST is expected to be rolled out. This, the tax authority said, is against the GST legislation.

“The CBEC and States have received several complaints that in view of the works contract service tax rate under GST at 12% in respect of under construction flats, complex, etc, the people who have booked flats and made part payment are being asked to make entire payment before July 1, 2017 or to face higher tax incidence for payment made after July 1, 2017. This is against the GST law,” the CBEC statement said.

“Construction of flats, complex, buildings will have a lower incidence of GST as compared to a plethora of central and state indirect taxes suffered by them under the existing regime,” the statement added.

“Suppose you buy a flat for Rs. 1 crore. The builder charges 4.5% service tax, and 1% composition. So, that’s Rs. 5.5 lakh in tax,” Abhishek Jain, Partner at EY India explained. “However, the builder was buying inputs on which there was excise duty and VAT, and there was no credit on this. When he factors this in, then, say that his cost of building the flat was Rs. 95 lakh and Rs. 5 lakh were the input costs.”

“Using the same example, in GST, the cost of the builder will be Rs. 95 lakh, but the Rs. 5 lakh that is excise and VAT on inputs will no longer be a cost,” Mr. Jain added. “So, ideally, he should say the cost of the building is Rs. 95 lakh and then the customer has to pay the 12% GST on that Rs. 95 lakh. But what the builders are trying to do is tell the customers that since they have already agreed to pay Rs. 1 crore for the flat, the 12% tax will apply on that Rs. 1 crore and not on the new cost of the flat, which is Rs. 95 lakh.”

Reduced prices

“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/instalments,” the statement added.

“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 imposition of GST.”

“Despite this clarity on law position, if any builder resorts to such practice, the same can be deemed to be profiteering under section 171 of GST law.”

Source: The Hindu