What are the recent GST provisions for the construction sector?

The Goods and Services Tax (GST) provisions for the construction sector in India are primarily governed by the Goods and Services Tax Act, 2017 (CGST Act, IGST Act, and respective State GST Acts). The construction sector is integral to the Indian economy, and the tax treatment for construction services under GST is essential for both developers and homebuyers. Here’s a breakdown of the recent GST provisions, relevant constitutional provisions, and landmark cases in the context of the construction sector.

1. Recent GST Provisions for the Construction Sector (As of 2023)

A. Nature of Construction Services

Under GST, construction services generally fall under Works Contracts. A Works Contract is defined as a contract that involves the construction, installation, completion, repair, renovation, or commissioning of any immovable property (e.g., residential, commercial, or industrial buildings, roads, bridges, etc.).
Works contracts are considered a composite supply under GST, which means they involve both goods and services. The taxability of works contracts depends on whether the construction is for residential or non-residential purposes and whether it is being done for private individuals or government entities.

B. GST Rates

Standard Rate for Construction Services: The GST rate on works contracts is 18% (9% CGST and 9% SGST) for most construction services. This rate applies to the construction of commercial properties or projects that are not specifically exempt.
Affordable Housing Projects: Under schemes like the Pradhan Mantri Awas Yojana (PMAY), the GST rate for affordable housing has been reduced to 1% on the construction of residential units, provided the project meets the criteria for affordable housing.
Housing Projects (Non-affordable): If the project is not considered affordable housing, the GST rate is 12% for the construction of residential units under a works contract.

C. Input Tax Credit (ITC)

Input Tax Credit (ITC) allows construction businesses to claim credit for the tax paid on inputs used for construction activities. However, there are restrictions on ITC claims for residential construction unless the property is being used for business purposes.
Developers and builders can claim ITC on the construction of commercial property or infrastructure projects. However, ITC is generally not available for residential property construction unless it is for business use.
The ITC restrictions for residential buildings apply to builders and developers who provide construction services to homebuyers. The GST on construction services is typically passed on to the end consumer in the form of an increased cost of the property.

D. Reverse Charge Mechanism (RCM)

In some cases, the reverse charge mechanism applies, where the recipient of construction services (instead of the supplier) is responsible for paying the GST. This typically applies in situations where the supplier is unregistered.

E. GST on Joint Development Agreements (JDAs)

In cases of Joint Development Agreements (JDAs), where a landowner and a builder/developer collaborate to construct a project, GST is applicable on the construction services provided by the developer to the landowner, with specific provisions on the value of land and development rights.

F. GST on Renting of Property and Construction Services

Renting of immovable property is a taxable service under GST, and the tax treatment depends on whether the property is residential or commercial.
If a builder rents out constructed property, GST may apply to the rental income, subject to certain exemptions (e.g., residential property rented for personal use).

2. Relevant Constitutional Provisions

The GST regime in India is a concurrent system, meaning both the Central Government and State Governments have the authority to legislate on GST. The following constitutional provisions are important:

Article 246A: This article of the Indian Constitution empowers the Parliament and State legislatures to legislate on GST matters, including those related to construction and real estate, as they fall under the Concurrent List (List III) of the Seventh Schedule.
Article 265: This article stipulates that no tax can be levied or collected except by authority of law. Hence, any GST on construction services is levied under the CGST Act and respective State GST Acts.
Seventh Schedule, List III (Concurrent List): This list covers taxation matters that both the Parliament and State legislatures can legislate on, such as GST, which is levied on goods and services, including construction services.
Central Goods and Services Tax (CGST) Act, 2017 and the Integrated Goods and Services Tax (IGST) Act, 2017: These laws provide the framework for the taxation of construction services, particularly under Works Contract provisions.

3. Landmark GST Cases in the Construction Sector

Several court decisions have significantly impacted the interpretation and implementation of GST provisions for the construction sector:

A. K. R. Ramaswamy v. Union of India (2018)

This case focused on the issue of whether construction of residential flats by a builder was subject to GST under a works contract.
The court held that construction services provided by the builder to the end consumer (homebuyers) would be taxable under GST as works contracts, and the builder could charge GST on the entire value of the works contract.

B. M/s. L&T Ltd. v. State of Karnataka (2020)

This landmark judgment clarified the interpretation of the term “works contract” under GST and established the principle that GST applies to the entire value of a works contract, including materials and services used in the construction process.
The Court also reinforced the applicability of GST on the supply of services where there is a combination of goods and services, such as in works contracts.

C. Shree Balaji Construction Co. v. Union of India (2019)

The case examined whether construction services provided by developers to end customers under works contracts are subject to GST. The court confirmed that construction services provided to the end customer would be taxable under GST and that builders can claim Input Tax Credit on construction-related goods and services.

D. Uptown Builders Pvt. Ltd. v. Union of India (2022)

This case dealt with the eligibility of ITC for construction-related inputs when constructing residential units. It clarified that developers of residential units cannot claim Input Tax Credit on certain construction inputs unless the construction is intended for business purposes (i.e., commercial usage).

E. Bharat Sanchar Nigam Limited (BSNL) v. Union of India (2021)

This case related to the reverse charge mechanism (RCM) and discussed the applicability of RCM to various services under the works contract. The ruling provided clarity on when RCM applies to the construction sector, particularly in cases of unregistered suppliers providing construction services.

F. State of Telangana v. M/s. Tech Mahindra Ltd. (2022)

This judgment examined the taxability of the sale of construction services under GST and the definition of works contract. The case clarified that even in large-scale construction projects, developers could claim ITC on the materials purchased for the project, which are integral to the works contract.

4. Key Takeaways:

GST on construction services is governed primarily by the works contract provisions of the CGST Act, and the rates vary based on the nature of the construction (residential vs. commercial).
ITC on construction services can be claimed by builders and developers in the case of commercial projects, but restrictions apply to residential projects unless they are used for business purposes.
Reverse Charge Mechanism (RCM) is applicable in specific scenarios involving unregistered suppliers or contractors in the construction sector.
Landmark cases have helped define the scope of GST applicability on construction services, works contracts, and eligibility for ITC, providing clarity to both developers and consumers.

The construction sector under GST continues to evolve, with the government and judiciary clarifying complex issues such as ITC eligibility, GST rates, and taxability of joint development agreements and residential projects.