What are the recent GST provisions for the construction sector?

The construction sector in India is a major contributor to the economy, and the Goods and Services Tax (GST) has specific provisions designed to regulate the taxability of construction-related activities. Over the years, there have been amendments and clarifications to the GST rules applicable to the construction sector.

Here are the key provisions and changes in GST related to the construction sector:

1. GST on Construction Services:

Under the GST regime, construction services are primarily classified as works contract services and are subject to GST.

• Works Contract refers to a contract for the construction, repair, alteration, or maintenance of any building, road, bridge, etc. A works contract includes both the supply of goods and services, and is thus treated as a composite supply.
• GST Rate:
  • For works contracts in the construction of residential complexes:
    • 5% GST without Input Tax Credit (ITC) on affordable housing projects (such as those under PMAY or RERA approved projects).
    • 12% GST with ITC for works contracts in other than affordable housing.
  • For commercial and industrial construction, the rate generally remains at 18% with ITC available.

2. Input Tax Credit (ITC) for the Construction Sector:

• Residential Construction (Affordable Housing):
  • GST is 5% without the benefit of ITC for affordable housing projects.
  • For other projects, ITC is available, but certain conditions need to be fulfilled regarding the nature of the contract and the goods/services used.
• Commercial and Industrial Construction:
  • If the construction is for a commercial or industrial purpose, the 18% GST applies, and ITC is available for construction materials and related services.
• Block Credit for Real Estate Developers:
  • Real estate developers cannot claim ITC on land (as it is not taxed under GST). However, they can claim ITC on construction materials, services, and machinery used in the development process.

3. Special Provisions for Real Estate Developers:

• GST on Sale of Flats/Buildings:
  • When a real estate developer sells flats/units before completion of construction, it is considered as a composite supply of services and subject to a GST of 18%.
  • However, after the completion certificate is issued or the property is sold after completion, GST is not applicable. The sale of completed properties is exempt from GST.
• GST on Under-Construction Property (Residential & Commercial):
  • Under the GST Act, properties sold during construction are subject to GST at 12% for residential projects and 18% for commercial properties.
  • The developer cannot claim ITC for taxes paid on land acquisition or goods/services used for non-taxable portions (such as land).

4. GST on Joint Development Agreements (JDAs):

• Joint Development Agreements (JDA), where a landowner contributes land to a developer for construction, are treated as a supply of land or property under GST.
  • The developer has to pay GST on the development rights or consideration given to the landowner.
  • The landowner, however, is considered a supplier of land, which is exempt under GST.

5. RERA (Real Estate Regulation and Development Act) and GST Impact:

• RERA-registered projects are generally subject to GST at reduced rates for residential construction, particularly under affordable housing schemes.
• The GST Council provides a special rate (5%) for projects that are registered under RERA with a particular focus on affordable housing to stimulate growth in the housing sector.

6. Advance Ruling and GST Clarifications for Construction:

• Several advance rulings and circulars have been issued clarifying the applicability of GST to construction services, especially regarding the treatment of contracts and the eligibility for ITC.

Provision in the Indian Constitution:

• The Indian Constitution provides the foundation for GST through the 101st Constitutional Amendment Act, 2016, which introduced Article 246A.
• Article 246A grants Parliament and State legislatures the power to legislate on matters related to the imposition of GST, including the construction sector. However, GST on real estate and construction services remains under the concurrent jurisdiction of both the Centre and States.
• Article 265 stipulates that no tax shall be levied or collected except by the authority of law, and Article 279A establishes the GST Council, which recommends the rates and procedures applicable to different sectors, including construction.

Landmark Cases Related to GST in the Construction Sector:

Several cases have shaped the interpretation and implementation of GST in the construction sector, especially concerning works contracts, ITC, and real estate.

1. M/s. Sree Ayyanar Spinning Mills Pvt. Ltd. v. State of Tamil Nadu (2019):
   • Issue: The applicability of GST on the construction of a factory building under works contracts.
   • Outcome: The court ruled that works contracts for the construction of factory buildings are subject to GST, and the developer must account for taxes on labor and material supplied in the course of the construction.
2. Union of India v. M/s. L&T Ltd. (2020):
   • Issue: Whether the construction of civil structures and works contracts related to real estate and infrastructure development should be taxed at a higher rate.
   • Outcome: The Supreme Court ruled that works contracts related to construction of commercial and industrial buildings are taxable under GST, and such contracts should attract 18% GST.
3. M/s. Shapoorji Pallonji & Co. Ltd. v. Union of India (2020):
   • Issue: The treatment of Joint Development Agreements (JDAs) under GST, especially with respect to the landowner’s share and taxability of development rights.
   • Outcome: The Court clarified that landowners under JDAs must pay GST on the transfer of development rights, and such agreements must adhere to the GST provisions on joint development.
4. M/s. Kanak Constructions v. GST Department (2022):
   • Issue: Clarification on whether GST is applicable on services related to the construction of residential properties before the completion certificate.
   • Outcome: The court ruled that GST is applicable to services related to under-construction properties. The property is subject to 12% GST until the completion certificate is issued.
5. M/s. Bhima Constructions v. Union of India (2021):
   • Issue: Whether the GST rate of 18% is applicable to residential constructions under works contract agreements.
   • Outcome: The court ruled in favor of uniform GST rates, with 18% applicable to construction of residential units unless RERA-approved affordable housing projects apply the 5% rate.

Conclusion:

The construction sector in India is subject to complex GST provisions, with specific rules for works contracts, real estate developers, and construction services. The GST rate for the sector generally depends on the nature of the construction (residential vs. commercial), the type of project (affordable housing), and whether the property is sold during or after construction.

The Indian Constitution provides the framework for GST laws, allowing both central and state authorities to legislate on construction-related matters under Article 246A. The GST Council plays a crucial role in determining tax rates and policies for the sector.

Landmark cases have significantly shaped the interpretation of GST in the construction sector, particularly with respect to works contracts, joint development agreements, and input tax credit. These cases clarify the application of GST in construction and real estate, providing a better understanding of the complex tax regime.