Introduction
The introduction of the Goods and Services Tax (GST) in July 2017 revolutionized the taxation system in India, streamlining various state and Central taxes into a unified structure. Prior to GST, the tax landscape for goods and services was convoluted, involving multiple levies such as excise duties, Octroi, VAT, and customs duties. The advent of GST simplified this by subsuming these taxes, thereby reducing the complexity of the tax regime for construction materials and contracts.
Importance of GST in the Construction Sector
The construction industry is a significant employment generator, providing jobs to approximately thirty million people nationwide. Annually, this sector contributes assets worth two hundred billion dollars. To regulate the various activities in construction, the concept of Works Contract under GST was introduced. This covers agreements related to constructing structures on properties, including the use of raw materials and completion details.
Pre-GST Tax Structure
Before GST, multiple Central and state taxes were levied, including:
- Central taxes: Service tax, excise duty, central sales tax, customs duty, and central surcharges and cess.
- State taxes: VAT, luxury tax, entertainment tax, purchase tax, state excise duty, and taxes on gambling, advertisement, lotteries, betting, surcharge, and cess charges.
The implementation of GST subsumed these numerous indirect taxes, creating a more streamlined and equitable tax regime.
Applicability of GST on Construction
GST is applicable to various construction activities in India, including private, commercial, and residential projects. Any under-construction property intended for sale is classified as a supply of service and is subject to GST. In contrast, completed properties ready for sale are exempt from GST.
Key Points on GST Applicability:
- Under-Construction Properties: GST is levied on properties still under construction. Once the property is ready for sale and the certificate of completion is issued, it no longer attracts GST.
- Exemptions: Ready-for-sale properties and resale properties do not attract GST.
According to para (5b) of Schedule II of the CGST Act, the construction of a complex, building, civil structure, or a part of it intended for sale is considered a supply of services. However, if full consideration is received after the completion certificate is issued, it is not deemed a supply of services and is exempt from GST.
GST Concessions and Exemptions:
- Affordable Housing: GST on construction work for affordable housing projects is levied at a reduced rate of 1%. Affordable housing is defined as residential properties with a carpet area up to 60 square meters in metropolitan cities and up to 90 square meters in non-metropolitan cities, valued at Rs. 45 lakhs or less.
- Non-applicability on Resale and Land: GST does not apply to the resale of properties, buying and selling of residential apartments, or land transactions.
- PMAY Projects: Construction and enhancement services provided under pure labor contracts for the Pradhan Mantri Awas Yojana (PMAY) are exempt from GST.
- Pure Labor Contracts: Pure labor contracts for constructing single residential units or parts of residential complexes are exempt from GST.
- e-Way Bills: e-Way bills are required for transporting building materials such as cement and steel only when the consignment value exceeds Rs. 50,000.
Invoicing Requirements:
Businesses involved in the supply of construction services must raise invoices if they are registered under GST. This ensures compliance with GST regulations and proper documentation of transactions.
By understanding the nuances of GST applicability, businesses and consumers can navigate the taxation landscape more effectively, ensuring compliance and benefiting from available exemptions and concessions.
Understanding Works Contract Under GST
A Works Contract under GST encompasses various construction activities such as building, fabrication, erection, completion, fitting out, installation, improvement, modification, maintenance, repair, renovation, commissioning, and alteration of immovable property. Properties covered under these contracts include:
- Apartments
- Residential complexes
- Single residential units
- Industrial buildings
- Multi and single-story buildings
- Administrative and commercial buildings
According to the CGST Act of 2017, GST is payable only on under-construction properties, eliminating the need for GST on ready-to-move-in properties. However, many individuals find calculating GST on under-construction properties challenging.
GST Rates on Construction Materials
Generally, the GST rate for construction services is set at 18%. However, this rate varies within the construction sector. For instance, affordable housing attracts a reduced GST rate of 1%. The input service and construction materials also typically fall under the 18% GST rate, with certain segments taxed at 5%. For ITC (Input Tax Credit) incidence, the GST rate for construction services can range between 8% and 10%.
Example Calculation of GST on Under-Construction Property:
Let’s assume the combined cost of materials and labor is 75 INR. The tax on 45% of this cost is 33.75 INR. Applying the standard GST rate of 18% on this amount gives a GST value of 6.075 INR. Adding a profit of 25 INR results in a pre-tax total of 106.43 INR. The final amount becomes 111.75 INR, After applying a 5% GST , without ITC.
For detailed steps and examples on how to calculate GST for under-construction properties, numerous tutorials are available online.
The GST rates on construction materials vary depending on the type of material. Here is a summary:
| Material | GST Rates |
|---|---|
| Natural sand | 5% |
| Asphaltic rocks, oil shale, bitumen | 18% |
| Mica | 12% |
| Bricks | 5% – 28% |
| Cement | 28% |
| Crushed stones, pebbles, gravel | 5% |
| Granite and marble (blocks) | 12% |
| Granite and marble (not in blocks) | 28% |
| Steel and Iron | 18% |
| Building stones | 5% |
| Tiles | 5% – 28% |
| Coal | 5% |
| Wallpaper | 28% |
| Varnish and Paint | 28% |
| Bathroom interiors and appliances | Pipes and tubes, fitting – 18%<br>Other items – 28% |
| Electrical Appliances | 28% |
Also read: List Of Legal Documents to Buy Property in India: Property Ownership
Movable vs. Immovable Properties
The GST rate on construction contracts also depends on whether the property is movable or immovable. According to the General Clauses Act, 1897:
- Immovable property: Anything attached to or benefiting the land.
- Movable property: Items like jewelry, books, utensils, crops, grasses, and standing timbers.
Properties that can be moved without repair or renovation do not require GST materials, services, or contracts.
GST Rates for Residential and Commercial Properties
Here are the GST rates for various types of properties:
| Nature of Service | Gross Rate | Effective Rate |
|---|---|---|
| Affordable residential apartment in RREP | 1.5% | 1% |
| Other residential apartments in RREP | 7.5% | 1% |
| Commercial apartments in RREP | 7.5% | 5% |
| Affordable residential apartment in REP | 1.5% | 1% |
| Other residential apartments in REP | 7.5% | 5% |
| Ongoing projects in specified schemes | 12% | 8% |
| Commercial apartments in REP | 18% | 12% |
| Ongoing residential apartments as of 31.03.2019 | 18% | 12% |
GST Rates and HSN Codes for Construction Services
| Construction Activity | Total GST Rate | HSN Code |
|---|---|---|
| Affordable housing apartment construction for projects starting on or after 1st April 2019 | 1%* | 9954 |
| Non-affordable housing apartment construction for projects starting on or after 1st April 2019 | 5%* | 9954 |
| Construction of commercial apartments in REP (except RREP) | 12%* | 9954 |
| Works contract services (where the contractor supplies materials) | 12% | 9954 |
| Works contract services (where only labor is supplied by the contractor) | 18% | 9987 |
| Composite supply of works contract and goods (where the value of goods is less than 25% of the total contract value) | 18% | 9954 |
| Composite supply of works contract and goods (where the value of goods is 25% or more of the total contract value) | 12% | 9954 |
After reducing the 1/3rd towards land component from 1.5%, 7.5%, and 18%.
HSN Codes for Various Building Construction Material
Here’s a list of the latest HSN (Harmonized System of Nomenclature) codes for various building construction materials:
| Material | HSN Code |
|---|---|
| Bricks | 6901 |
| Cement | 2523 |
| Concrete Blocks | 6810 |
| Steel | 7208 |
| Tiles | 6907 |
| Electrical Fittings | 8536 |
| Plumbing and Sanitary Fittings | 7418 |
| Glass | 7007 |
| Building Stones | 2516 |
| Sand | 2505 |
| Granite and Marble (blocks) | 2516 |
| Granite and Marble (not in blocks) | 6802 |
| Crushed Stones, Pebbles, Gravel | 2517 |
| Mica | 2525 |
| Wallpaper | 4814 |
| Varnish and Paint | 3208 |
| Bathroom Interiors and Appliances (pipes, tubes, fittings) | 3917 |
| Bathroom Interiors and Appliances (other items) | 3922 |
| Coal | 2701 |
These HSN codes are essential for categorizing products correctly under GST and ensuring proper taxation compliance in the construction industry.
Legal Judgements on GST for Construction
Recent legal rulings have clarified various aspects of GST on construction:
- Gujarat High Court: GST on construction is applicable only to the cost of construction, excluding the land value.
- Telangana Authority of Advance Ruling (TAAR): Input Tax Credit (ITC) is not allowed for structures made using prefabricated technology.
- Rajasthan Authority of Advance Ruling (AAR): Construction services provided under contract will attract an 18% GST rate.
- GST Refund for Unregistered Homebuyers: Procedures are being defined to allow unregistered buyers to claim GST refunds on canceled contracts.
Conclusion
Understanding GST on construction materials and contracts is crucial for anyone involved in the construction industry. The GST regime has simplified the tax structure, but calculating the applicable GST rates can still be complex. Proper knowledge of GST rates and legal rulings can help navigate the taxation landscape more efficiently.
Frequently Asked Questions:
GST has streamlined India’s tax system by merging multiple state and Central taxes into a unified structure. Before GST, the tax regime was complicated with various levies like excise duties, VAT, and customs duties. GST simplifies taxation for construction materials and services, providing a more transparent and straightforward approach.
GST applies to construction activities involving under-construction properties, whether private, commercial, or residential. Properties that are still under construction are subject to GST, while completed properties ready for sale are exempt.
GST is calculated on the cost of materials and labor used for construction. For example, if the combined cost of materials and labor is 75 INR, with GST at 18%, the tax would be 6.075 INR. The total amount before GST would be 106.43 INR, increasing to 111.75 INR with 5% GST applied.
Businesses providing construction services must issue invoices if registered under GST. This ensures compliance and proper documentation of transactions.
Recent rulings include:
Gujarat High Court: GST applies only to the construction cost, excluding land value.
Telangana Authority of Advance Ruling (TAAR): ITC is not allowed for prefabricated structures.
Rajasthan Authority of Advance Ruling (AAR): An 18% GST rate applies to construction services under contract.
GST Refunds: Procedures are being defined for unregistered homebuyers to claim GST refunds on canceled contracts.
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