Goods and Services Tax aka GST has finally come into force and the whole nation is trying to settle around this new tax regime. GST was rolled out on 1st July 2017 but just 2 days before the final roll out, the Central Government made a slight tweak to its taxation on the real estate construction services. The government removed the construction services from the 12% GST slab and kept them in the 18% tax slab, shocking the entire Indian population. The government suddenly hiked the tax from 12% to 18% on construction services and has also tweaked the mode of calculation. Let’s read on to find this new change in the tax rate.
Here Is The New Change In the GST On Construction Services
The tax rate on the construction of complex, building, civil structure, including a complex or building intended for sale to a buyer, wholly or partly, were kept under the 12% tax slab as per the announcements made by the Central Government in May this year. However, just two days before the official implementation of this new tax reform, the government shocked everyone related to the real estate sector by applying a GST of 18% on the construction services for any type of building.
Although the government hiked the tax on construction services, it still made sure that there was no injustice done to the citizens. While making the changes in the tax slab, the government also tweaked the way the tax was to be calculated. In the earlier taxation system, i.e., the 12% tax on building construction services, the value of land was also included in the total amount on which the tax was levied. This added land price hiked the total amount by a large difference which led to the tax to be very high.
While making an announcement about the tax hike on 29 June 2017, the Central Government declared that the land price would not be included in the amount on which the tax would be levied. This would be a big sigh of relief to all the real estate India persons who felt cheated by this tax hike. The exclusion of land price from the purview of this new hiked tax would ensure that no extra tax would have to be paid by the persons. The 18% tax would now be payable on two-third of the total contract value after the land price have been excluded from the contract value.
Explaining this change with an example, Manish Mishra, partner-indirect tax at BDO India LLP, said, “If the value of a property is Rs 90 lakh, a developer can deduct up to Rs 30 lakh (one-third of Rs 90 lakh) as land cost and compute GST at the rate of 18 percent on the remaining Rs 60 lakh. This is in turn is levying GST on only two-third of the total value.” So that means that now one-third of the total cost could be deducted as land price and the 18% GST would be levied only on the remaining two-0thrid of the price.
On the overall changes in the tax hike on construction services, Shubham Jain, Head of Corporate Sector Ratings, ICRA Ltd says, “Despite higher rates, the sector is likely to benefit under GST regime from the availability of input tax credit. As under the current tax regime the benefit of input tax paid is not fully available, the benefits arising out of input tax credit on the raw-materials available under the GST regime would result in an overall neutral tax incidence for construction services.”
This means that the Central Government has indeed made a very calculated decision to hike the GST on construction services from 12% to 18% as the effective GST would still remain unchanged at 12%. The Central Government does not have the power to impose tax on land. By hiking the tax on the remaining two-third contract amount and excluding land from the tax ambit, it has avoided any type of future litigations as well. Overall, the home buyers can breathe a sigh of relief as the price of homes would not be impacted even though the tax has been hiked.
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