Many services linked to flat construction to attract lower 12% GST: AAAR

The recent ruling by the Appellate Authority for Advance Rulings (AAAR) in the case of Puranik Builders, has brought good news for buyers of under-construction properties. The AAAR held that charges for services such as water connection, electric meter installation and deposit for meter, development charges and legal fees collected by the developer were "inextricably linked" to the primary service of construction. As a result, these charges will be part of a "composite" or bundled supply and will be subject to GST at the rate applicable to construction services, which is a lower rate of 12%.

This ruling has significant implications for buyers of under-construction properties as it could result in reduced costs. Typically, builders provide "other services" such as providing a water connection and collection of advance maintenance charges, which are listed in the agreement for sale. These services are usually subject to GST at the higher rate of 18%. However, the AAAR has held that only those services that are not part of the bundled supply, such as advance maintenance, club house maintenance, and share application money, will be taxable at 18%.

The AAAR's ruling emphasizes the importance of the perception of the consumer or service receiver in determining whether the services provided are bundled or not. Charges such as preferential location charges, external and internal development charges, water connection, electric meter charges, etc., are all inextricably linked to construction and cannot be provided on a stand-alone basis. Therefore, these charges should enjoy the benefit of the lower tax rate on construction.

The revised GST rate for construction services has been 5% without input tax credit for housing projects that do not fall in the affordable housing segment since April 1, 2019. For ongoing projects, builders can opt for the 12% rate with input tax credit. This means that buyers of under-construction properties will benefit from reduced costs as a result of the AAAR's ruling.

While rulings do not set a judicial precedent, they have a persuasive effect in similar cases in the course of assessment, according to experts. In this case, Puranik Builders had collected GST at 18% against charges for other services. For those components of other services that are now part of bundled supply and subject to a lower rate, the builder has been directed to refund the excess tax collected to the buyers.

In conclusion, the AAAR's ruling in the case of Puranik Builders is good news for buyers of under-construction properties as it could result in reduced costs. Charges for services such as water connection, electric meter installation and deposit for meter, development charges, and legal fees are now part of a bundled supply and subject to GST at the lower rate of 12%. While this ruling does not set a judicial precedent, it will have a persuasive effect in similar cases during assessment.

Next (Jharkhand's urban development department takes steps to regularise illegal buildings)

Many services linked to flat construction to attract lower 12% GST: AAAR

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