GST on Residential Construction – Nature and Tax Rates

GST on Residential Construction refers to the Goods and Services Tax levied on the supply of construction services related to residential properties, such as flats, apartments, and housing complexes. Under the GST law, if a residential property is sold before the issuance of a completion certificate or before first occupation, it is treated as a supply of service and is liable to GST. However, if the sale takes place after the completion certificate is issued or after first occupation (whichever is earlier), it is treated as a sale of immovable property, and no GST is applicable.

Table of Contents

1. Introduction
2. Nature of Service
3. Levy of GST

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1. Introduction

Construction is the process of preparing for and forming buildings and other civil structures. Construction starts with planning, design, and financing and continues until the structure is ready for occupancy. Far from being a single activity, large-scale construction is a feat of human multitasking. Normally, the job is managed by a project manager, and supervised by a construction manager, design engineer, construction engineer or project architect. For the successful execution of a project, effective planning is essential. Those involved with the design and execution of the infrastructure in question must consider the environmental impact of the job, the successful scheduling, budgeting, construction site safety, availability and transportation of building materials, logistics, inconvenience to the public caused by construction delays and bidding, etc.

The construction activity is also for constructing commercial apartment, bridges, roads, offices for non-commercial use, etc.

2. Nature of Service

The major nature of services are discussed below:

(a) Development of complex, etc. by builder for sale under construction

(b) Joint Development Agreement

(c) Redevelopment

(d) Sale of TDR

(e) Sale of apartment under different schemes

(f) Sale after OC

(g) Sale of Land

(h) Contractor/Sub-contractor

(i) Transfer of Development right/FSI/Long term Lease

(j) Services by Local Authorities

(k) Other Charges

(l) Meaning of specified services recipient

(m) Sale of plotted land

(n) Rates

2.1 Development of Complex, etc. by Builder for Sale Under Construction

Section 7(1) of the GST Act defines supply in an inclusive manner. The Schedule II of GST Act [Section 7(1)(d)] specifies certain activities which are considered as goods or services. Clause 5(b) of Schedule II reads as follows:

“(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation.––For the purposes of this clause:

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;”

Therefore, construction of complex building, civil structure or part thereof including complex or building intended for sale to a buyer, except when the entire consideration is received after completion certificate will be considered as rendering of service.

2.1.1 Judicial Interpretation of Services By Builder – The Honourable Supreme Court in the case of M/s. Larsen & Tourbo Ltd. reported in 2014 (34) STR 481 (SC) has held that construction activity performed by the builder for buyer shall be considered as ‘works contract’. The works contract involves transfer of property of goods as well as rendering of services. The same has been defined in Section 2(119) of the GST Act as follows:

“(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.”

The definition of ‘Works Contract’ reproduced above provides that works contract service means specified services of any immovable property wherein transfer of property in goods is involved. If the specified services are for movable property, then supply of services will not be classified as works contract service. It will be considered as composite supply. The clause (6) of Schedule II of GST Act deems works contact as service.

2.1.2 Sale of Complex to Buyer Wholly or Partly – Normally, the builder constructs the premises intended for sale. The sale may be made before commencement of construction activity or during construction or after completion of the construction activity. The agreement is entered into between the builder and the buyer for sale of the premises. The agreement specifies the consideration payable by the buyer on the specified dates to the builder. The builder normally raises the Demand Letter on the buyer for receiving the amount.

The taxability arises only when construction activity is supplied to buyer of premises. If the building is not meant for sale i.e. the builder is constructing for its own use, no GST is payable as there is no consideration for construction services supplied by the builder. Thus, the tax will be payable by the builder/developer only when the constructed premises is meant for sale and not for self-use.

2.1.3 Issuance of Completion Certificate by Competent Authority – The construction of premises is regulated by the Local Authority. The builder is required to appoint the approved Architect for the construction work. The Architect submits the drawings and designs of the building for approval of the Local Authority. The construction work can commence only after the Local Authority has approved the drawings and designs of the apartment.

After completion of the construction activities, the Architect submits the certificate about the completion of construction work. The Regulation of Local Authority normally provides for issuance of certificate normally known as ‘Occupation Certificate’ by Competent Authority which entitles the builder to provide occupation to the various purchasers of the premises. For example, Section 353A of the Mumbai Municipal Corporation Act, 1888 provides for issuance of Occupation Certificate to the builder by the Commissioner of Municipal Corporation.

2.1.4 Receipt of Entire Consideration – As per the Entry No. 3 of the notification, if the entire consideration is received after the Completion Certificate has been issued, no tax will be payable. In such a case, the transaction between the builder and the buyer is considered as a sale of immovable property and therefore the same is excluded from the purview of taxability.

It must be noted, that if the agreement of sale has been made prior to obtaining Completion Certificate, it means the builder/developer has provided the works contract service to the buyer in as much as the construction has been made subsequent to the agreement of sale. The tax would be payable on such transactions, even if the part consideration under the said agreement is received after the receipt of Completion Certificate. Such transaction cannot be considered as a sale of immovable property, as part consideration was received during construction.

2.1.5 Value for Land – The provision relating to exclusion of value of land for determining the taxable value are discussed further.

2.2 Joint Development Agreement

The builder/developer normally under a joint development agreement procures development rights from the land owner. The GST implication for such transfer of right prior to 01/04/2019 and subsequent to 01/04/2019 are different.

The land owners are paid by any of the following method:

(a) Payment in cash;

(b) Payment in constructed area;

(c) Payment as percentage of sale price of the premises (Revenue Sharing);

The value of constructed premises or revenue share will have to be determined for the purpose of payment of tax if the tax is leviable.

2.3 Redevelopment

The redevelopment can be of building occupied by various tenants or building owned by society or of slum area. In case of tenants, land is owned by landowner who will be different than the tenant. It is possible that the landlord may also the one of the tenants. In case of development of slum, the land is generally owned by Government. The approval for development of slum is given by Slum Rehabilitation Authority. The GST implication in all these developments is more or less same. The redevelopment of society is discussed below.

Generally, in this model, land is owned by a society, comprising members with each member entitled to his share by way of an apartment. Society/individual flat owners give development right to builder/developer for development. The builder/developer makes new flats with same or different carpet area for original owners of flats and additionally may also provide following:

(i) construct some additional flats for sale to others;

(ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of redevelopment;

(iii) pay an additional amount to the original owners of flats in the society.

The taxability in redevelopment will be similar to that adopted under joint development model.

2.4 Sale of TDR

Very often in the trade, floor space index (FSI)/Transfer of development rights (TDR) are procured by the builder by developing various facilities for local authorities. These FSI/TDR are either consumed by him or are sold by him to different persons. TDR is nothing but benefits arising from land.

2.5 Sale of Apartment Under Different Schemes (Deleted from 18-7-2022)

The different rates of taxes have been specified under different sub-clauses of entry No. 3 of Notification No. 11/2017 – CT (Rate). The sub-clauses (iv), (v) and (vi) specifies the rate of tax for different scheme. The description of various schemes given in clauses (iv), (v) and (vi) is tabulated below:

Sr. No.	Clause No. of Sr. No. 3 of Notification No. 11/2017 – CT (Rate)	Description
1.	Clause (iv)(b)	Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awas Yojana
2.	Clause (iv)(c)	In-situ redevelopment of existing slums under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (Urban)
3.	Clause (iv)(d)	Beneficiary led individual house construction/enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana
4.	Clause (iv)(da)	Economically Weaker Section (EWS) houses” constructed under the Affordable Housing
5.	Clause (iv)(db)	Credit Linked Subsidy Scheme for EWS/LIG/MIG
6.	Clause (v)(b)	A single residential unit otherwise than as a part of a residential complex
7.	Clause (v)(c)	Low-cost houses up to a carpet area of 60 square meters per house under scheme framed by Ministry of Housing and Urban Poverty Alleviation, Government of India
8.	Clause (v)(d)	Low-cost  houses up to a carpet area of 60 square meters per house under the Housing for All (Urban) Mission/PMAY or any housing scheme of a State Government;
9.	Clause (v)(da)	Low-cost houses up to a carpet area of 60 square meters per house in an affordable housing project which has been given infrastructure status
10.	Clause (vi)(c)	A residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III

The clauses mentioned above in the notification specifies the recipient of service and nature of service.

• Deleted from 18-7-2022 – The above tariff entries have been deleted w.e.f. 18-7-2022 vide Notification No. 03/2022-CT (Rate) dated 13-7-2022. The deletion appears to be to simplify the rate of tax for activity of construction.

2.6 Sale After OC

The Schedule III of the GST Act specifies activities which are not considered as sale of goods or sale of services. The entry No. 5 of Schedule III reads as follows:

‘5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.’

The activity of sale after OC is not considered as supply of goods or services. However, in view of the specific provisions in explanation given below Section 17(3) of GST Act, such activity will be considered as the exempt supply. The provisions of Rule 42 and Rule 43 of GST Rules will accordingly apply for reversal of credit.

2.7 Sale of Land

As mentioned above sale of land is specified in entry 5 of Schedule III. Therefore, it is not considered as supply of goods or services. However, in view of the specific provisions in explanation given below section 17(3) of GST Act the sale of land will be considered as the exempt supply. The provisions of Rule 42 and Rule 43 of GST Rules will accordingly apply for reversal of credit.

2.7.1 Sale of Undivided Share in Land – Clause (ii) of entry no.16 of heading 9972 of Notification No. 11/2017-CT (R) specifies nil rate of tax for supply of land or undivided share of land by way of lease or sub-lease where such supply is part of composite supply of construction of flat. Generally, builders after construction of premises form society of all purchasers of flat and convey the land to such society. In Southern States undivided share in land is sold to the members. This entry provides for nil rate of tax on such sale of land.

2.8 Contractor/Subcontractor

The Builder/Developer have to engage different types of contractors like plumbing contractor, electrical contractor, tiling contractor for construction of the project. The different rate of taxes is payable by the contractor depending upon the nature of apartment for which services are provided. The contractor may also appoint subcontractors.

2.9 Transfer of Development Right/FSI/Long-term Lease

The builder procures development right from landowners or society for the development of the project. The society transfer development right for the benefit of their members. The society normally will not be in business of transfer of development right for the development of complex. The statutory authority like Slum Rehabilitation Authority or MHADA in Maharashtra provide higher FSI for development of slum or old building.

Many states have established different authorities for planned development of district/city. These authorities provides land on long term lease to the builder/developer for development of area.

2.10 Services by Local Authorities

Normally State Government have made rules and regulations for planned development of society. The development plan for big cities like Mumbai, Delhi is prepared by the State Government which is executed by local authorities. The Local Authorities invariably are required to approve the drawing design and layout of the building. They make rules and regulation regarding parking, fungible FSI, etc. The builder is required to make payment for various services like obtaining of approval for public parking, scrutiny of plan, obtaining commencement certificate, etc. As per the provisions contained in Notification No. 13/2017-CT (Rate) the tax is payable by business entity for services provided by local authorities unless the same is exempt from payment of GST under Notification No. 12/2017-CT (Rate).

2.11 Other Charges

The builder collects various other charges like legal charges, electrical and water connection charges, formulation of society, club house charges, etc. The GST is payable on such charges.

2.12 Sale of Plotted Land

The builder/developer buys the land and divide the same in different plots say in area of 2000 sq. ft. The common amenities like road, supply of electricity, sewage connection, water connection, garden, etc. is developed in the area. The builder may develop himself or appoint contractor for development. Thereafter the plots are sold to the person who can either construct the bungalow themselves or builder/developer can take contract for construction of bungalow on plotted land.

2.13 Rates

The tariff rates are specified under Service Accounting Code (SAC) 9954 for services discussed in this chapter. The description of various services covered under SAC code are given in Sr. No. 3 of Notification No. 11/2017 – CT (Rate). The Sr. No. 3 of the said notification is divided into (i) to (xii) clauses. The different services for which rate of taxes are provided are summarised below:

(a) The lower rate of tax has been specified for affordable residential premises and non-affordable residential premises without input tax credit under various clauses from (i) to (if) of this entry. The following explanation has been added below clause (ie) vide Notification No. 6/2023-CT (Rate) dated 26.07.2023.

“Explanation. – This item refers to sub-items of the item (iv), (v) and (vi), against serial number 3 of the Table as they existed in the notification prior to their omission vide Notification No. 03/2022-Central Tax (Rate) dated 13th of July, 2022.”

Even though the said explanation was not available during the period 18.07.2022 to 26.07.2023 yet it is felt that the same will be applicable for earlier period also. Otherwise, the entry (if) in Sr. No. 3 of Notification No. 11/2023-CT (R) will become redundant.

(b) The concessional rate of tax is also provided for contractors who are engaged in constructing affordable housing premises. (Deleted from 18-7-2022)

(c) The concessional rate of tax for work contract service of construction, erection, commissioning, installation, completion, fitting out, repair & maintenance, renovation, etc. provided to Central Government, State Government, Union Territory or Local Authority for different purposes are specified. The clause (iii) and clause (vi) of the said notification specifies the concessional rate of tax for services provided to these recipients for the services specified in different sub-clauses of clause (iii) and clause (vi) of entry 3. The lesser rate of tax is also specified for subcontractors undertaking government projects. (Deleted from 18-07-2022)

(d) The government has the objective of providing housing to the weaker section of the society. The government has formulated the different types of housing scheme under which housing is provided to specified eligible persons. The concessional rate of tax is specified for works contract service of construction, erection, commissioning, installation, completion, fitting out, repair & maintenance, renovation or alteration under clause (iv) of entry 3. (Deleted from 18-7-2022)

(e) Further, road, bridges, tunnels, burial ground etc. are constructed for utilisation by general public. The concessional rate of tax is specified for works contract service of construction, erection, commissioning, installation, completion, fitting out, repair & maintenance, renovation or alteration under clause (iv) of entry 3. The concessional rate of tax is specified for services like construction, erection, commissioning is of such items also. (Deleted from 18-7-2022)

(f) The concessional rate of tax is also provided for construction, erection, commissioning, installation of original works for railways including mono and metro railway and low-cost housing under clause (v) of entry No. 3. (Deleted from 18-7-2022)

(g) The clauses (vii) to (x) of entry 3 of the notification specifies rate of tax for different services namely pile foundation, roofing and water proofing, demolition services, excavating and earth moving services, masonry, building completion and finishing services.

(h) Clause (ix) of entry 3 of the notification specifies concessional rate for services provided by sub-contractor of the main contractor who are paying tax under clauses (iii) and (vi) of the entry 3 of the notification. (Deleted from 18-07-2022)

The Sr. Nos. 10, 10A, 11, 41A and 41B of Notification No. 12/2017-CT (Rate) exempts from payment of tax and services specified in these events. In addition the exemption provided under notification No. 14/2017-CT (Rate) is also applicable to supplier of service discussed under this chapter.

3. Levy of GST

The description of the services specified in entry 3 of Notification No. 11/2017-CT (Rate) which specifies the levy has been amended from time to time. The provisions specifically applicable to services discussed:

1. General Provisions
2. Composite supply
3. Charging Section
4. Composition scheme
5. Exemption
6. Main contractor/Sub-contractor
7. Transfer of development right/FSI/Long term lease
8. Joint Development/Redevelopment
9. Sale after OC
10. Services from Local Authorities
11. Services provided by builder is works contract service
12. Other Charges
13. Sale of plotted land
14. Sale of land

The levy of tax on projects commencing construction after 1-4-2019 was overhauled.

1. Levy of tax subsequent to 1-4-2019
2. Summary of Notification
3. Affordable and Non-affordable
4. Meaning of various terms used in notification applicable for construction commencing from 1-4-2019
5. Condition for availing new rate of tax
6. Evaluation of option for ongoing projects
7. Composite supply
8. Main contractor/Sub-contractor
9. Transfer of development right/FSI/Long-term lease
10. Joint Development/Redevelopment
11. Sale after OC
12. Services from Local Authorities
13. Other Charges
14. Clarification by CBIC

3.1 General Provisions

The tax rate of the projects which has commenced prior to 01/04/2019 were different under different schemes. The clauses (iv), (v) and (vi) of entry 3 of Notification No. 11/2017-CT (Rate) specifies concessional rate when the residential apartment have been constructed under different scheme of Government or the purchaser has availed the benefit of concessional rate of interest on loan received by him. Subsequent to 01/04/2019 the rate of tax was different for affordable and non-affordable housing.