OM PRAKASH JAIN | Mar 19, 2022 |
18% GST on Ancillary Services for Sale of Flats
AAR, Rajasthan has pronounced judgment on 26.11.2021, in the case of Richwell Enterprises Pvt. Ltd. (2021) 36 J.K.Jain’s GST & VR 490, that;
“The Other services [JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Non-refundable IFMS (Interest Free Maintenance Security), Club Membership], provided by the builder after completion certificate would be taxed separately as consideration for independent service(s) @18%, under different SAC codes, on the entire consideration received as charges on account of other services, per notfn No.11/2017-CT(R) dated 28.6.2017.
A combined & common agreement for sale of immovable property showing separate charges for sales of immovable property & supply of other services will not take character of Composite Supply.
However, the applicant is eligible to take ITC of the GST paid on goods or services used or intended to be used in the course or furtherance of providing ‘the ancillary/other services’ subject to the stipulated conditions per S.17(5), GST Act, 2017”
1.Background ─ The applicant, registered under GST ACT and engaged in the business of construction and sale of residential apartments, discharges GST in respect of such supply for which, consideration is received before receipt of Occupancy/Completion Certificate.
Applicant submitted that apart from consideration for the main construction activity, they also recover charges for “the ancillary services’ like JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Nonrefundable IFMS (Interest Free Maintenance Security) and Club Membership from the residents.
To provide “the ancillary services, broadly the applicant makes the following inward supplies:
Applicant feels that the charges for the ‘Ancillary Services’ are primarily for supply of construction services since they are received only from the Customers to whom construction services are supplied and therefore the services underlying the ‘Ancillary Services’ may be treated as naturally bundled with supply of main construction services which are supplied in conjunction with each other, in the ordinary course of business. Hence, in case these services are treated as ‘Composite supply’, construction services may be treated as principal supply of such composite supply; since the same clearly constitutes predominant element of such transactions and is the primary supply giving rise to the associated or ancillary supplies. Per applicant, in such a situation, the entire value of the charges of the ‘Ancillary Services should attract the effective rate of GST, as applicable on the main construction service (supplied by the Company supplied under the same Agreement). In other words, the applicant is contending that 1/3rd of the value of land is available to them as rebate even on these other charges.
The question before AAR was whether the Charges for the Ancillary Services’ recovered by the applicant will be treated as consideration for ‘construction services’ and classified under SAC 9954 along With the main residential construction services or whether the same will be treated as consideration for independent service(s) under the respective head. And consequently, what would be the applicable GST rate on such Charges collected for the ‘Ancillary Services.
The applicant provided, a sample copy of the ‘Agreement for sale deciding the present issue. On perusal of the said ‘agreement for sale, it seen that the charges for the construction of residential property and the other charges for providing different ancillary services are mentioned separately.
Findings by AAR ─In order to be held as ‘Composite supply’ as per S.2(30), CGST Act, 2017, there must be two or more taxable supplies of goods or of services or both or any combination thereof, which are naturally bundled and are supplied in conjunction with each other in the ordinary course of business, one of which is a ‘principal supply’.
In the present case, we observe from said agreement for sale that, the applicant has mentioned the value of supply of construction of residential unit and the value of other ancillary services separately. As per para no.1.2 of page 3 & 4 of the impugned agreement for sale, the applicant intend to collect the value of construction of residential unit supply (having saleable area of apartment No. A-704 is 1603 Sq Ft.), for an amount of Rs. 40,50,000/- + taxes extra separately from the customer on which stamp duty is payable. Para no. 1.2 of page 4 shows that certain charges are collected separately for ‘Ancillary services provided by the applicant viz., JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Non-refundable IFMS (Interest Free Maintenance Security) and Club Membership from the residents etc.
A combined reading of the agreement as a whole, reveals that, there are more than two supplies in the subject transaction, which are independent supplies and so taxable separately. From the above terms and conditions of the agreement of sale, it is seen that the applicant intend to collect the basic flat sale price separately for the supply of residential unit and the other charges are to be collected separately for supply of different ancillary services which are called as ‘other charges’. Merely because the agreement is common will not make it a supply of bundled services.
Therefore, in the present case, we find that there are more than two supplies which are independent supplies and so taxable separately, the supply of construction services of residential unit and the other supply of ancillary services (as mentioned in Agreement for Sale provided), viz., JDA Lease Charges, Electrification Charges, Sewage Treatment Plant Charges, Nonrefundable IFMS (Interest Free Maintenance Security) and Club Membership from the residents. Ancillary Services supplied in respect of the ‘other charges’ are different from the service of construction of residential flats.
Therefore, it is observed that the ‘ancillary services’ provided cannot be said to be naturally bundled and supplied in conjunction with each other in the ordinary course of business with main supply of residential flat in the subject case.
We find that Heading 9954, Entry No. 3 covers ‘construction services” of notfn No.11/2017-CT(R) dated 28.6.2017. The entry no. 3 is reproduced as below:–
‘3(i) 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. (para 2 of this notfn shall apply for valuation of this service).
The above entry is specifically related to construction of a Complex, building, Civil structure or a part there of, including a complex or building intended for sale to a buyer, wholly or partly.
Further, the Entry No. 3 of notfn No.11/2017-CT(R) dated 28.6.2017 as been amended vide notfn No. 3/2019-CT(R) dated 29.3.2019, which is as under–
TABLE
| Description of Service | Rate |
| (3) | (4) |
| “(i) Construction of affordable residential apartments by a promoter in a Residential Real Estate Project (herein after referred to as RREP) which commences on or after 1.4.2019 or in an ongoing RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if) below, as the case may be, in the manner prescribed therein, 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. (Provisions of para 2 of this notfn shall apply for valuation of this service) | 0.75 |
| (ia) Construction of residential apartments other than affordable residential apartments by a promoter in an RREP which commences on or after 1.4.2019 or in an ongoing RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if) below, as the case may be, in the manner prescribed therein, 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. (Provisions of paragraph 2 of this notfn shall apply for valuation of this service) | 3.75 |
| (ib) Construction of commercial apartments (shops, offices, godowns etc.) by a promoter in an RREP which commences on or after 1.4.2019 or in an ongoing RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if) below, as the case may be, in the manner prescribed therein, 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. (Provisions of paragraph 2 of this notfn shall apply for valuation of this service) | 3.75 |
| (ic) Construction of affordable residential apartments by a promoter in a Real Estate Project (herein after referred to as REP) other than RREP, which commences on or after 1.4.2019 or in an ongoing REP other than RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if) below, as the case may be, in the manner prescribed therein, 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. (Provisions of paragraph 2 of this notfn shall apply for valuation of this service) | 0.75 |
| (id) Construction of residential apartments other than affordable residential apartments by a promoter in a REP other than a RREP which commences on or after 1.4.2019 or in an ongoing REP other than RREP in respect of which the promoter has not exercised option to pay central tax on construction of apartments at the rates as specified for item (ie) or (if) below, as the case may be. in the manner prescribed therein, 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. (Provisions of paragraph 2 of this notfn shall apply for valuation of this service) | 3.75 |
| (ie) Construction of an apartment in an ongoing project under any of the schemes specified in sub-items (b), (c), (d), (da) and (db) of item (iv); sub-items (b), (c), (d) and (da) of item (v); and sub-items (c) of item (vi), against entry No. 3 of the Table, in respect of which the promoter has exercised option to pay central tax on construction of apartments at the rates as specified for this item. (Provisions of paragraph 2 of this notfn shall apply for valuation of this service) | 6 |
| (if) Construction of a complex, building, civil structure or a part thereof, including,─ (i) commercial apartments (shops, offices, godowns etc.) by a promoter in a REP other than RREP, (ii) residential apartments in an ongoing project, other than affordable residential apartments, in respect of which the promoter has exercised option to pay central tax on construction of apartments at the rates as specified for this item in the manner prescribed herein, but excluding supply by way of services specified at items (i), (ia), (ib), (ic), (id) and (ie) above 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 removal of doubt, it is hereby clarified that, supply by way of services specified at items (i), (ia), (ib), (ic), (id) and (ie) in col. (3) shall attract central tax prescribed against them in col. (4) subject to conditions specified against them in col. (5) and shall not be levied at the rate as specified under this entry. (Provisions of paragraph 2 of this notfn shall apply for valuation of this service | 9 |
| Conditions.─ Provided that the central tax at the rate specified in col.(4) shall be paid in cash, that is, by debiting the electronic cash ledger only; Provided also that credit of input tax charged on goods and services used in supplying the service has not been taken except to the extent as prescribed in Annex.I in the case of REP other than RREP and in Annex.II in the case of RREP; Provided also that the registered person shall pay, by debit in the electronic credit ledger or electronic cash ledger, an amount equivalent to the ITC attributable to construction in a project, time of supply of which is on or after 1.4.2019, which shall be calculated in the manner as prescribed in the Annex.I in the case of REP other than RREP and in Annex.II in the case of RREP; Provided also that where a registered person (landowner-promoter) who transfers development right or FSI (including additional FSI) to a promoter (developer-promoter) against consideration, wholly or partly, in the form of construction of apartments,─ the developer-promoter shall pay tax on supply of construction of apartments to the landowner promoter, and (ii) such landowner–promoter shall be eligible for credit of taxes charged from him by the developer promoter towards the supply of construction of apartments by developer-promoter to him, provided the landowner promoter further supplies such apartments to his buyers before issuance of completion certificate or first occupation, whichever is earlier, and pays tax on the same which is not less than the amount of tax charged from him on construction of such apartments by the developer promoter. Explanation.–(i) “developer-promoter” is a promoter who constructs or converts a building into apartments or develops a plot for sale, (ii) “landowner-promoter” is a promoter who transfers the land or development rights or FSI to a developer-promoter for construction of apartments and receives constructed apartments against such transferred rights and sells such apartments to his buyers independently. Provided also that 80% of value of input and input services, [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, HSD, motor spirit, natural gas], used in supplying the service shall be received from registered supplier only; Provided also that inputs and input services on which tax is paid on reverse charge basis shall be deemed to have been purchased from regd. person; Provided also that where value of input and input services received from registered suppliers during the financial year (or part of the financial year till the date of issuance of completion certificate or first occupation of the project, whichever is earlier) falls short of the said threshold of 80%, central tax shall be paid by the promoter on value of input and input services comprising such shortfall at the rate of 9% on reverse charge basis and all the provisions of the CGST Act, 2017 shall apply to him as if he is the person liable for paying the tax in relation to the supply of such goods or services; Provided also that notwithstanding anything contained herein above, where cement is received from an unregistered person, the unregistered person, the promoter shall pay tax on supply of such cement at the applicable rates on reverse charge basis and all the provisions of the CGST Act, 2017, shall apply to him as if he is the person liable for paying the tax in relation to such supply of cement; (Please refer to the illustrations in annexure III) Explanation.–1. The promoter shall maintain project wise account of inward supplies from registered and unregistered supplier and calculate tax payments on the shortfall at the end of the financial year and shall submit the same in the prescribed form electronically on the common portal by end of the quarter following the financial year. The tax liability on the shortfall of inward supplies from unregistered person so determined shall be added to his output tax liability in the month not later than the month of June following the end of the financial year. 2. Notwithstanding anything contained in Explanation 1 above, tax on cement received from unregistered person shall be paid in the month in which cement is received. 3. ITC not availed shall be reported every month by reporting the same as ineligible credit in GSTR-3B [Row No. 4(D)(2)]. Provided that in case of ongoing project, the registered person shall exercise one time option in the Form at Annexure IV to pay central tax on construction of apartments in a project at the rates as specified for item (ie) or (if), as the case may be, by the 10.5.2019; Provided also that where the option is not exercised in Form at annexure IV by the 10.5.2019, option to pay tax at the rates as applicable to item (i) or (ia) or (ib) or (ic) or (id) above, as the case may be, shall be deemed to have been exercised; Provided also that invoices for supply of the service can be issued during the period from 1.4.2019 to 10.5.2019 before exercising the option, but such invoices shall be in accordance with the option to be exercised.; | |
The services to be provided by the applicant covered under entry No. (i) or (1a) as the case may be, is specifically related to Construction of residential affordable apartments other than affordable residential apartments by a promoter in a Residential Real Estate Project (RREP).
Further, as per the explanatory note pub. by the Govt., for the purposes of the CGST Act. 2017, ‘the ancillary services’ provided by the applicant can be said to be classified under different SAC as under:–
| Sr. No. | Description of charges | Brief Description | Group of SAC | SAC |
| 1. | JDA Lease charges | Amount recovered for payment made by the applicant towards Lease charges payable to JDA. | Trade services of buildings | 997213
|
| 2. | Electrification charges | Amount charged by the applicant to lay down wires and cables from electricity consumption meter to the apartment. | Installation services | 995461 |
| 3. | Sewage treatment plant charges | Amount charged by the applicant towards construction, maintenance and operation of sewage treatment plant in the building. | Sewerage and Sewage treatment services | 999411
|
| 4. | Non- refundable IFMS(interest free maintenance security) | Additional charges recovered by the applicant until the formation of Resident’s welfare Association (RWA) for maintenance, upkeep and security of the complex. | Other services nowhere else classified. | 999799 |
| 5. | Club Membership | Amount charged by the applicant towards construction and maintenance of Club House in the complex. | Services provided by other membership organizations nowhere else classified. | 999599 |
Analysis & conclusion by AAR ─ Considering the above, the AAR opinioned that, the ‘Construction services’ and the ancillary services’ provided by the applicant are not naturally bundled and are not supplied in conjunction with each other in the ordinary course of business with main supply. These are the facilities /amenities provided by the applicant to its customers for the limited period because, for these facilities created the customers have not been given perpetual rights. The amount or consideration is charged separately for different services. Therefore, the other charges for the ancillary services provided is not covered under the scope of Composite supply of services. Therefore, the contention of the applicant is found not acceptable.
In view of above, the ‘other mentioned charges to be charged for ancillary services as above are held taxable as per their SAC under the GST Act, at 18% in terms of the respective and appropriate entries (against the SAC mentioned in the Table at Para No. 17 above) in notfn No.11/2017-CT(R) dated 28.6.2017 as they are covered under services, other than construction services.
Therefore, in the opinion of AAR, the consideration for providing the construction services by way of construction of residential unit and the consideration for the ancillary services (i.e., other charges collected) are considerations against separate independent services being provided by the applicant. Considering the nature of supplies in question, the services for each of the service head description are covered under notfn No.11/2017-CT(R) dated 28.6.2017 mentioned above and therefore, the Other Charges would attract GST @18%. Thus, the 1/3rd deduction from total value as per entry No. 2 of the notfn (as claimed by the applicant) cannot be allowed as deduction from the Other Charges. A plain reading of the items or the list of other charges itself shows that ancillary services supplied against the said charges have no connection with land and therefore, question of considering the 1/3rd deduction or rebate towards land cost does not arise, particularly, as thee entries applicable to both of the above services are different.
As far as availability of ITC on goods & services received for supply of the ‘ancillary services’ is concerned, we are of the view that as ‘ancillary services’ are subject to outward tax liability at the rate of 18% (without any abetment) therefore, as per S.16, CGST and RGST Act, the applicant shall be eligible to take ITC of the GST paid on goods or services used or intended to be used in the course or furtherance of business subject to the conditions as prescribed and the provisions of S.17(5), GST Act.
Ruling by AAR ─ Ruling –In view of the extensive deliberations as hereinabove, we rule as follows:–
Question No. 1:–Whether recovery of charges for “the ancillary services’ by builders would be considered as a ‘composite supply’ naturally bundled with ‘Construction Services’ u/s 8, GST Act, 2017?
Answer No. 1: No, ‘the ancillary services’ would not be considered as a ‘composite supply’ naturally bundled with ‘Construction Services’ u/s 8, GST Act, 2017. The applicable rate of GST on ‘the ancillary services’ would be as per the SAC prescribed under notfn No.11/2017-CT(R) dated 28.6.2017 and are liable to GST @18%. Further, the applicant has to pay GST on the entire consideration received as charges on account of ‘the ancillary services’, without any abatement.
Question No.2: If answer to Question No. 1 is YES, whether the charges for “the ancillary services’ would attract GST at the rate specified for Construction Services’ (principal supply), i.e., 1%% or 5% as the case maybe?
Answer No. 2: Not applicable as per Answer No. 1.
Question No.3: Further, if answer to Question No. 1 is YES, whether recovery of the charges for the ancillary services by builders, after completion certificate would not attract GST liability considering them to be composite supply naturally bundled with Construction Services which does not attract GST once completion certificate is issued?
Answer No. 3: Not applicable as per Answer No. 1.
Question No.4: If answer to Question No. 1, 2 and 3 is No and GST is levied on charges for ‘the ancillary services’ as individual respective service (considering 18% GST rate) then whether ITC can be claimed in respect of GST paid on expenses incurred to provide the said ancillary services?
Answer No. 4: As per S.16, CGST and RGST Act, the applicant is eligible to take ITC, GST paid on goods or services used or intended to be used in the course or furtherance of providing ‘the ancillary services’ subject to the conditions as prescribed and the provisions of S.17(5), the CGST and RGST Act, 2017.
CA Om Prakash Jain s/o J.K.Jain, Jaipur
Tel: 9414300730
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