Kerala AAR: Developer liable for 7.5% GST irrespective of construction agreement entered before or after execution of sale deed

Kerala AAR: Developer liable for 7.5% GST irrespective of construction agreement entered before or after execution of sale deed

The applicant sought clarity if he was eligible for effective rate of 5 percent on gross value of land

The Kerala Bench of the Authority for Advance Rulings (AAR) has ruled that the applicant was liable to pay the Goods and Services Tax (GST) at the rate of 7.5 percent for the construction of residential apartments (other than affordable residential apartments), as per entry (ia) of Sl. No. 3 of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017.

This was applicable irrespective of whether the agreement for construction was entered into with a purchaser before or after the execution of the sale deed for the land.

The applicant, Prime Property Developers, a Partnership firm, is engaged in the business of construction and sale of real estate, including villa projects. It sought an advance ruling on when an agreement for construction was entered into with a purchaser before the execution of the sale deed, was the developer eligible for an effective rate of 5 percent on the gross value of land and construction (i.e., availing 1/3rd deduction towards land on the of 7.5 percent effective rate).

The AAR observed that the residential villas being constructed by the applicant fell within the definition of a residential apartment. Thus, the projects undertaken by the applicant fell within the definition of a real estate project. The applicant also fell within the definition of a ‘promoter’. The services of construction of villas provided by the applicant squarely fell within the description of services specified in the Central Tax (Rate) dated 28.06.2017, as amended by Notification No. 03/2019 Central Tax (Rate) dated 29.03.2019.

Therefore, the tax rates prescribed in the entry were applicable to the services supplied by the applicant. The applicant was liable to pay GST at the rate of 7.5 percent for the construction service of residential apartments, other than affordable residential apartments, subject to the conditions prescribed under the entry.

The authority held that when an agreement for construction with a purchaser was entered into after the execution of the sale deed for the land, the developer was eligible for an effective rate of 5 percent on the gross value of land and construction. This included availing a 1/3rd deduction towards the land, resulting in an effective rate of 7.5 percent as per notification number 03/2019 dated 29.03.2019.

The Bench emphasized that any amount charged by the applicant from villa buyers for supplementary items of work (conducted before the completion of construction) would be considered a part of the total amount charged for the supply. This was defined in the explanation to Para 2 of Notification No. 11/2017 Central Tax (Rate) dated 28.06.2017.

Consequently, it would be subject to GST at the same rate specified in Item No. (ia) of the notification, subject to the prescribed conditions.