With this ruling the uncertainty surrounding tax treatment of such ancillary charges may come to an end.
Clearing the confusion with regard to the GST rate to be levied on services such as car parking, swimming pools, clubs and gymnasiums, a ruling by the West Bengal bench of the Authority for Advance Ruling (AAR) has said that these services will now be regarded as a composite construction service and will attract 12 or 5 percent GST, as against 18 percent levied on variety of other services.
The ruling was given by the AAR on an application filed by Bengal Peerless Housing Development that sought clarification on whether additional services would be treated as a composite supply with construction services as they are usually bundled while booking a flat in an apartment complex.
"The applicant (Bengal Peerless Housing Development) is providing service of construction of a dwelling unit in a residential complex, bundled with services relating to the preferential location of the unit and right to use car parking space and common areas and facilities. It is a composite supply, construction service being the principal supply," the AAR said.
It added that the "entire value of the composite supply is, therefore, to be treated, for the purpose of taxation, as supply of construction service."
The applicant in the case Bengal Peerless Housing Development Company had submitted that the charges for preferential location charges (PLC) are an integral part of the supply of construction service. The said services are only provided once the agreement for sale of such a unit is signed and other terms are fulfilled. Hence, the service of PLC is naturally bundled with the supply of services of construction of a residential dwelling unit, making these services a composite supply, it had said.
The applicant had contended that the services of construction of a unit of a residential dwelling is the principal supply in such a composite supply. Therefore, it would be incorrect to conclude that the other services provided i.e. the preferential location, the right to use car parking space and common area maintenance services are distinct from the main service or should be treated on a standalone basis which would then attract the rate of 18 percent, it had said.
It submitted that the overall activity undertaken by it is a composite supply, wherein the principal supply is a construction service and the other services are ancillary/ incidental to construction service. It treated the entire transaction as construction services and claimed the abatement of one third for the value of land, thereby effectively discharging GST at the rate of 12 percent (i.e. 18 percent less 1/3rd abatement).
The Revenue too agreed with the submissions of the applicant and echoed a similar view that the overall activity should qualify as a composite supply with the construction service being the principal supply.
West Bengal AAR held that although one has the option not to pay for the right to use car parking space, one cannot buy it, or for that matter any other service in the bundle separately. The recipient has to buy these services only as a package, where the construction service remains the predominant element. Hence, the services are rightly taxable at lesser rate of 12 percent (which is the same rate as applied to construction) and not full rate of 18 percent, tax experts said.
Prior to this ruling there was confusion in the industry on tax to be applied on such ancillary services and many builders (adopting a conservative approach) were charging tax at the full rate of 18 percent on PLC, parking charges, transfer charges etc. instead of charging the lower rate of 12 percent as applicable to construction services (post abatement), they said.
“The ruling has rightly held that a homebuyer cannot procure PLC or parking services without first availing the construction services and hence, provision of such ancillary services with construction services for a single price qualifies as a composite supply.” said Harpreet Singh, Partner, KPMG
“With this ruling the uncertainty surrounding tax treatment of such ancillary charges should come to an end and hopefully builders would going forward levy lower rate on such charges which are being recovered in conjunction with construction services." adds SinghEY India Tax Partner Abhishek Jain said, "This ruling should aid in bringing some clarity on the taxability of these charges for the real estate sector.”
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