GST UPDATE ON CONSTRUCTION SERVICES

GST UPDATE ON CONSTRUCTION SERVICES

This note intends to discuss the special procedure prescribed under GST with respect to payment of tax by registered person supplying service by way of construction against transfer of development right and vice versa. Although the time of supply provisions put forth the time of payment of taxes, the Government has used the powers conferred onto it by virtue of section 148 of CGST Act to override the provisions and issue a special procedure, has issued notification no. 04/2018-Central Tax (Rate), dt. 25-01-2018 and it covers the following class of persons:

(a) registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and
(b) Registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights,

The liability to pay the tax on abovementioned transactions will arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter).

Now the question arises of what will be the value of the transaction undertaken for the purpose of GST. Land owner will be given flats as consideration against development rights. This is barter transaction and value is not defined for the same. Hence, we have to refer the valuation rules for the same. There is no specific valuation rule given for such kind of transaction. It should be noted that now the tax has to be paid at the time of allotment of flats and thus valuation should be considered at the time of such allotment. Valuation rule 27 states that

Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-

(a) be the open market value of such supply;
(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.

Thus the transfer of the flats to the land owner will be governed by this rule and the fair market value at the time of allotment of flats will have to be considered. Arriving at the fair market value of development rights is another headache because there is no fixed criterion to determine its value. If the value of flats transferred is taken, it may lead to over valuation resulting in excess payment of taxes. It is certain to lead to litigations in future and thus proper valuation rules for such transactions should be issued.

The content of this GST update is for educational purpose only and not intended for solicitation.
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GST UPDATE ON CONSTRUCTION SERVICES

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