Homebuyers gain from removal of differential tax rates on preferred locations, lowering overall costs

If you’re planning to buy a house in a preferred location, there’s no need to worry about additional GST. The GST Council has clarified that the Preferred Location Charge (PLC) is considered part of the composite supply with construction services.

As of now, the GST rate on non-affordable housing project is 5 per cent, but without Input Tax Credit (ITC).

For affordable housing, the rate is 1 per cent, also without ITC.

One third of the transaction value of an immovable property is attributed to land, which is excluded from GST calculation.

Commercial construction is subject to a 12 per cent GST rate. If a buyer opts for a preferred location, such as next to a swimming pool, sea-facing, or a corner unit, they must pay a Preferred Location Charge (PLC), which typically attracts 18 per cent GST.

The GST Council has now recommended issuing a clarification stating that “location charges or Preferential Location Charges (PLC) paid along with the consideration for the construction services of residential, commercial, or industrial complexes, prior to the issuance of completion certificate, form part of composite supply.

In this scenario, the construction service is the main supply, and the PLC is naturally bundled with it. As a result, the PLC will receive the same tax treatment as the main supply, which is the construction service.”

This means there will be just one supply, which would be treated as composite supply.

A composite supply refers to two or more goods or services that are sold together as a set and cannot be sold separately.

Every composite supply has a principal supply, which is the primary product or service the buyer is seeking. The rate applicable to the principal supply will apply to the entire supply.

This means there will not be a separate GST rate for the Preferential Location Charge (PLC); instead, it will follow the same tax rate as the main construction service.

Harpreet Singh, Partner at Deloitte India, explained that there were favourable rulings under the previous Service Tax regime, which treated construction and PLC as a ‘bundled service.’ However, “a few unfavourable Advance Rulings under the GST regime held that PLC is a separate service, subject to a higher tax rate of 18 percent. This clarification will finally alleviate concerns for all builders by resolving any doubts regarding the taxability of PLC,” he said.

This clarification became necessary due to rulings by the AAR (Authority for Advance Rulings) and AAAR (Appellate Authority for Advance Rulings). In one such case, the Haryana AAAR ruled that Preferential Location Service (PLS) is distinct from construction services and should be taxed at 18 percent GST.

Addressing an application by DLF, the AAAR stated that PLS, collected along with the consideration for the sale of properties, is subject to 18 percent GST if the sale or transfer occurs before the issuance of a completion or occupation certificate (CC/OC).

Earlier, West Bengal AAAR had said that in preferential location service (PLS) in a real-estate project cannot be treated as a part of construction service It also ruled that the same would hold good for the right to use of parking space.

It said that the very transaction mechanism of PLS is that the builder charges a separate consideration from the buyer for choosing a particular floor/location advantage.

Thus, the abatement, which is allowed on construction service with respect to land on which construction is done, cannot be extended to PLS as it is altogether a separate service having no association with land.