Last updated: January 13th, 2020 12:49 PM

GST on Preferential Location Charges

In order to boost the economt, the Finance Minister Smt. Nirmala Sitharaman has come up with various measures which also includes relaxation in GST rates. It is noteworthy to mention here that the real estate sector is also facing various issues under GST. Treatment of ‘Preferential Location Charges’ is one such issue which is taken up and explained in the present article.

Understanding the term ‘Preferential Location Charges’

Before going into the details of the GST taxability of ‘Preferential Location Charges’, it is important to understand the term. ‘Preferential Location Charges’, basically, means an additional charge collected by the builder, from the buyer, for providing additional preference like providing park facing or pole facing flat or providing first floor or top floor flat or providing Vaastu specific flat etc.

Prevailing rate structure of GST in the construction sector

GST was chargeable at the rate of 12% (on value after excluding the value of the land at 1/3^rd of the consideration) on residential dwelling, till 31^st March 2019. The same was 8% in case of notified schemes like Pradhan Mantri Awas Yojana; Rajiv Awas Yojana etc. From 1^st April 2019, in order to boost the real estate sector, the GST rates were reduced to 5% (on value after excluding the value of the land at 1/3^rd of the consideration) on residential apartments. However, GST rates in case of affordable housing were reduced to 1%. It is highly important here to note that the residential construction service, not classified anywhere else, would be subject to 18% GST.

Confusion prevailing in the market

When we go through the present matter, the same involves two types of services, one is construction service, and another is allied service in the form of a preferential location. Under GST, when there is a supply of more than one service, the same can be either classified as ‘Composite Supply’ or ‘Mixed Supply’. In case of composite supply, the supply comprises of two or more services which are naturally bundled. Such services are supplied with each other in the ordinary course of business, and one of such is a principal supply. Whereas, in case of mixed supply, there is a combination of two or more services combined together for a single price. Such services can even be provided/supplied separately, and the combined services are not dependent on each other. It is a major confusion prevalent in the market that whether the construction + preferential location service be treated as ‘composite supply’, considering the construction service as the ‘principal supply’ or the same should be treated as ‘mixed supply’ considering that the same cannot be naturally bundled. The confusion basically prevailed with regard to the taxability of preferential location charges since if the same is classified as ‘construction service’ abatement of the value of land is available, however, vice-versa, if not, the abatement benefit will not be available.

Advance Ruling Judgement

In M/s. Bengal Peerless Housing Development Company, the Authority for Advance Ruling (AAR) West Bengal has dealt with a similar matter. The AAR has held that the services of construction service and allied service (preferential location service) are provided in a bundle, wherein, construction service is the principal service. Accordingly, the entire sale consideration (including preferential location charges) shall be eligible for claiming 1/3^rd abatement towards the value of the land. The said judgment of Authority for Advance Ruling (AAR) West Bengal was challenged by the respective Commissionerate before the Appellate Authority for Advance Ruling (AAAR) West Bengal. After hearing both the sides, AAAR concluded that the builder is charging an additional amount in the form of Preferential Location Charges. Such preferential location charges are a separate service which has no association with the land and hence the abatement cannot be available in respect of such preferential location charges.