The West Bengal Bench of the Appellate Authority of Advance Rulings (AAAR) Upholds Ruling on Car Park and Construction Services
In a recent ruling, the West Bengal bench of the Appellate Authority of Advance Rulings (AAAR) has addressed a crucial aspect concerning the taxation of car park facilities in conjunction with construction services. The AAAR upheld an earlier ruling stating that the sale or right to use a car park should not be considered a naturally bundled composite supply with construction services. Consequently, such transactions will not be treated as composite supplies and will attract the goods and services tax (GST) at the higher rate of 18%.
Impact on the Real Estate Sector and Homebuyers
This ruling has significant implications for the real estate sector, particularly for homebuyers looking to purchase properties with parking spaces. Under the current GST regime, from April 1, 2019, non-affordable housing projects without input tax credit (ITC) are subject to a 5% GST rate. However, for ongoing projects, builders have the option to pay GST at the old rate of 12% with ITC, allowing them to set off taxes paid on inputs.
Had the AAAR considered the transaction involving the car park as a composite supply, the applicable GST levy would have been that of the primary supply of construction, which is lower. As a result, the ruling means that purchasing homes with parking spaces will now incur higher costs due to the application of the 18% GST rate.
Ruling Interpretation and its Implications
According to Anita Rastogi, Principal (Indirect Taxation) at Price Waterhouse-India, while advance rulings are binding only on the parties involved in the specific transaction, tax authorities often rely on favorable rulings for future reference. If taxpayers, such as builders, adopt a different approach, it could lead to potential litigation. To avoid such complications, some builders may choose to exercise caution and charge 18% GST on car parking spaces.
In the case considered by the AAAR, the real estate developer argued that the car parking space was provided exclusively to flat buyers, with stamp duty being paid on the entire consideration, encompassing both the apartment price and the car parking space. However, the AAAR bench observed that prospective flat buyers may or may not opt for a car parking space when booking their flat. Consequently, the argument suggesting that the facility of the right to use open parking space is naturally bundled with construction services and constitutes a composite supply did not hold.
Furthermore, the bench highlighted that the “right to use” an open car parking space does not involve the transfer of ownership to the flat buyer, thus making it a separate service in itself. The arguments presented mainly revolved around open car parking spaces, and it is worth noting that the Real Estate (Regulation and Development) Act (RERA) does not include open parking spaces in its definition of a garage.
Implications for Homebuyers and Developers
With the AAAR ruling against treating car park facilities as a composite supply, developers may need to reassess their pricing strategies and consider the potential impact on the demand for parking spaces. The increased GST rate of 18% on car parking spaces could result in higher costs for homebuyers, who will now have to factor in this additional expense when making their purchasing decisions.
The ruling also emphasizes the importance of clear contractual terms and precise documentation for developers and homebuyers alike. It is crucial for developers to ensure that their agreements clearly outline the separation of construction services and car park facilities, avoiding any ambiguity regarding the applicability of GST rates.
Conclusion
The West Bengal bench of the Appellate Authority of Advance Rulings has delivered a significant ruling regarding the taxation of car park facilities in conjunction with construction services. By declaring that the sale or right to use a car park is not naturally bundled with construction services, the ruling establishes that it should not be treated as a composite supply. As a result, car park facilities will attract a higher GST rate of 18% instead of the lower rate applicable to primary supplies of construction.
It is essential for both developers and homebuyers to be aware of these implications and adapt their strategies accordingly. Developers should review their pricing structures, while homebuyers should consider the impact of higher costs when deciding on properties with parking spaces. Clear documentation and adherence to tax regulations will be crucial to navigate the complexities of GST in the real estate sector.