The government on Thursday asked builders to pass on the benefit of lower tax under the GST system to buyers by reducing prices and instalments, otherwise the action will be violative of the anti-profiteering clause.

"The builders are expected to pass on the benefit of lower tax burden under the Goods and Services Tax (GST) system to buyers of property by way of reduced prices/ instalments. It is, therefore, advised to all builders/construction companies that for flats under construction, they should not ask customers to pay higher tax rate on instalments to be received after GST imposition," a Finance Ministry statement said here. 

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"Despite this clarity, if any builder resorts to such practice, the same can be deemed to be profiteering under Section 171 of the GST law," the statement said.

The clarification came as the government said that the Central Board of Excise and Customs (CBEC) and states have received several complaints that in view of the works contract service tax rate under GST at 12 per cent in respect of under-construction flats and complexes, people who have booked flats and made part payments are being asked to make the full payment before July 1 or face higher tax. 

"This is against the GST law," the government said.

The construction of flats, complexes, and buildings will have a lower GST as compared with a plethora of central and state indirect taxes under the existing regime, it added.

Under the GST, the full input credit will be available for offsetting the headline rate of 12 per cent. 

"The input taxes embedded in the flat will not form a part of the flat's cost. The input credits should take care of the headline rate of 12 per cent and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed," the statement said.

Central excise duty is payable on most construction materials at the rate of 12.5 per cent. It is higher in case of cement. 

In addition, value-added tax (VAT) is also payable on construction material at 12.5-14.5 per cent in most states. Besides, construction material is also at present liable to entry tax by states. 

Input tax credit of the above taxes is not currently allowed for payment of service tax. Credit of these taxes is also not available for payment of VAT on construction of flats under composition scheme. Thus, there is cascading of input taxes on constructed flats, it said.

"As a result, incidence of central excise duty, VAT and entry tax on construction material is also currently borne by the builders, which they pass on to the customers as part of the price charged from them. This is not visible to the customer as it forms a part of the flat's cost," the statement said.

The current headline rate of service tax on construction of flats, residences, and offices is 4.5 per cent. Over and above this, VAT at 1 per cent under composition scheme is also charged. The buyer only looks at the headline rate of 5.5 per cent. 

"In other cities/states, where VAT is levied under the composition scheme at 2 per cent or above, the headline rate visible to the customer is above 6.5 per cent. What the customer does not see is the embedded taxes on account of cascading and sticking of input taxes in the cost of the flat," it said.