All set for 1st July, big day in Indian taxation history. GST council on 18th July had made it pretty clear that GST will be rolling out on said date. But in past few days we have heard many queries relating to real estate  industries where builders are demanding to pay whole consideration before 1St July or pay additional amount due to increase in tax rates. On which government is demanding builders, to pass on the benefit of the tax credit availed on inputs to buyer and not demand any additional amount or else they have to face the wrath of government’s new weapon (Anti-profiteering clause and related rules). But is it possible for builder to take proper credit of all inputs lying in stock as raw material, WIP or finished stock?

Current Scenario:

Builders have to pay service tax on the service provided at the rate of 4.5% after the abatement provided under notification no 26/2012 as amended by 8/2016. Under the said notification they were not eligible to take credit of inputs used for providing the taxable service. At the time of sale they are also liable to pay VAT under the state VAT laws. Construction services are generally continuous in nature, the point of taxation shall be the date of completion of an event on which whole or part of service is determined as per the contract.

Scenario in GST regime:

Supply of construction services is taxed at 12% with full credit but no refund of the overflow will be given. In GST regime time of supply shall be determine as per section 13 of CGST act read with sub-section 5 of sect 31 of the same act.

Transition Provision:

As per sec 140 of the CGST act, a person can:-

  1. Carry forward the credit of duty and taxes as per the last filled return in current regime subject to fulfillment of condition mention in sub-section 1.
  2. If not registered in any act, then can take credit of duty and taxes of value as mention in invoice, subject to condition of sub-section 3.
  3. And the last resort is to pay tax in GST regime and then take the credit of 40/60 percent of the tax paid subject to sub rule 4 of rule 1 of transition rules. But this window is open for only six tax periods from the appointed day.[Proviso to sub-section 3]

Issues in central indirect taxes:

  1. Since builder is not eligible to take credit, balance of credit in return will be nil. Thus no benefits of sub-section 1 of sec 140 of CGST act.
  2. If builder has invoice on which excise duty paid is mentioned then credit can be taken as per sub section 3 of section 140 of CGST act. But in general goods are purchased from local traders, which cannot issue such invoice. Thus if benefit of credit of the excise duty has to be taken, we have the only option of proviso to sub-section 3 of section 140.
  3. Benefit of the said proviso is available only for six tax periods. Thus to get the maximum benefit of the said proviso builder has to pay all the taxes within this six tax period. Now these taxes can be paid by builder from his own pockets and recover it from the buyers as per the contract or by demanding the whole amount from the buyers during this period.

But what if credit not taken:

If credit not availed then, high rate of tax will be levied on the payment receivable after the appointed day, with no reduction in cost. This will increase the tax liability of the builders. Builders on the basis of decision of Delhi high court in case of “M/S Meattles Pvt. Ltd. vs Hdfc Bank Limited” read with sub-section 9 of section 49 of CGST act can recover the increased liability of tax from buyers.

Issues in state indirect taxes:

Since VAT paid documents are always available, thus builders can take the credit on inputs easily either by sub section 1 or sub-section 3 of sec 140 of state GST act. But route of sub section 3 taken then there is a condition that invoice should not be older than 12 months before the appointed day. Real estate projects take long period, there will be a situation where invoice are older than the said period. On these goods no credit will be given.

Further Issues if want to take credit as per sec 140(3):

The said sub section allows taking credit for the inputs held in stock, contained in WIP and finished goods. As per guidelines issued by ICAI on accounting for real estate, revenue is booked as per percentage of completion method. Now consider a situation where project is completed around 75% but payment is received of 30% of total amount. The difference of 45% is not in stock but payment will be received in future on which tax will be levied. Since there is no stock of input either in raw material or WIP or finished goods builder will not be able to take credit. This will also increase the tax liability.

As of now there are many cases where builder has to call for additional amount from buyers because of increased tax liability but they cannot demand the buyer to pay whole value before the date of payment as decided in contract. I think government has to do a detail analysis on this sector and according take actions so that builder can take proper credit and cost to buyers remain unchanged.

Disclaimer:

Above views are those of the author. In no case it should be considered as professional advice. Readers are requested to take proper consultation before acting.

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Qualification: CA in Practice
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Location: Khandwa, Madhya Pradesh, IN
Member Since: 17 Jun 2017 | Total Posts: 2

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6 responses to “GST: A Builder’s Dilemma”

  1. Sanjay Pokharkar says:

    Section 140(3)A registered person, who was not liable to be registered under the existing law, or
    who was engaged in the manufacture of exempted goods or provision of exempted services,
    or who was providing works contract service and was availing of the benefit of notification
    No. 26/2012—Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage
    dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his
    electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs
    contained in semi-finished or finished goods held in stock on the appointed day subject to
    the following conditions, namely:––
    (v)- the supplier of services is not eligible for any abatement under this Act:.
    This provision takes away builder developer from taking ITC on goods in stock/ WIP as on 1 July who will pay tax @18% after taking abatement of 1/3 of Taxable value of supply of services.

  2. Suresh S says:

    Builder being a Service Provider is not eligible for the scheme as per sub – section (3) of Section 140. The presumptive scheme of 40% / 60% of tax aid on old stock is available only for Traders. Builder cam avail credit only if he is in possession of duty paid documents.

  3. Suresh S says:

    Builder being a Service Provider is not eligible for the scheme under sub- section (3) of Section 140. Presumptive scheme of 40% / 60% of tax paid on old stock applicable only to Traders. Builder can avail credit only if he is in possession of duty paying documents

  4. Manish Sachdeva says:

    Good article, thanks

  5. C's mayur says:

    Deemed credit is only for trader’s

  6. CA. Amit Jain, Khargone says:

    Sir,
    Input tax credit under transitional provisions
    under the proviso to Section 140(3) starts with “Provided that where a registered person other than manufacturer or a supplier of services is not in possession of an invoice or any other document evidencing payment of duty in respect of input” then he will be allowed to take credit.
    But in case of builder he is a supplier of service then he can not take credit under this proviso of 40/60 % credit in respect of stock WIP.
    Only he can get credit when he possess duty paying document. please clarify sir thank you

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