GST Rates on Construction Industry- An Analysis

A Kerala based reputed builder advertised that they have apartments ready for sale. The hash tag in that advertisement was NO GST.

In the same newspaper there was another piece of news which stated that a Delhi based builder by name Emmar MGF, an associate of UAE based construction giant was found guilty of violating the Anti-Profiteering provision of the CGST Act 2017 and directed to pass on a total sum of 13.5 crores to home buyers and also directed to reduce the prices of unsold flats in the Emerald Floor Premier, commensurate with the benefit of input tax (ITC) availed by the builder.

The above information found in the newspaper has caused confusion in the minds of several logical thinkers as the above are contradicting to one another.

In the first advertisement, the builder has advertised to sell homes without GST and in the second news item, a huge sum is bundledupon a builder as penalty by an authority under GST Law and directed to return to clients who have purchased apartments from the builder and also directed to reduce the price of unsold flats.

The logical question that arose here was how a builder can avoid GST in a sale transaction of an apartment. Is this legal. Is this false information to mislead buyers?

The second logical question is how GST authorities can involve in the pricing of the product which is a prerogative of the vendor, inthe present case apartments. If this news istrue, will that not amount to infringement of fundamental rights of a business entity to take business decisions? How can government interfere in product pricing and costing?

In India real estate sector is the largest employer after the agriculture. Presently, sale of immovable property (land and building) is out of the purview of the GST law. The exclusion of a constructed property from the ambit of GST happens when either of the two conditions is satisfied. In the absence of the following two conditions GST shall apply to under construction properties.

1. Issuance of completion certificate by the competent authority

OR

2. After its 1^st occupation.

 Whichever is earlier.

GST cannot be levied upon land which is a state subject and is an immovable asset. The schedule III of the CGST Act 2017 talks about activities or transactions which shall be treated, neither as a supply of goods nor as a supply of service. In schedule III item number 5 says “sale of land and, subject to clause (b) of paragraph 5 of schedule II, sale of a building shall be treated neither as a supply of goods nor a supply of service.

Schedule II reads as follows: –

5(b) Construction of a complex, Building, Civil Structure or part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certification, where required by the competent authority or after its first occupation whichever is earlier.

5(2) of the schedule II further clarifies that the expression “construction” included additions alterations replacements or remodeling of any existing Civil Structure.

In nut shell under construction properties shall come within the ambit of GST. Once construction is completed and completion certificate is obtained or occupancy happens, an apartment falls out of the ambit of GST and as in the case of any immovable property title is transferred in a sale transaction involving stamp duty and registration charges.

So going back to the advertisement of the builder with the catching word NO GST, what he meant is that he is selling a completed property having an occupancy certificate. As in such case, the apartments come within the definition of immovable property and the same is excluded by schedule III of the item 5 of the CGST Act 2017.

Whether or not this NO GST tag in the advertisement does honestly mean complete tax benefit to a buyer?The answer definitely is a big NO.

The price which the builder would be willing to transfer title of an immovable property, an apartment in this case consisting of undivided share of land and the agreed built up area is inclusive of all taxes paid for the inputs used for the construction. Since in such sale the builder is not entitled to claim any input tax benefits,(taxes paid for inputs used for paying the output tax) the net effects of the sale price could be almost similar to an under construction property where GST is also added to arrive at the gross consideration. In the case of an under construction property, while GST is added to arrive at the gross consideration, the builder enjoys the benefit off setting his output tax liability from the taxes paid for inputs such as steel, cement, tiles, doors, bathroom fitting, switches, fans etc. Which are estimated as 45% of the cost.While the builder is given the benefit setting off output tax with the input tax, the GST law requires the builder to pass on that benefit to the final consumer by way of commensurate reduction in prices.

In order to fully comprehend why national Anti-Profiteering Authority directed Emmar MGF to pass on an amount of 13.5 crore to home buyers, we need to understand how the tax system operated during the pre GST and post GST period.

PRE GST TAX SYSTEM

COSTING EXAMPLE PRE GST

Tax structure when GST was introduced

COSTING EXAMPLE GST

Thus with the implementation of GST the net effect of taxes on under construction properties should have been neutral or negative, as under GST, the full amount of input credit would be available for setting off the headline rate of 12%. As a result, the input tax embedded in the under construction property should not form part of the cost. However, builders started charging more amount as sale consideration just by comparing the headline rate of 12% GST with 6.5%(4% service tax and 2% VAT) in the pre GST regime. In other words builders were not properly costing their product and passing the benefit of input tax availed by them to be final consumer resulting in higher rate of sale price. This entire exercise was defeating the anti-inflationary theory envisaged in introducing GST.

In this MGF case one of the apartment buyers who booked flat on 24.01.2010 and had paid 10 installments prior to the GST coming into force, (July 2017) filed a complaint dated 07.01.2019 before the standing committee of Anti-profiteering Authority under rule 128 (1) of the CGST rules.

National Anti-profiteering Authority (NAA) is a statutory mechanism under GST law to check the unfair profiteering activities by registered suppliers. The formation of NAA came into being when the 22^nd GST council decided to reduce the rates of large number of items.

The object behind NAA is to ensure that the reduction in the rate of tax or the benefit of input tax credit is passed on to the final consumer by way of commensurate reduction in prices. This is the only way cascading effect of taxes are not saddled on the final consumer and thereby control inflationary impact on the overall economy.

In this instant Emaar MGF case, the NAA concluded that there was profiteering by the Emaar MGF in respect of Flat No. EFP24-050 in their Emerald Floor Premises. The Emaar has not passed on the benefit of input tax (ITC) by way of commensurate reduction in the price of Flat.

In a similar case, consumer giant Johnson & Johnson was found guilty of profiteering the tax advantage when the rate applied in its products were reduced to 18% from 28%.

The quantum of money arrived was Rs.230 crore. Since the buyers cannot be identified Rs. 230 crore was asked to deposit to the consumer welfare fund.

The 35^th meeting of the GST council extended the term of NAA up to Nov 2021. The GST council has also sought to impose 10% penalty on a company if the profiteered amount quantified is not deposited in 30 days.

National Anti-Profiteering provision is criticized for not having prescribed a methodology based on which one could determine whether or not there has been profiteering by an enterprise. The law is also silent of a statutory appellate mechanism to deal with challenges to orders of NAA.

What is meant by the term commensurate as used in section 171 of the CGST Act is silent as to whether the same has to be an absolute figure of price reduction or would it be enough if the reduction is within a range?.

The 34^th GST council held on 19^th March 2019 decided to lower the rates in the real estate sectors as an impetus to revive the slagging real estate sector which is the second employment producer in India. The GST council also was convinced that the rate reduction in the GST system did not benefit several final consumers as in the case of the complainant in the Emaar MGF case.

In the newly reduced rate scheme, builders are given one time option either to continue to pay at the old rate of 8%-12% with input tax credit for ongoing projects were construction and actual booking both have started before 01.04.2019 but which has not been completed by 31.03.2019.

NEW RATES

1% without input tax credit on affordable homes.

Affordable homes are houses having 60 sqmt in non-metro/90sqmt in Metro and value not exceeding Rs. 45 Lakhs.

5% for all houses other than affordable houses. There shall not be any input tax credit available.

The promoters could apply new rates only if 80% of the inputs and input services are purchased from a registered vendor. In case the promoter decides to purchase from unregistered suppliers, the tax for such purchases shall be paid by the promoter at the rate of 18% or higher rates on reverse charge mechanism. Reverse charge is a mechanism under which the recipient of goods or services is liable to pay tax instead of supplier of goods or services.

In case of transferable development rights and long term lease by a landowner to a developer shall be exempted subject to the condition that the constructed flat are sold as under construction property and applicable GST is paid to the government. In case flats are sold after issuance of completion certificate. The exemptions shall be withdrawn and the same shall be taxed at 1% in cases of affordable homes and 5% in other category. The liability to pay tax on transferable development right and long term lease shall be shifted to the promoter.

COSTING EXAMPLE IN THE NEW AMENDED GST RATE

Thus the impact of New rates is lower than the Pre GST regime as the cascading effect of supply by the manufacturer through wholesaler (excise duty in Pre GST regime) is absent almost similar to the Pre GST rate, except that the cascading effect of excise duty is absent.

Government is aware that the real estate sector is the primary sector in India where maximum amount of tax aviation and cash generation takes place despite the inclusion of various stringent provisions in the direct tax code such as Section 269 ST. Government is considering bringing real estate under the ambit of GST and would result in consumers paying one final tax on the property.

Prathap Pillai | Advocate | High Court of Kerala