GST vis-a-vis Real Estate Builders and Civil Engineering Construction Contractors

Notification No. 20/2017- Central Tax
(Rate) New Delhi, the 22nd August,
2017

Natural’ bundling implies that the recipient of the supply has no option to decide whether he wishes to receive the various elements of the supply being provided as a bundled supply. Whereas, if such an option to decide is possible then the supply cannot be said to be ‘naturally’ bundled and such a supply will not be ‘composite’ supply. Therefore, clarifications required in for inclusion of value of maintenance charges as a composite supply.

Execution of works includes multiple activities in its ambit and to classify it either as mixed or as composite supply is an onerous task and prone to lots of litigations.

Further, this provision also blocks credit in situation where works contract services are used as input for providing output construction services. This blockage needs to be removed.

2. Credit blockage if works contract service is used to provide construction service should be removed.

Government Entity” means an authority or a board or any other body including a society, trust, corporation,
i) set up by an Act of Parliament or State Legislature; or
ii) established by any Government,
with 90per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.“

Lack of Uniform methodology for assessment of pre GST taxes

Title

Provisions of the Law

Issues being faced

Effects on Indian Economy

Our Suggestions

Coverage of Supply

1. As per section 7 of the CGST Act, supply includes all forms of supply of goods and/or services.

2. As per Recommendations made by GST council in its 23rd Council meeting, a Circular No. 21/21/2017-CGST was Issued to extend the clarification for inter-state movement of rigs, tools and spares, and all goods on wheels [like cranes].

1. Taxability of movement of capital goods within the same business including branch transfers will cause lot of financial hardship. Capital goods like machines, cranes etc. require huge capital deployment and levy of tax when they are moved for business purposes will prove to be a huge financial burden for entities owning these and moving them from one place of business to another.

2. Lack of proper clarification will lead to mis-interpretation of the circular and may create disputes between the officials and the entities.

3. A lot of hardship to business entities may result into non-compliance by them and thereby reducing the tax base of the Govt

Non-compliance may increase due to hardships in working capital management reducing Government’s tax base.

1. The supply of capital goods (whether to own place or to the customer) be kept outside the purview of GST, and only the leasing/ renting/ transfer of right to use the asset be subject to tax.

2.a. Suitable circular needs to be issued.
b.Circular should also cover taxability in case branches belonging to same entity, located in same or different States and having separate GST number.

Credit Notes

Section 34 of CGST Act – Credit and Debit Notes

Credit notes can be issued in two circumstances viz –
a. Return of goods
b. Change in price of existing supply of goods or services
However, law does not permit issue of credit note for cancellation of service.

Mutiple treatments will result in non-compliance, huge litigations and reduction in tax base.

Suitable amendment is required.

Time of Supply

Section 13 of the CGST Act indicates the provisions for determining the time of supply in respect of services.

As per the recommendation made by the GST Council in its 23rd meeting, exemption have been granted on payment of GST on advance receipt of goods, however, in case of services, the same is still continued and GST is payable on receipt of advances.

In case of long term advances of contracts, where mobilization advance is paid to the contractors and the recovery of such advances is also done proportionately from the invoices being raised. Thus, this results in blockage in working capital.

Working capital loss to businesses will result in tax evasion and non-compliance.

Exemption on payment of GST on advances should also be extended to advances received on account of supply of services.

Refund of unutilised credit on account of inverted rate structure

Section 54 of CGST Act and Rule 89(5) of CGST Rules

1. Section 54 allows refund of unutilised credit on “inputs”. The word “inputs” is not defined in the Act. Reading it with Rule 89(5), we may conclude that it intends to allow refund of input goods and input services.

2. Rule 89(5) prescribes formulae for calculating eligible refund claim. The formulae is –

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods

It seems that this formulae is meant for claiming refund of excess credit due to inverted rate structure for supply of goods only. However, Act allows refund for both supply of goods and services. Further, if we go through this formula then, it mentions adjusted total turnover which includes turnover for goods as well as turnover for services.

We have to guess the applicability of refund provisions. There is no clarity.

Rule being inconsistent with Act may get struck down. Court’s may allow refunds with retrospective effect. Interest cost and cashflow issues may arise.

Suitable amendment and clarification is required.

Transitional Provisions

Section 140(3) and 140(6) of CGST Act

Credit on stock held cannot be claimed if invoice is earlier than 12 months from the appointed day.

Rigid conditions in credit availment will attract non-compliance and govt.’s tax base may reduce.

This provision restricts seamless flow of credit. Therefore, suitable amendments should be made to remove it.

Input Tax Credit

Section 17(5)(a) of CGST Act

Credit can be claimed for motor vehicles if they are used for transportation of goods. However, some machineries used in construction sector falls in the category of motor vehicles. Hence, those vehicles cannot be classified as vehicles for transportation of goods and contractors and builders are lossing its credit. So we request you to issue a clarification that credit should be allowed for such plant and machineries.

Defeats the purpose of seamless credit. Further, high costing may increase black money generation in this sector.

-Capital Goods used solely for providing taxable service.
-Used only during construction activity.
-Never used for plying on the road.
-GST liability at the time of sale of such machinery. Therefore if ITC denied, then double taxation.
-Other plant & Machinery allowed ITC u/s 16.
-Defeats the purpose & fundamental of GST law.
-ITC of Motor Vehicles used in transportation of goods is admissible u/s 17(5)(a) exceptions.

Compliances

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1) Lack of Clarity on GST Provisions (Rules and Regulation)
2) Increased compliance, with increase in the number of returns to be filed annually
3) Problems in GSTN Portal

1. Return of all type of GST for all categories of assessee should be made quarterly..
2. While filing GSTR 3B monthly and thereby paying tax monthly but differing/extending dates of filing GSTR-1 and GSTR-2, does not allow assessee to take correct quantum of ITC. Hence end up paying more out put tax.
3. Mandatory scrutiny should not be done by Dept for all assessee claiming tax credit in TRANS-1 of more than one crore. Instead this should be done at random and in extreme cases where credit shown is more in proportion to turn over.
4. No penalties for the returns filed up to December-2018, by which time majority confusion for GST should get settled. Only interest on delayed payment may be collected.
5. Interest rate also should be brought down to 15% from 18%.
6. Process of advance ruling should be made faster. There should be some time frame/limit for giving ruling.