Pre-Union Budget 2018 presentation GST given for construction sector by Builders Association of India through CA Sandesh Mundra, Chairman GST Committee of Builders’ Association of India.

Article discusses GST vis-a-vis Real Estate Builders, GST vis-a-vis Civil Engineering Construction Contractors , GST vis-a-vis Real Estate Builders and Civil Engineering Construction Contractors and Direct Taxes vis-a-vis construction industry.

GST vis-a-vis Real Estate Builders

Title Provisions of the Law Issues being faced Effects on Indian Economy Our Suggestions
Valuation Section 15 – Value of taxable supply read with Notification No. 11/2017 dated 28.06.2017 – Valuation mechanism for deduction of land value is improper.

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

Explanation 2 of the said Notification prescribes that land value shall deemed to be 1/3rd of total value. Two issues arise:-
1. The deduction is prescribed through Notification which is not proper. The similar situation arose in Service tax and the deduction mechanism was held unconstitutional in case of Suresh Kumar Bansal vs Union Of India & Ors. on 3 June, 2016.
2. This deduction seems to be compulsory. However, in case of Joint Development Agreements, bifurcation is available for land value and construction value.
3. As per Notification No. 20/2017, lower rate of 12% is prescribed for works contract services used for affordable housing projects. However, 1/3rd deduction for land value is not available in this case. So it makes no difference whether we claim lower rate or not because for construction services, the rate of tax effectively is 12% after land deduction.
Court may struck down deduction mechanism resulting into high litigation cost. Further, benefits given to affordable housing project will be of no use. 1. Proper deduction mechanism should be prescribed in Valuation rules.
2. Suitable clarification should be issued and this deemed deduction should not be a compulsion as at some locations, land value forms 60% of total value. Hence, compulsory deemed deduction should be avoided.
3. We request you to allow deduction of land in case of works contract used for affordable housing projects, where consideration includes land value.
Valuation Schedule II, Entry 5(b) Tax will not be levied if unit sold after first occupation or completion certificate, which ever is earlier. However, how to substantiate first occupation is no where defined. Until the term first occupation is defined, everybody will try their own means to substantiate first occupancy. Revenue will be at a loss with respect to tax amount and further litigation cost. Suitable clarification is required.
Coverage of Supply Section 7 Consideration to builder includes maintenance charges. Taxability of same is not clarified. However, the same should be considered as naturally bundled.

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.

If maintenance charges are not treated in bundle then, developers will not disclose it separately. So for better disclosure, it should be clarified. Suitable clarification is required.

GST vis-a-vis Civil Engineering Construction Contractors

Title Provisions of the Law Issues being faced Effects on Indian Economy Our Suggestions
Works Contract on movable property Section 2(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair,
maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is
involved in the execution of such contract;
Definition of works contract covers only immovable property. Hence, any works executed on movable property has to be classified under composite supplies or mixed supply, as the case may be.

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.

Department may have to incure litigation cost. To remove this ambiguity, we request you to take one of the following measure viz.-
a. To include works executed on movable property in the definition of works contract. Or
b. To provide guidelines to classify works contract as composite or mixed supplies.
Rate of tax Notification No. 20/2017- Central Tax (Rate) dated 22.08.2017, Notification No. 24/2017 – Central Tax (Rate) dated 21.09.2017 and Notification No. 31/2017 – Central Tax (Rate) dated 13.10.2017. These notifications allow lower rate of 12% on specified works contract services provided to specified Government orgainisations. However, only the contractor will be eligible to take benefit of lower rate and the sub-contractor will still be liable to pay tax @ 18%. Resultantly, contractor will pay output tax of 12% and claim credit of tax charged by sub-contractor @ 18%. Huge unutilised credits will create issues in contractor’s fund flow. Discriminatory treatment for contractors and sub-contractors is in violation of Article 14 of the Constitution. Petitions are already admitted on this issue by two High Courts. If the case goes in petitioner’s favour then, it will have retrospective effect as per Article 12. In such cases, court may order refund by the department, adversely effecting cashflow’s. Lower rate benefit granted to contractors should be extended to sub-contractors also.
Input Tax Credit Section -17(5)(c) – (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
ITC of tax charged on works contract service is blocked for end user of such service. For example – If Mr. A receives works contract service for renovation of his factory, which is used by him for production of taxable goods then also he is not entitled to claim credit of such tax.

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.

Defeats the purpose of seamless credit. Further, loss of credit will increase the costing and increased cost may increase black money generation in this sector. 1. Credit of works contract services if such services are related to business premise should be allowed otherwise it will defeat the purpose of seamless credit. Hence the clause needs to be suitably amended to cover those cases where structure is used for residence purpose.

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

Lower rate Notification No. 9-2016 dated 1/3/2016 in entry 12-A & Notification No. 9-2016. St. dated 1/3/2016 in entry 14 A In earlier regime, exemption was provided for service Provided to the Government, Local Authority or a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of monorail, metro rail, ports and air-ports.
But from 1/7/2017, GST @ 18% is applicable to all the above works.
Negative effect on infrastructure development. We request that the rate should be reduced and this service should be taxable at lower rate of 12%.
Lower rate GST on single residential unit The exemption are given only to pure labour contracts of construction , erection, commissioning, installation, completion, fitting out, repairs, maintenance, renovation or alteration of the structure or any other original work pertaining to Individual house construction under the PMAY Government’s effort to provide house to all sections of society will go in vain. GST @ 12% will adversely effect prices in real-estate sector. All the contracts are normally in the nature of works contract and not of pure labour contract. The exemption should allow the works contract service also. Further Sub-contractor providing exempt service should also be exempted
Exemption Government works undertaken prior to 1.7.2017 Definition of Government Entity does not cover cases of NBCC where the stake is 75%

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

Negative effect on infrastructure development. We request that the definition of government entity should be relaxed to cover entities with more than 51% government control.
Lower rate Notification No. 20/2017-Central Tax (Rate) New Delhi, the 22nd August, 2017 – Works contract service for construction of roads Presently, construction service for roads is taxable at the rate of 12%. This rate is very high for taxing a basic infrastructure project. Therefore, we request you to reduce the tax rate at 5%. Negative effect on infrastructure development. We request you to reduce tax rate.

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

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
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.
Direct Taxes vis-a-vis construction industry
Taking some of the benefits granted by the Finance Act, 2017 to logical ends
  • Reduced holding period for land and building : to stimulate housing sector : need to give consequential effects
  • Section 2(42A), 54, 54B, 54D, 54F
  • Amended sec. 2(42A) : Reduced holding period of 24 months from 36 months
  • Consequential effects for new asset to be provided u/s. 54,54B, 54D, 54F

Suggestion: Amend sections 54, 54B, 54D, 54F to bring in alignment with holding period u/s. 2(42A)

  • Section 2(42A) amended for land or building, while many real estate transactions place on leaseholds, tenancies. To serve spirit of amendment, all immovable properties should be included to stimulate housing sector.

Suggestion: Amend further section 2(42A) to include all immovable properties.

  • Tax on unsold properties held as stock in trade : Set off limit of Rs. 2 lakhs applied. Ref. : Sections 23(5), 71(3A)
  • New section 23(5) taxes notional rental income from properties held as stock in trade after prescribed period. Mainly for builders, developers.
  • In many cases, the builders pay interest on funds borrowed for construction. Eligibility u/s. 36(1)(iii) as business expenditure.
  • New section 71(3A) provides ceiling of Rs. 2 lakhs for set off of income under the head house property against any other head of income.
  • Effect of combined application of sections 23(5) and 71(3A) would mean double sufferings by the builders, developers.

Suggestion: Amend section 71(3A) to exclude provisions of section 23(5).

  • Taxation Joint Development Agreements : Relaxation granted to individuals and HUFs
  • In towns and cities, due to land availability being scarce, more developments are happening through vertical expansions via JDAs. Tax on most JDAs are litigated w.r.t. time of taxation and/or value for taxation.
  • While relaxations by F. A. 2017 are welcome, the equity lies in favour of all joint developments, for capital gains as well as for stock in trade and for all types of assesses. This will encourage real estate joint developments.
  • The new section incorporates provisions of section 50C but only partly with the result that relief provisions to assesses aggrieved against higher stamp valuation are not applied.
  • While holding constitutional validity of section 50C the courts have also taken cognisance of relief remedies built in the said section.
  • For capital gains inter alia from JDAs, the exemption provisions are contained in section 54, 54F, 54EC, 54EE. However, the time limits in the said sections have not been extended w.r.t. Section 45(5A).

Suggestions: Extend scope of section 45(5A) to all assessees and to transfers of capital assets as well as non capital assets. Make section 50C fully applicable to section 45(5A). Extend time limits of section 54, 54F,54EC, 54EE in alignment with section 45(5A).

  • Incentive to Affordable Housing : Section 80IBA:
  • Finance Act, 2016 granted benefits for affordable housing to housing projects approved on or after 1st June, 2016. Finance Act, 2017 has further relaxed some of the relevant conditions.

Suggestion: Clarify that amendments by Finance Act, 2017 will also apply to projects approved on or after 1st June, 2016.

  • Taxation of Consortiums/JVs/AOPs : Ref. Sec. 40(ba), CBDT Circular dated 7th March 2016, Sub head : Section 40(ba)
  • Substantial number of real estate transactions are structured as JVs.
  • Some of these joint ventures become taxable as AOPs.
  • While in case of a partnership, u/s. 40(b), remuneration, interest to partners are allowable deductions subject to prescribed ceilings, in cases of AOPs, section 40(ba) does not allow such deductions.
  • In practice, in many cases, the JV partners provide specific services, specialised services. Therefore, there such deduction may be allowed subject to fair market valuation of such services.

Suggestion: Amend section 40(ba) to allow remuneration, interest to JV partners. Making the same subject to section 40A(2) with protect revenue’s interest.

  • Cicrular : CBDT vide Circular dated 7th March 2016, has clarified regarding the Taxability of Consortium members.
  • Industry has welcomed the Circular as it lends clarity to taxation of JV partners. One of the requirements of Circular is each member of JV is independently responsible for executing its part of work through its own resources. Practically, in many cases, the works may be subcontracted to the JV partner. The independence needs to be seen w.r.t. who bears risk and rewards of its part.

Suggestion: Amend circular or issue clarification.

  • TDS :
  • JV/AOP members should be allowed to declare to the contractee under rule 37BA, that the income of the Joint Venture is taxable in hands of the individual members. Such declaration should enable the contractee to issue separate TDS certificates in the name of the partners.

Suggestion: Issue clarification.

  • Section 44AD : Presumptive taxation at 8%: Extend to LLPs also.
  • Section 44AD relating to presumptive taxation applies only to small businesses carried on by resident Individuals, HUFs and Firms excluding LLP. More and more businesses of real estates are carried on now by LLPs in place of partnerships. The purposes of ease of taxation will be better served by extending the benefit to LLPs also.

Suggestion: Extend 44AD benefit to LLPs also.

  • Tax Deductions at Source : Lend ease by introducing continuing credit system :
  • One of the main issues that keeps the income tax law away from ease of doing business is mis matches in TDS due to differences in accounting by the deductor and the deductee.
  • If a simple rule is introduced that once tax at source has been deducted paid into government treasury, then the deductee may claim deduction in any year(s) of his choice. Introduce pass book system to do this.

Suggestion: Once tax deducted, allow assessee to claim deduction in any year(s). Introduce a pass book system.

  • Capital Gain Exemption for investment w.r.t. Sections 54, 54F:
  • Section 54 and 54F provided tax exemption for investment into “a” residential house. Finance No. 2 Act, 2014 replaced “a residential house “with “one residential house”.
  • Same litigations continue as for e.g. 4 flats can comprise in “a house” as well as “one house”.

Suggestion: Amend section enabling CBDT to prescribe guidelines w.r.t. “one” residential house.

  • Taxation of Retentions money/margin money in the hands of contractors / sub-contractors :
  • Law has settled that retention money becomes taxable only when the concerned obligations under the contract are fulfilled or contingencies get decided.
  • However, ICDS III relating to construction contracts, provides for taxation of retention money also on percentage completion basis in a manner that every year part of retention money also becomes taxable. This will result into lot many litigations. Further, application of section 5 takes place first and then section 145.

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2 responses to “GST vis-a-vis Real Estate Builders and Civil Engineering Construction Contractors”

  1. vswami says:

    RIDER
    To Admn. My honest suggestion is that anyone who for his own reasons wishes to find and spare time on such write-ups , not being of contextual relevance, need to at least take pains to make self informed about the current state of related affairs; so as to be of useful read to the subscribers to thisd website !

  2. vswami says:

    IMPROMPTU
    AN ALERT (for the common GOOD) : If at all so called for , and mind to, anyone need to go through , diligently, on a point to basis, with a fine toothed comb; so as to make an independent appraisal of each and every ‘suggestion’ volunteered in the CA’s write-up. And, for obvious reasons, ideally by the eminent Experts having a thorough knowledge and good exposure in the field.

    The first and foremost point of grave doubt that instantly arises in one’s mind is, -OPEN TO CORRECTION IF THE FACTUAL POSITION AS OF NOW BE ANY DIFFERENT :- is not such an analysis rather too premature at this stage; for , so far as one knows, the idea of levying GST on say, among others, so called ‘under construction contract’ itself is a matter on which a decision to go ahead has thus far remained to be taken by the Govt. If so, any useful analytical study and eminent suggestions should be put forth / shared, only after the draft proposals have been finalized and are made available for public comments/contribution.
    According to the latest media Report,, the FM is expected to make certain vital proposals in the forthcoming Budget in view of the largely prevailing outcry against the GST Woes !

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