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1. Anti Profiteering Provisions under GST need better clarity

“Profiteering is a pejorative term for the act of making profit by adopting unethical methods.”

Section 171 of the CGST Act, requires a registered taxable person to pass on the benefit of every rupee accrued on account of additional input tax credit or reduced tax rate, to the next level of supply chain. Section 171(2) of the CGST Act requires constitution of an Authority to examine whether input  tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

Rules 122 to 137 of CGST Rules have been framed for the purpose of constituting the Anti-Profiteering Authority and laying down the procedure for the lodging of compliant with the Authority and the prescription of the procedure for the disposal of the compliant.

The crux of the anti-profiteering Rules is-

  • If there is reduction in rate of tax on the supply of goods or services or
  • Benefit of input tax credit is accruing under GST to a registered person
  • Then a registered person must pass on the benefit to the consumers by reduction in prices.

The intention of the Anti-Profiteering is indeed very noble and has been welcomed by all the stakeholders in the GST including the trade and consumers in particular. But unfortunately there are no guidelines/circulars/instructions issued by the Government/CBIC till date which clearly stipulate the mechanism to be adopted by the trade in computing the “profiteering” element earned by the industry which has not been passed on to the consumers.

The industry is totally in dark as to how to approach the issue and even if wants to genuinely pass on the benefit to the consumers the lack of presence of clear cut anti-profiteering rules has come in as a big disadvantage. The industry is not sure whether the in house mechanism which it has adopted to compute the amount of “profiteering” will be accepted by the National Anti-Profiteering Authority (NAA). The Anti-profiteering provisions not only prescribe the refund of the profiteered amount to the consumer but they also vest the anti-profiteering authority to levy interest and penalty on the defaulting industry.

We have read plethora of rulings by the NAA which have finalised the amount of ‘profits” earned by the industry and directed to them to either pass on the benefit to the consumer by reduction in prices or refund to the consumers. Many NAA orders have been assailed by the trade in the High Courts which have subsequently stayed the orders. Most of the stay orders have been granted due to lack of methodology to compute the real benefit.

There seems to be a proposal under consideration by the GST Council to extend the tenure of the Anti-profiteering authority by one more year till 2020. It is high time now that the CBIC lays down clear cut guidelines. This clear cut mechanism will go a long way in not only ensuring that the industry does not enrich itself unduly and that all the stakeholders including the trade, consumers and the government are well informed about the computation mechanism.

All the major Chambers of Commerce, Trade Associations, Tax Professionals in their individual capacity as well as through their associations have been repeatedly urging the government to lay down clear cut guidelines to compute the “profiteering” and the GST Council should direct the CBIC to take this issue on top priority.

2. Retrospective reversal of ITC by Real Estate Sector

The Real estate companies are required to reverse the proportionate ITC earned by them till 31.03.2019 as per the formula laid down in Annexure I & II of Notification No.03/2019-Central Tax (Rate) dated 29.03.2019  in case they opt for the concessional rate of GST output @%5 on non-affordable and @1% on affordable residential apartment.

As per GST law, a registered person is entitled to take ITC to the extent it attributes to taxable supplies including zero-rated supplies. Correspondingly, ITC attributable to exempt supplies needs to be reversed in the prescribed manner.

The moot question that needs to be answered is whether construction services would constitute to be an ‘exempt supply’ in the first place or not? As per Section 2(47) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), an exempt supply means a supply attracting nil rate of tax or wholly exempt from tax. An exempt supply also includes a non-taxable supply within its ambit i.e. a supply not leviable to tax under GST.

It is pertinent to note that the above definition only includes supply which is wholly exempt from tax. On the other hand, construction services are not wholly exempt from tax but are partly exempt. This is in contradistinction with pre-GST regime wherein the definition of ‘exempted service’ specifically covered service whose part of value was exempt subject to non-availment of credit. The extension in definition of ‘exempted service’ in pre-GST regime took place with effect from July 1, 2012; however, such services / supply does not qualify as ‘exempt supply’ under the GST regime.

The reversal of ITC in case of construction services can be triggered only when the statute contains a specific provision to that effect. In the instant case as well, a statutory provision dealing with reversal of ITC in respect of partly exempt supply is conspicuously missing for the period till 31.03.2019.

It is submitted that the GST council revisits this position of requiring the real estate companies to reverse the ITC which has been rightfully earned by them till 31.03.2019. The proposed mechanism seeking reversal of ITC on procurements made by construction companies till March 31, 2019, cannot be legally enforced in view of absence a specific provision in the Statute.

However, prospectively, Section 11 of the CGST Act and Section 6 of the IGST Act empower the government to grant full or part exemption subject to conditions, one of which can be ITC reversal. Thus, going forward, non-availability of ITC on procurements post April 1, 2019 is valid.

3. Retrospective amendment of Rule 42 and Rule 43 of CGST Rules

Rule 42 (and Rule 43 as well) have been drastically amended with effect from 1-4-2019, to provide for reversal, on the date of the completion certificate, of the ITC availed by the Developer/Builder from the date of inception of the residential project or 1-7-2017 whichever is later.

It is clear that Rule 42 has been amended with effect from 1-4-2019 to plug the obvious lacuna in the CGST Rules, 2017 regarding the lack of a procedure for reversal of ITC attributable to unsold flats as on the completion date (i.e. O.C). In terms of this amended Rule, the credit pertaining the construction of flats which have been booked/sold and those that are yet to be booked, to be worked out on the basis of the carpet area, cannot be considered for purposes of arriving at the figure under ‘T4′ for purposes of computing the reversal under the amended  Rule 42.

Most Developers have been availing of ITC on their ongoing projects for the period 1-7-2017 to 31-3-2019, on the basis of the statutory provisions contained in the CGST Act, 2017 (Section 17) as well as, the CGST Rules (Rule 42), by including the credit attributable to the un-booked flats as well as the booked flats, under ‘T4′ of the then prevailing Rule 42. Now, in terms of the amendments carried out in Rule 42 with effect from 1-4-2017, this methodology is no longer possible. The question that would arise is, whether, the amended Rule 42 can be retroactively applied for the period prior to 1-4-2019?

It is the settled legal position, that since applying the new methodology for reversal of ITC in terms of Notification No. 16/2019-Central Tax dated 29-3-2019 in Rule 42 is not a clarificatory provision but a substantive provision resulting in an incremental tax liability for Developers and Builders, the amended Rule 42 cannot be retroactively applied. Attention is invited to the decision of the Hon’ble Supreme Court in Union of India & Ors vs Martin Lottery Agencies 2009-TIOL-60-SC-ST, wherein, it was categorically held that a substantive explanation cannot be retrospectively applied.

Another import issue to remember is that, the amended Rule 42 is seeking to recover the input tax credit that has already been rightfully availed by the Developer/Builder and this is impermissible in law, in terms of the decision of the Supreme Court in the celebrated Dai Ichi Karkaria case (2002-TIOL-79-SC-CX-LB).

It is submitted that the GST Council should immediately direct the CBIC to issue necessary clarification on both the above issues of retrospective reversal of ITC as well change in formula for computation of unavailable ITC also retrospectively. As in the past the CBIC can issue Removal of Difficulty order (ROD) under Section 172 of CSGT Act to clarify that the above changes would be prospective in nature. This is required in the larger interest of the trade in particular and would reduce the unwanted and unnecessary litigation piling up in various judicial forums on an issue which has already been decided by the Apex Court.

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May 2024