One of the fundamental features of GST is seamless flow of input credit across the chain (from the manufacture of goods or provider of services till it is consumed) and across the Country. Input Tax Credit (ITC) is the backbone of the GST regime. GST is nothing but a value added tax on goods & services combined.
In this article, an attempt is made to analyse one very important aspect of GST and its implication on the real estate industry (on builders).
Taxability and exemption
According to paragraph 5(b) of the Schedule-II of the CGST Act, 2017 read with section 7 of the CGST Act, 2017, construction of a complex, building, civil structure or a 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 certificate, where required, by the competent authority or after its first occupation, whichever is earlier is to be considered as supply of service.
Accordingly, if entire or part of the consideration is received before, earlier of obtaining the completion certificate or first occupation certificate then such activity is to be considered as supply of construction of immovable property service.
In other case, if entire consideration is received after, earlier of obtaining the completion certificate or first occupation certificate then such activity is to be considered as neither supply of goods nor supply of services.
According to paragraph 5 of the Schedule-II of the CGST Act, 2017 read with section 7 of the CGST Act, 2017, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building shall be treated neither as a supply of goods nor a supply of services. Therefore, sale of immovable property (flats/complex) after receipt of completion certificate or occupancy certificate by the builder shall not be subject to GST.
Relevant provisions for Input Tax Credit
3. 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;
4. goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
**************Rest are not relevant******************
Analysis of ITC provisions from the point of the Builder
Section 16(1) of the CGST Act, 2017 provides that a registered person can take the input tax credit of tax paid on procurement of goods and/or services to be used or intended to be used in the course or furtherance of the business. Therefore, the tax paid on inputs utilized for construction of residential or commercial complex should be available to builder.
But for the purpose of availment of ITC, section 17(5) of the CGST Act, 2017 overrides to the rights of the registered person to claim credit in certain cases.
Accordingly, the 3 major restrictions applicable to builders are-
Accordingly, from the combined reading of the restrictions, as given in section 17, and time limit to avail credit, as given in section 16(4) of the CGST Act, 2017 as discussed above, following points can be drawn for the builders:
1. The builder can’t avail input tax credit till the time he finds a buyer otherwise it will result in constructing in his own account.
It may be noted that credit shall be allowed only to the extent of outward taxable supply or sale of flats to the respective buyer and not on the whole project.
2. The builder can’t take input tax credit after the time period prescribed under section 16(4) of the CGST Act, 2017, i.e., approx. 1 year from the date of invoice of goods and/or services.
Accordingly, for instance, if a builder of a project which normally takes long period, let’s say, 5 years, to complete and he finds the buyer at the end of the 4th year, then in that case builder can avail the credit only in respect of the goods and/or services purchased in the 3rd year beginning only and balance credit for the 1st year and 2nd year will lapse.
3. Builder is required to reverse the common credit which is attributable to the portion of land during the sale of such constructed property.
4. It is important to note that if the entire credit is availed from the start of construction till its completion with the hope of prospective buyers, for the flats unsold after obtaining occupancy certificate, there shall be a requirement to reverse the entire credit attributable to those flats.
Further, there is no mechanism has been provided under GST to reverse the credit availed during the previous years by the registered person, accordingly, the liability may be required to be discharged through cash by the builder.
5. If the builder is constructing an office space for his business then in that case also he can’t avail input tax credit on the input supply of goods and or services.
Therefore, in view of the above discussion, it can be said that the main objective of GST, i.e., seamless flow of credit, is an illusion for the builders. Existing provisions of input tax credit will lead to various litigation and assessment related disputes. Further, management of the separate books of accounts for project wise/ credit wise/ flats wise/common utility wise will lead to new and biggest headache for the builders. If the Government does not relax any of the aforementioned restrictions, then the GST may burden the real-estate industry with major Input Tax credit being unavailable.
Disclaimer: The view expressed by the Author is personal and it is for an educational purpose. (04.01.2018)