AUGUST 09, 2017

By Rakesh Kumar, Member, CESTAT (Retd.)

THE Delhi edition of the Indian Express and the Hindustan Times, dated 28th July 2017, featured a clarification cum trade advisory jointly issued by the Central Board of Excise & Customs and Commercial Taxes Department of States/Union Territories, pertaining to the impact of GST on real estate prices.

The text of the clarification/trade advisory is reproduced below–

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"Reduced tax liability on homes under GST

The CBEC and States have received many complaints that in view of the works contract service tax rate under GST at 12% in respect of under construction flats, complex etc, the people who have booked flats and made part payment before 1st July, 2017, are being asked to bear higher tax incidence for payments made after 1st July, 2017. This is against the GST law, as explained below.

- Construction of flats, complex, buildings have a lower incidence of GST as compared to a plethora of Central and State Indirect Taxes suffered by them under the earlier regime.

- Central Excise duty was earlier payable on most construction material @ 12.5%. It was higher in case of cement. In addition, VAT was also payable on construction material @ 12.5% to 14.5% in most of the States. In addition, construction material also earlier suffered Entry Tax levied by the States. Input Tax Credit of the above taxes was not allowed for payment of service tax. Credit of these taxes was also not available for payment of VAT on construction of flats etc. under the composition scheme. Thus, there was cascading of input taxes on constructed flats etc.

- As a result, incidence of Central Excise duty, VAT, Entry Tax, etc. on construction material was earlier being borne by the builders, which they passed on to the customers as part of the price charged from them. This was not visible to the customers as it formed a part of the cost of the flat.

- The earlier headline rate of service tax on construction of flats, residences, offices, etc. was 4.5%. Over and above this, VAT @ 1% under composition scheme was also charged. The buyer only looked at the headline rate of 5.5%. In other Cities/States, where VAT was being levied under the composition scheme @ 2% or above, the headline rate visible to the customer was above 6.5%. What the customer did not see is the embedded taxes on account of cascading and sticking of input taxes in the cost of the flat etc.

- The situation has changed under GST. Under GST, full credit is available for offsetting the headline rate of 12%. As a result, the input taxes embedded in the flat will not (& should not) forma part of the cost of the flat. The input credits should take care of the headline rate of 12% and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed.

- The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/installments. It is, therefore, advised to all builders/construction companies that in the flats under construction, they should not ask customers to pay higher amount of installments inclusive of all taxes to be received after imposition of GST.

- Despite this clarity on law position, if any builder resorts to such practice, the same can be deemed to be profiteering under section 171 of GST law.

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Thus, according to the clarification/trade advisory, the present GST rate of 12% in respect of under construction flats,complexes, buildings etc. is not a justification for charging higher amount from the property buyers towards tax, as under GST, full input tax credit is available for offsetting the headline rate of 12%, while in the erstwhile taxation regime, though the total service tax and VAT under respective composition schemes was 5.5% (4.5% service tax + 1% VAT) to 6.5% (4.5% service tax + 2% VAT), or even more in some States, the actual tax incidence was higher on account of cascading and other input taxes in the cost of the property, as the credit of VAT and Entry Tax were not available for payment of service tax. The builders/real estate companies have, therefore, been advised that in view of clarity in the legal position, they should pass on the benefit of lower tax burden to the property buyers by way of reduced prices/installments, failing which, they may face action under anti profiteering provisions of Section 171 of the GST law.

However, the question arises as to whether there is absolute clarity on all the aspects of GST on real estate transactions and whether the tax burden on the property buyers is actually lower under GST?

2. In the construction sector, there are two major players – the builders and the construction contractors. The builders plan the projects for construction of residential or commercial complexes on the land, either owned by them or by another person, arrange the finance for the project, market the same by inviting applications for allotment of flats/shops in the residential/commercial complex to be constructed and finally, arrange for the execution of the project. For execution of the project, the builder may undertake the job himself or else award the building contract to another person.

3. In terms of S. No. 5(b) of Schedule II to the CGST Act &SGST Acts, "construction of a complex, building, civil structure or a part thereof, including a complex or a building which is intended for sale to a buyer, either wholly or partly", is to be treated as a service, "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". During the pre-GST period, the activity described in Sr. No. 5(b) of Schedule II was a "Declared Service" under Section 66E (b) of the Finance Act, 1994. Thus for the supply of service covered by S. NO. 5(b) of Schedule II-(a) there must be construction of a complex,building, civil structure or a part thereof including a complex or building intended for sale to a buyer; and (b)either full consideration has been received prior to the date of issue of completion certificate or the date of first occupation, whichever is earlier, or part of the consideration has been received prior to this date and the remaining after this date.When the entire consideration has been received after the date of issue of completion certificate or the date of first occupation, whichever is earlier,this would become a sale of immovable property, outside the purview of GST.

3.1 Section 2(119) of the GST Law defines a "Works Contract" as 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 (either as goods or in some other form) is involved in execution of the contract.In terms of S. NO. 6(a) of Schedule II, composite supply of "works contract" is to be treated as supply of service. During pre GST period,transfer of property in goods involved in execution of a works contract was being taxed by the State governments, as 'deemed sale' and on the service portion of the works contract, Service tax was being levied by the Central Government, as the service portion of a works contract was a 'declared service' under Section 66E(h) of the Finance Act, 1994.

4. The GST Council has recommended GST rate of 18% for composite supply of works contract, as defined in clause 119 of Section 2 of the CGST Act. However, for the service covered by Sr. No. 5(b) of Schedule II of the CGST Act/SGST Acts, the GST rate recommended by the GST Council is "12% with no refund of accumulated ITC."

5. The Notification No. 11/2017 – Central tax (rate) dated 28/06/17, Notification No. 11/2017 –UT-Tax (rate) dated 28/06/2017 and Notification No 08/2017 - Integrated Tax(rate) dated 28/06/2017, issued by the central government and similar notifications issued by State Governments notify service-heading-wise rates of CGST, UTGST, IGST and SGST respectively for various services. The total GST rate for Works Contract Service covered by heading 9954(ii), notified in these notifications on the recommendation of the GST Council, is 18%, which obviously would be calculated on the amount charged for the composite supply of the goods and services involved in execution of the works contract and would not include the value of land in cases where the works contract is for construction of some building or commercial or residential complex.

5.1 While the total GST rate for the construction of complex, building etc. covered by heading 9954(i) i.e. the service covered by S. No. 5(b) of the Schedule II, recommended by the GST Council is "12% with no refund of accumulated ITC", the total GST rate for this service notified by the notifications is 18% and in terms of para 2 of each of these notifications, the assessable value of the supply of this service shall not include the value of the land/undivided share of land, which shall be deemed to be one third of the total amount charged for such supply. Thus, the 18% GST on the assessable value of 67% of the gross amount charged (including the value of the land/undivided share of land involved in this supply), would translate into 12% GST on the gross amount charged including the amount for land. Even in respect of Works Contract Service covered by heading 9954(ii), when it is for construction of a building, residential or commercial complex etc., the 18% total GST rate on the amount charged for the composite supply of goods and services (excluding the value of the land) would mean 12% GST on the gross amount charged including the value of the land, if the value of the land is deemed to be one third of the gross amount charged for the property. However, the provisions of para 2 of the rate notifications are not applicable to the works contract service.

6. The 12% GST rate mentioned in the clarification cum advisory of the CBEC and the State Commercial Tax Departments, published in the newspapers is, thus, not the notified rate or "headline rate", but is the effective rate based on the deemed value of the land/undivided share in land as one third of the total amount charged.

7. During the pre-GST period, the builders were availing the composition schemes for payment of service tax and VAT and the total service tax and VAT payable in most of the States was 5.5% (4.5% service tax plus 1% VAT) to 6.5%(4.5% service tax plus 2% VAT) of the gross amount charged including the amount for land/undivided share in land. Presently, in the GST regime, there is no composition scheme for the construction services covered by S. NO. 5(b) and 6(a) of the Schedule II and the effective rate of GST is 12% of the gross amount charged including the amount towards the value of the land/undivided share in land, if the value of the land/undivided share in land is taken as one third of the gross amount charged. However, according to the clarification/advisory published in the newspapers, since now, full input tax credit is available, it will take care of the headline rate of 12% and net tax burden will be lower than that during the pre GST period. But is it the correct position? Here, it may also be pointed out that Notification no 15/2017-central tax (rate) dated 28/06/2017 issued under Sec 54(3) of the CGST Act and identical notifications issued under UTGST Act, IGST Act and SGST Acts provide that no refund of unutilized input tax credit shall be allowed under Sec 54(3) the GST Laws in case of supply of services covered by S. NO. 5(b) of Schedule II.

8. When the builder, who has planned the construction project, instead of engaging in construction himself, engages a contractor, the contractor would provide Works Contract Service to the builder. The contractor can take credit of the tax paid on inputs and input services used in execution of the Works Contract and utilize this credit for payment of GST on his outward supply of Works Contract Service to the builder. But will the builder get the credit of the GST paid by the contractor? The answer appears to be – "NO", in view of the provisions of clause (c) of Sec17(5) of the GST Law which is mentioned as follows -

"….input tax credit shall not be available in respect of……..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;…."

The Sec 17(5) (c) does not make exception for the situation where the works contract service received by a builder from his contractor is an input for the service covered by S. NO. 5(b) of the Schedule II being provided by him – the exception is only for the situation where the works contract service received by a registered person is an input for further supply of works contract service.But the service provided by a builder to his customers, when he has got the building / complex etc. constructed by engaging a contractor, is not works contract service. Thus, so far as the builder is concerned, the benefit of the input tax credit availed and utilized by his contractor and passed on by him to the builder by the way of commensurate reduction in the price for his services, will get neutralized by the denial of the credit of the GST paid by the contractor, as the GST paid by the contractor would be passed on by him to the builder.

9. If the builder, instead of engaging a contractor for construction of the building/complex intended for sale, undertakes the construction himself, his eligibility for input tax credit would be determined by Sec 17(5)(d) of the GST Law according to which-

"….input tax credit shall not be available in respect of-

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 course or furtherance of business."

Here also, there is no exception for the situation where the inputs or input services or both are used for supply of the service covered by S.NO. 5(b) of the Schedule II of the CGST Act/SGST Acts. The input tax credit would be admissible only when the construction of building/complex by the builder is NOT on his own account i.e. the construction of the building/complex by the builder is against contract/contracts already entered into by him with the prospective buyer/buyers. But when the construction of a huge residential or commercial complex planned by a builder has started, it is not necessary that at that time, in respected of all the flats or shops/offices planned to be constructed, the prospective buyers have been found and they have signed the agreements with the builder.Some buyers may buy almost ready to move in property in a residential/commercial complex and if either full or part payment has been made before the date of issue of completion certificate or the date of first occupation, whichever is earlier, the transactions would still be service transactions covered by S. NO. 5(b) of Schedule II and would attract GST. The question arises whether the construction of flats in a residential complex or shops or offices in a commercial complex at any point of time, in respect of which prospective buyers have not been found, is to be treated as "construction on his own account" or otherwise.

10. There is also an issue regarding application of transitional arrangements for input tax credit under Sec 140 of the CGST Act/SGST Acts in respect of ongoing construction projects. Subsection (3) of Sec 140 provides that a registered person who was providing works contract service and was availing the benefit of notification no. 26/2012-ST dated 20/06/2012 shall, subject to the conditions specified in this subsection, will be entitled to take the credit of the specified duties in respect of input in stock and inputs contained in semi finished goods or finished goods in stock on the appointed day. There is no issue regarding availability of input tax credit in respect of the quantity of inputs like cement, steel bars, bricks etc., lying in stock as on 01/07/2017. But if in respect of an ongoing project, a particular milestone of the project, say, completion of tenth floor of the twenty floor building to be constructed, was achieved prior to 01/07/2017 and the invoice for this job was raised and payment was received on or after 01/07/2017, and in accordance with the provisions of Sec 14 of the CGST Act/SGST Acts, the amount received would attract GST, would the contractor/ builder cum contractor get the input tax credit in respect of the tax paid inputs used in the construction and which are now part of the semi constructed building? Would for this purpose, the building under construction be treated as "semi-finished goods". This point must be clarified as Sec 140(3) appears to have been drafted keeping in mind only the manufacturers, not the builders/ contractors.

11. Thus, the legal position regarding availability of input tax credit in respect of the inputs and input services required for the supply of the construction service is not clear at all. During pre GST period, the issues regarding availability of input tax credit raised in para 8 and para 9 above were mostly not relevant, as –

(a) for payment of service tax, there was composition scheme of Notification no. 26/2012-ST dated 20/06/2012 (s. no. 12 of the table to the notification) which provided for payment of service tax at the rate specified in Sec 66B of the Finance Act, 1994, but without the benefit of "Cenvat credit on inputs used for providing the service", on 25%/ 30% of the gross amount (including the value of land), charged from the service receiver; and

(b) For payment of VAT on the goods portion, there were similar composition schemes of the State Governments.

But in GST regime, since there is no composition scheme for payment of GST on the construction services covered by S. NO. 5(b)of Schedule II and tax has to be paid at the notified rate of 18% on 2/3rd of the gross amount charged including the value of the land and admissible input tax credit has to be availed which can be utilized for payment of tax, the issue of admissibility of input tax credit becomes important. Therefore, when the Government expects the builders/construction companies to reduce the price on the ground that "under GST full input tax credit is available for offsetting the headline rate of 12%", it should first clarify the issues raised in para 8, 9 & 10 above.

12. The construction of a complex,building, civil structure or part thereof, intended for sale, where either entire consideration or a part of the consideration had been received prior to the date of completion certificate or the date of first occupation, whichever is earlier, would be classifiable as a service covered by S. NO. 5(b) of the Schedule II (heading 9954(i) of the rate notifications), irrespective of whether the construction activity has been undertaken by the builder himself or has been contracted out. There are two implications of this. The first implication, as explained in an article dated 21st July, 2017 titled – "Realty players-confusion continues unabated in GST" on this portal is that the provisions of para 2 of the rate notifications would become applicable and, therefore, if the actual value of land/undivided share in land is more than 30% (say 40%)of the total price of the property including the value of land/undivided share in land, the GST at the rate of 18% would be charged not on 60% of the total price, but on 2/3rd of the total price, which would result in effective rate of GST becoming more than 12% of the total price including the value of land. The second implication would be that the Notification no 15/2017-central tax (rate) dated 28/06/2017 issued under Sec 54(3) of the CGST Act and identical notifications issued under UTGST Act, IGST Act and SGST Acts would become applicable which provide that no cash refund of unutilized input tax credit under Sec 54(3) of the GST Laws shall be admissible in case of supply of services covered by S. NO. 5(b) of Schedule II of the CGST Act/SGST Acts. Since an assessee can pass on the benefit of input tax credit by the way of commensurate reduction of prices only to the extent he has been able to utilize the credit for payment of tax on his outward supply or has been refunded the unutilized credit in cash, the denial of refund of unutilized input tax credit would only impact his ability to pass on the benefit of full input tax credit available to him.

13. Therefore, in view of the above, the correctness of the clarification by CBEC and State commercial taxes Departments that under GST, full input tax credit is available for offsetting the headline rate of 12% is doubtful and the advice to the builders/construction companies to pass on the benefit of lower tax burden under the GST regime to the buyers of the property and failure to do so would invite action under anti profiteering provisions of Sec 171 of the GST Law, is apparently premature. Before acting upon this clarification cum trade advisory, the issues raised above must be clarified.

Otherwise, it will only result in harassment of the assessees and avoidable litigation.