DECEMBER 11, 2017

By Rishab J

REAL Estate industry is considered to be the most lucrative industry and its worth in India is estimated to be about US$ 180 billion by 2020. Further, the housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP) [Source: https://www.ibef.org/industry/real-estate-india.aspx]. Apparently, the government considers the industry as an easy target to extract the maximum revenue possible.

In the erstwhile regime, both Service Tax and VAT Laws provided for levy of tax on activity of construction. The methodology of determining the value was prescribed, though there were instances of levy of both the taxes on the same value.

With the introduction of GST, the industry considered the same to be a blessing in disguise, wherein it was expected that only one tax shall be payable. But then, the intention of the legislature seems to remain identical i.e. to garner revenue.

In this article, an attempt is made to analyse one very important aspect of GST and its implication on the industry -Input Tax Credit.

According to Schedule II of the CGST Act read with Section 7 of the CGST Act, the activity of 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 considered to be a supply of service.

Therefore, where the supply takes place before receipt of completion certificate or occupancy certificate, the activity qualifies as a construction of complex service under the GST Law.

Schedule III of the CGST Act provides that sale of land after receipt of completion certificate or after first occupancy and sale of building shall be treated as neither supply of goods or services. In effect, sale after receipt of completion certificate or occupancy certificate by the builder shall not be exigible to GST.

INPUT TAX CREDIT- RELEVANT PROVISIONS AS APPLICABLE TO BUILDERS

Section 16(1) of the CGST Act, 2017 provides that every registered person shall, subject to such conditions and restrictions as may be prescribed is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. Therefore, the tax paid on inputs utilized for construction of residential or commercial complex shall be available to builder.

Section 17(5) of the CGST Act prescribes the restrictions applicable in relation to eligibility of input tax credit. The 2 major restrictions applicable to builders are-

1. If works contract service is received for construction of an immovable property except where it is an input service for further supply of works contract service. {Section 17(5)(c)}

2. If goods or services or both received by a builder for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business. {Section 17(5)(d)}

A reading of Section 17(2) along with Section 17(3) of the CGST Act suggests that if common inputs/input services/capital goods are used for supplying both works contract service and sale of constructed building, the credit shall be restricted to the proportion attributable to works contract service/construction service.

Emerging Issues

A conjoint reading section 17(5)(c) and (d)and Section 17(2) of the CGST Act leads to the following conclusion -

- The restriction prescribed under Section 17(5) is notwithstanding Section 16. Hence a builder cannot avail credit on inputs used till the time he finds a buyer. This is for the reason that till such time he is said to use inputs on own account or receive works contract service for not providing further works contract service.

Let us now examine the situation where the builder opts to avail credit -

- If the builder decides to avail the credit notwithstanding the restriction prescribed in Section 17(5)(c) and (d), he shall subsequently be required to reverse the credit attributable to the portion of land during the sale of such constructed property.

- But, it is pertinent to note that if the credit is availed from the start of construction till its completion, for the flats unsold after obtaining occupancy certificate there shall be a requirement to reverse the entire credit attributable to those flats, and with no mechanism provided under GST to reverse credit availed during the course of previous years, the liability may be required to be discharged by cash.

Therefore, in the light of the aforementioned analysis, it could still be said that if the government does not relax any of the aforementioned restrictions, then the GST may further burden the industry with major Input Tax credit being unavailable and a continuing obligation for maintaining separate accounts and provisionality attached to the assessments till the project is completed and all the flats are sold.

(The author is an Associate with Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)