MARCH 20, 2019

By Vijay Kumar

By the time we get used to the change, that won't even be the prevailing change anymore-we'll be on to some new change.

By the time you try to understand the changes in GST, the change is changed and you are not sure where you are. The other day, I was discussing some aspects of GST with a young professional, who has about two years experience in the taxation field against my alleged forty. After some time, each of us understood that the other had absolutely no understanding of GST.

Astro Teller of Google X says,

What we are experiencing today, with shorter and shorter innovation cycles, and less time to learn to adapt, is the difference between a constant state of destabilization versus occasional destabilization. The time of static stability has passed us by. That does not mean we can't have a new kind of stability, but the new kind of stability has to be dynamic stability. There are some ways of being, like riding a bicycle, where you cannot stand still, but once you are moving, it is actually easier. It is not our natural state. But humanity has to learn to exist in this state. We are all going to have to learn that bicycle trick. When that happens, in a weird way, we will be calm again, but it will take substantial relearning.

How true of GST!

Yesterday, the PIB issued a Press Release explaining the decisions taken by the GST Council on the modalities for transition to the lower effective GST rates of 1% in case of affordable houses and 5% on construction of houses other than affordable houses. See some of the simple modalities.

Option in respect of ongoing projects:

The promoters shall be given a one-time option to continue to pay tax at the old rates (effective rate of 8% or 12% with ITC) on ongoing projects (buildings where construction and actual booking have both started before 01.04.2019) which have not been completed by 31.03.2019.

The option shall be exercised once within a prescribed time frame and where the option is not exercised within the prescribed time limit, new rates shall apply.

New tax rates:

The new tax rates which shall be applicable to new projects or ongoing projects which have exercised the above option to pay tax in the new regime are as follows.

(i) New rate of 1% without input tax credit (ITC) on construction of affordable houses shall be available for,

a. all houses which meet the definition of affordable houses as decided by GSTC (area 60 sqm in non-metros / 90 sqm in metros and value upto Rs. 45 lakhs), and

b. affordable houses being constructed in ongoing projects under the existing central and state housing schemes presently eligible for concessional rate of 8% GST (after 1/3 rd land abatement).

(ii). New rate of 5% without input tax credit shall be applicable on construction of-

a. all houses other than affordable houses in ongoing projects whether booked prior to or after 01.04.2019. In case of houses booked prior to 01.04.2019, new rate shall be available on instalments payable on or after 01.04.2019.

b. all houses other than affordable houses in new projects.

c. commercial apartments such as shops, offices etc. in a residential real estate project (RREP) in which the carpet area of commercial apartments is not more than 15% of total carpet area of all apartments.

Conditions for the new tax rates:

The new tax rates of 1% (on construction of affordable) and 5% (on other than affordable houses) shall be available subject to following conditions, -

a. Input tax credit shall not be available,

b. 80% of inputs and input services (other than capital goods, TDR/ JDA, FSI, long term lease(premiums)) shall be purchased from registered persons. On shortfall of purchases from 80%,tax shall be paid by the builder @ 18% on RCM basis. However, Tax on cement purchased from unregistered person shall be paid @ 28% under RCM, and on capital goods under RCMat applicable rates.

Transition for ongoing projects opting for the new tax rate:

Ongoing projects (buildings where construction and booking both had started before 01.04.2019) and have not been completed by 31.03.2019 opting for new tax rates shall transition the ITC as per the prescribed method.

The transition formula approved by the GST Council, for residential projects (refer to para 4(ii)) extrapolates ITC taken for percentage completion of construction as on 01.04.2019 to arrive at ITC for the entire project. Then based on percentage booking of flats and percentage invoicing, ITC eligibility is determined. Thus, transition would thus be on pro-rata basis based on a simple formula such that credit in proportion to booking of the flat and invoicing done for the booked flat is available subject to a few safeguards.

For a mixed project transition shall also allow ITC on pro-rata basis in proportion to carpet area of the commercial portion in the ongoing projects (on which tax will be payable @ 12% with ITC even after 1.4.2019) to the total carpet area of the project.

Amendment to ITC rules:

ITC rules shall be amended to bring greater clarity on monthly and final determination of ITC and reversal thereof in real estate projects. The change would clearly provide procedure for availing input tax credit in relation to commercial units as such units would continue to be eligible for input tax credit in a mixed project.

And here is tax humour at its wry best.

The decisions of the GST Council have been presented in this note in simple language for easy understanding. The same would be given effect to through Gazette notifications/ circulars which alone shall have force of law.

If you understand or don't understand the above note in simple language, wait for the simpler notifications and circulars, which alone shall be legal. Whatever you understand from the Press Note is immaterial and insignificant. Do wait for the imminent LAW which will come in a couple of days.

Even the Finance Ministry has in its tweet emphasized the above disclaimer, "Decisions of the GST Council would be given effect through Gazette Notifications/Circulars which alone shall have force of law."

Ground Scorching Tax: Last week a book 'Ground Scorching Tax', written by economist Arun Kumar was released. The author says,"Not" only is the GST 'ill-planned', it also suffers from structural problems which will stay with us.

The West Bengal Finance Minister is reported to have written to the Union Finance Minister "the mechanism proposed for the allowance and reversal of credit for ongoing projects is highly cumbersome and mind boggling"

Sweet Shop Running a Restaurant - GST Liability: Kundan Misthan Bhandar, Uttarakhand, primarily engaged in the business of supplying goods & services sought an advance ruling on:

(a) whether supply of pure food items such as sweetmeats, namkeens, cold drink and other edible items from sweetshop which also runs a restaurant is a transaction of supply of goods or a supply of service;

(b) what is the nature and rate of tax applicable to the following items supplied from ground floor of a sweetshop in which restaurant is also located on the first floor and whether the applicant is entitled to claim benefit of input tax credit with respect to the same:

(i) Sweetmeats, namkeens, Dhokla etc. commonly known as snacks, cold drinks, ice creams and other edible items;

(ii) Ready to eat (partially or fully pre-cooked/ packed) items supplied from live counters such as jalebi, cholebhatura and other edible items;

(iii) Takeaway order of sweetmeats or namkeens by a person sitting in the restaurant of a sweetshop when such products are not consumed within the premises of the applicant but are taken away.

The AAR ruled in 2018-TIOL-276-AAR-GST:

(i) The supply shall be treated as supply of service and sweet shop shall be treated as extension of restaurant;

(ii) The rate of GST on aforesaid activity will be 5% as on date, on the condition that credit of input tax charged on goods and services used in supplying the said service has not been taken;

(iii) All the items including takeaway items from the said premises shall attract GST of 5% as on date subject to the condition of non availment of credit of input tax charged on goods and services used in supplying the said service.

Against this ruling, both the assessee and Revenue filed appeals before the Appellate Authority for Advance Ruling, Uttarakhand and the AAAR set aside the impugned ruling and ruled:

(i) Sale of sweets, namkeens, cold drinks and other edible items through restaurant will be treated as 'composite supply' with restaurant supply being the principal service. Existing GST rates on restaurant service will also be applicable on all such sales and no input credit will be allowed.

(ii) Sale of sweets, namkeens, and other edible items from sweet shop counter will be treated as supply of goods with applicable GST rate of the items being sold and input credit will be allowed on such supply.

(iii) the applicant should maintain separate record for restaurant and sweetshop with respect to input and output billings as well as other accounting records should also be separately maintained.

Please see 2019-TIOL-29-AAAR-GST.

On that sweet note,

Until next week