MARCH 25, 2019

By Dr G Gokul Kishore

REALTY sector is in the news again. In the 27th Part of this series, we prayed along with the industry that the GST Council and the relevant committees address concerns over proposed changes. They have been addressed in part in the 34th meeting of the GST Council almost exclusively devoted to this sector. This 30th part is dedicated to highlight adverse impact of the changes on industry and compliance and implementation challenges.

Mandatory lower rate for new projects - Moving backwards

When the rate reduction to 1% for affordable housing and 5% for non-affordable housing was announced with bar on availment of input tax credit, two concerns were primarily raised. First, the major worry pertained to lapsing of credit lying in balance when the new rate regime will be in force from 1-4-2019. Secondly, treatment of the existing projects as to whether they will be governed by new rate or old rate. The latter has been addressed by providing the option to continue with payment of tax at old rate for on-going projects. The former has been taken care of by allowing use of ITC for on-going projects opting to pay tax at old rate and to provide for proportionate credit if new rate is opted. The picture appears rosy upto this point.

As noted in this series earlier, the normal expectation was that the entire industry should not suffer for not passing of ITC benefits by certain others and the lower tariff should be optional. Those who wish to be in the credit chain and pay at higher rate should be allowed to do so and the lower rate may come with the obvious restriction on ITC. In Central Excise, when large number of exemptions was withdrawn, industry was provided with both the options viz., concessional rate without Cenvat credit and payment of duty at tariff rate with credits intact. But, the present rejig of the tariff structure for realty whereby lower rate without ITC for new projects will be mandatory, is likely to cause irreparable damage to the system.

If a few sectors are taken out of credit chain, the industry may suffer in the interim but in the long-term, the victim will be consumers. Industry will have no option but to load such loss of ITC in the cost. Tax administration or anti-evasion agencies or anti-profiteering authority cannot police all the members of industry all the time to compel price reduction in all the cases. Having travelled forward for more than three decades starting with Modvat credit of 1980s, Indian indirect system seems to be decisively moving backwards and away from taxing value addition. The infamous cascading effect is making a comeback. It is not known whether there will be a re-think but we hope the structure will be tweaked in the third year of GST based on experiences and demands.

Building complex easier than complying with complex tax regime

There is a saying in Tamil which implies that building a house is a challenge (the other one is marriage). The complicated tax regime now sought to be implemented for residential real estate sector makes tax compliance more challenging than actual construction itself. Legal validity of placing condition on how to structure procurements by prescribing a minimum limit of 80% as purchases from registered suppliers is questionable. Purchase invoices and bills will be subject to verification by the department. Vendors who are not registered may be investigated to check whether despite crossing threshold limit, they have not come within the ambit of GST. Those engaged in construction of both commercial and residential projects need to plan from purchase order stage, project-wise in an attempt to ensure they do not cross the line.

Such utopian conditions can neither improve tax collection nor compliance but will lead to insurmountable burden on the industry and disproportionate allocation of time by the department in scrutiny. Penalty may be imposed for breaching such conditions even if tax is otherwise paid correctly by the builder as supplier of service. It will be interesting to watch how judiciary will react to such deviations when there is no loss of revenue in the strict sense. Collecting tax under RCM for purchases from unregistered persons in certain cases, it appears, may not have sufficient legal backing except if the notification is issued using the amended Section 9(4) of CGST Act. At the time of deferment of liability under RCM for purchases from unregistered persons, apparently a benevolent measure, one would not have imagined that this amendment will be put to such use. The kind of misuse of powers by detaining vehicles and goods for infractions in e-way bills will be repeated in this sector also. Without taking cognizance of myriad practical problems, anti-profiteering provisions may be invoked using certain numbers rejecting arguments of the taxpayer.

Right from service tax regime, one of the aberrations sought to be cloaked as exception is shifting of liability on to recipient in the name of reverse charge mechanism. RCM is meant to aid tax administration in verification of compliances by the organized recipient than struggling with unorganized supplier. Legislative powers apart, RCM should remain an exception as the default dispensation is to tax the supplier and not the recipient. However, the list of supplies under RCM is on the rise. The present set of changes for realty sector includes coverage of certain transactions under RCM like receipt of supplies from unregistered persons below 80% limit, transfer of development rights (TDR), FSI and long-term lease premium. Ideally, TDR should not be liable to GST at all if one were to apply ratio of judicial precedents. Instead, time of supply for TDR was prescribed earlier by Notification No. 4/2018-Central Tax (Rate) and now RCM is being stipulated coupled with an exemption in certain cases. Seeking to tax TDR after completion certificate may be perceived as lacking legislative competence as it may amount to tax on land.

Moving away from such intricate issues, it is not known how builders will find the present measures as helpful to them as is being publicised. Builders may feel the new regime with no ITC, condition on purchases from registered suppliers, RCM on TDR, etc., coupled with anti-profiteering investigations, inquiries by anti-evasion agencies, verification by department at every stage and of every process, suffocating. Many may find survival difficult.

As per press release, transition of ITC in respect of on-going projects where the builder opts for new tax rate will be covered under separate set of provisions. It may well be another Rule 6 type formula requiring elaborate exercise. One wonders whether transition to new regime of GST was less complicated than transition within GST when such large-scale changes are made. Reports also indicate that certain States have demanded increase in the limit for categorization as affordable housing. Industry will certainly flag more issues in the coming days. Field formations of tax department will internally escalate implementation challenges. All these may well mean the new regime for residential real estate will witness substantial and frequent changes in the near future. We hope that the dust raised in the second year of GST will settle down in the third year.

(…To be continued)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal.]

See - Part XXIX