Fulfilling the condition of 80% purchase from registered Persons - Builder dilemma
JULY 14, 2020
By CA Anish Goyal & CA Kushal Rathi
 THE effective GST rates on residential projects were reduced from 12% and 8% to 5% and 1% for non-affordable and affordable housing segment. The reduced rate of GST is based on the condition that the input tax credit should not be claimed by the developers and the amount of not availed input tax credit must be reflected in GSTR-3B. Further, an additional condition has been imposed that atleast 80% of inward supplies must be from registered persons in a financial Year.
Although the GST rates on outward supplies are reduced but this has effectively increased the cost of projects due to non-availability of input tax credit. In addition to the increased cost an additional burden has been cast on the developers that at least 80% of inward supplies must be from registered persons, consequently, maximum 20% of inward supplies can be from unregistered person. The proviso in this regard of condition reads as under:
"Provided also that eighty percent of value of input and input services, [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges etc.) or FSI (including additional FSI), electricity, high speed diesel, motor spirit, natural gas], used in supplying the service shall be received from registered supplier only."
If value of supplies from registered person is less than 80% then promoter (builder/developer) has to pay GST @18% on reverse charge basis on shortfall inward supplies. From total inward supplies received during the Financial Year, atleast 80% should be from registered person. For computing 80% of the total inward supplies received during the financial year, let us examine some of the inward supplies, which needs to be considered in total inward supplies or not:
|
Sr. No.
|
Nature of inward supplies
|
Must be included in total value?
|
Reasons
|
| 1. |
Value of services by way of grant of development rights |
No |
This expense has been specifically excluded in the condition itself of Sr.No.3 of Not. No. 11/2017- Central Tax (Rate) dt. 28.06.2017 as amended vide Not No. 03/2019 - Central Tax (Rate) dt. 29.03.2019. Thus, can be excluded from total inward supplies. |
| 2. |
Long term lease amount paid for land |
No |
| 3. |
Floor space index (including additional FSI) |
No |
| 4. |
Value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartment in a project |
No |
| 5. |
Salary and Wages including daily wages |
No |
These are neither supply of goods or service as per Clause (1) of Sch. III of CGST Act, 2017. Therefore, salaries and wages paid by promoter to his employees can also be excluded for computing the 80% limit. |
| 6. |
Interest on secured loan from Financial Institution (Bank, NBFC etc.) registered under GST |
No |
The primary condition this that 80% of value of input and input services shall be received from registered supplier. Interest paid to Financial Institutions registered under GST can be excluded for computing the 80% limit. |
| 7. |
Interest on unsecured loan paid to unregistered person. |
Yes |
Yes, as interest on unsecured loan is exempted vide Sr. No. 27 of Notification No. 12/2017- CT (R) dt. 28.06.2017 and inward supplies of exempted goods/services shall be included in the value of supplies from unregistered person. Therefore, the amount of interest paid to unregistered person has to be included for computing 80% limit. |
| 8. |
Interest on Partners Capital |
Yes |
Interest on partner's capital is merely an appropriation of Profit under the Income Tax Act, 1961. There is plethora of judgments in this regard. Ideally, it must not be included for computing the limit of 80%.
However as per CBIC's released FAQ's - Part-II, inward supplies of exempted goods/services shall be included in the value of supplies from unregistered person. Thus, it has to be included for computing the limit of 80%.
Hope the CBIC, clarifies this matter immediately to avoid future litigation.
|
| 9. |
Cement purchased from unregistered person |
No |
If cement is purchased from unregistered person, GST under RCM at applicable rate is required to be discharged, presently @ 28%. Inward supplies on which RCM is paid will be deemed to be received from Registered persons. |
| 10. |
Incremental Charges (IC) paid to local Authority |
No |
Incremental Charges is paid to local authority as a charge for developing the area around the project. Local Authorities are generally registered under GST. For instance, Surat Municipal Corporation (SMC) is registered under GST, thus, amount paid to SMC should not be considered for computing 80% limit. |
Further, recently, the CBIC had issued an Instruction no. 3/2/2020-GST dt. 24.06.2020, stating that tax on shortfall for the F.Y 2019-20 is to be paid by 30th June 2020 by filing FORM GST DRC-03 electronically. With the law of the land being so, there is no option but to discharge this tax liability under Reverse Charge Mechanism.
[The authors are Partners, M/s Goyal Rathi & Associates, Chartered Accountants and the views expressed are strictly personal.]
| (DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site) |
|
