By Altamush Zafar, CA at PL Tandon & Co.
GST is finally going to become a reality with all the Acts and important rules being approved by the GST Council in its 15th Meeting. GST is conceived to be adopted from the existing tax laws, especially a lot of similarities can be drawn from current service tax. However, GST can be full of surprises, and some of the surprises can hit stakeholders hard. Here we will discuss some grey areas in GST law which can greatly impact the Real Estate Industry and its stakeholders. One of the reasons that GST is being applauded is its free flow of credits.
However, there is a provision of blocked credits where restrictions have been imposed on availing of credits on certain inputs and input services. Coming to the real estate industry, builders currently provide the service of “construction of complex, building, civil structure or a part thereof intended for sale except where the entire consideration is received after issuance of Completion Certificate by the competent authority,” which is being continued as it is in the GST regime. Builders currently take the benefit of Exemption Notification 26/2012 and pay service tax on 30% of the value.
A paradigm shift in the economic structure of the entire nation: builders take full CENVAT credits on input services including works contract, labour supply, etc., and credits on capital goods. The CENVAT credit of inputs is disallowed due to availing the benefit of the notification.
LITIGATION 1: Works Contract Credit and Transition Issues
Currently, a builder can take credits of works contract. A works contract is a contract where the service provider provides labour services along with materials. All builders engage a number of work contractors for their projects. The contracts with them are extensive and they exist for years. In GST, builders will continue to provide the service of “construction of complex, building, civil structure or a part thereof intended for sale except where the entire consideration is received after issuance of Completion Certificate by the competent authority,” which is taxable at a 12% rate.
However, the credit of input service of works contract is in doubt due to Clause (c) of sub-section (5) of Section 17 of the CGST Act, which states:
“Input tax credit shall not be available in respect of works contract services when supplied for construction of immovable property except where it is an input service for further supply of works contract service.”
By virtue of this clause, it seems that credits shall not be available as builders are not providing services of works contract but are providing services of “construction of complex, building…”. Therefore, they will have to make amends in their existing contracts to take the benefit of credits in future. This will also impact the transition of credits, as only those credits are eligible to be transferred which are allowed in GST. The credits regarding works contract, though eligible credits under the present scheme, will not be allowed to be transferred in the GST regime. A clarification from the ministry will be welcomed.
LITIGATION 2: Reverse Charge on Unregistered Persons and Labour Supply
A new system of reverse charge has been introduced by the GST law whereby any purchase of services or goods from an unregistered person by a registered person is liable to GST on a reverse charge basis (i.e., the recipient will have to pay tax on it). This provision is new to the taxation system and will pose problems on implementation.
Say labourers have been engaged in projects by a labour contractor. A common practice has been witnessed that these contractors, to save themselves from PF and ESI regulations, show fewer numbers of labourers engaged by them. If the workers are not considered as employees, then the provisions of reverse charge will get attracted as each single labourer who is unregistered is providing services to a registered person. Although there is a lot of scope of tax evasion in this regard with collusion, builders will have to make amends in their existing contracts to be liable for GST. In case of scrutiny and on findings of default, confusion may arise as to who will be liable to pay GST under reverse charge—the labour contractor or the builder.
Neither of them will be showing their engagement with such workers in the books because in case they show payment to labourers, such transactions can easily get tracked on the filing of returns. There can be cases of litigation between contractors and builders in this regard. It will be highly convenient if the contract between contractors and builders is crystal clear in this regard. Still, the onus to prove that such workers are not engaged by the builder will be on the builder itself.
LITIGATION 3: Construction on Own Account
Another restriction on credits is stated under clause (d) of sub-section (5) of Section 17 of the CGST Act, which states:
“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 on his own account including when such goods or services or both are used in the course or furtherance of business.”
The builder giving the service of “construction of complex, building, civil structure or a part thereof intended for sale except where the entire consideration is received after issuance of Completion Certificate by the competent authority” does not construct buildings on his own account, but on account of his customers who book flats.
But consider a situation where a customer booked a flat, paid some instalments, and then cancelled his booking, and the flat remained unbooked till its completion. Will the whole construction of that flat be considered construction on his own account for the builder, or will it be considered construction on his own account only to the extent it remained unbooked? The answer will determine from which period the input credits already taken have to be reversed. This again is a matter of interpretation, and in the absence of clarification, litigations will follow.
A lot of new areas of litigation have been thrown open by the GST law. Taking regard of the unique and complex structures of the Act, it is natural that such cases will be settled in due course of time; until then, we should all prepare for some tough litigations.