Real Estate & GST Are we Heading Towards New Areas of Litigation
The 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 the current Service tax. However GST can be full of surprises and some of the surprises can hit stakeholder hard. Here we will discuss about some grey areas in GST Law which can greatlyimpact the Real Estate Industry and its stakeholders. One of the reason that GST is being applauded of 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 Real Estate Industry, the 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 of Certificate by the competent authority” which is being continued as it is in the GST regime. The 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
They 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 notification.
Currently a builder can take credits of works contract. The works contract is a contract where the service provider provides labour services along with materials. All the builders engage a number of work contractors for their projects. The contracts with them are extensive and they exist for years. In GST the 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 of Certificate by the competent authority” which is taxable at 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 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 and the builders as they 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 present scheme will not be allowed to be transferred in GST regime. A clarification from the ministry will be welcomed.
Builders will have to make amends in their existing contracts to take the benefit of credits in future
A new system of reverse charge has been introduced by the GST Law whereby any purchase of services or goods from an un- registered person by a registered person is liable to GST on reverse charge basis i.e. the recipient will have to pay tax on it. This provision is new to taxation system and it will pose problems on implementation. Say where labourers have been engaged in the projects by labour contractor. A common practice has been witnessed that these contractors to save themselves from PF and ESI regulations show less number of labourers engaged by them. If the wo rkers are not considered as employees then the provisions of reverse charge will get attracted as each single labour that is un- registered is providing services to a registered person. Although there is a lot of scope of tax evasion in this regard with collusion, there will be liability of GST. In case of scrutiny and on finding 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 then such transactions can easily get tracked on filing of returns. There can be cases of litigation between the contractors and the builders in this regard. It will be highly convenient if the contract between the contractors and builder 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.
Another restriction on credits is stated under clause d of sub-section 5 of section 17 of CGST Act where it 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 r 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 exceptwhere the entire consideration is received after issuance of Completion of 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 remain un- booked 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 un-booked? The answer will determine as from which period the input credits already taken have to be reversed. This again is a matter of interpretation and in 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 but natural. Such cases will be settled in due course of time until then we should all prepare for some tough litigations.