GST- Input Tax Credit

GST- Input Tax Credit
Sep 2017 , by , in Legal Opinion & Counsel

In GST, Input Tax Credit (ITC) facility is being hailed as biggest game-changer. However, buyers across markets are perplexed thinking how the whole mechanism will work.

The Goods and Services Tax (GST) has finally become a reality and is touted as the one of the biggest tax reforms in Indian. For real estate, removing the cascading effects of the current tax regime to pave way a simple and single transparent tax applied on the purchase price is the biggest take-away for property buyers.

While the GST is being lauded for simplifying the tax structure, the Input Tax Credit (ITC) is being seen as the biggest game changer whereby credits of input taxes paid at each stage of production or service delivery can be availed in the succeeding stages of value addition. At present, the Industry is rife with speculation about the functioning or implementation of ITC facilities in real estate and its role to force a dip in real estate prices.

This is because, under the GST structure, buying under-construction properties will attract a net effective rate of 12% as against the earlier rate of around 4.5-9% (Including VAT & service tax that varies across states). However, due to the input credit benefits that most builders will get on the key raw materials they buy, the buyer could actually benefit in terms of lower prices.The optimists might buy into the argument, but sceptics believe that the reality on the ground could be very different.

 

Passing the ITC Benefits to Customers

The quantum of GST a developer will be charging customers will be based on total outstanding amount as on July 1, 2017. This can be different for different customers in the same project. It is, therefore, possible that different customers in the same project with different amounts payable to the builder and different customers in different projects with the same amount payable to the builder may end up getting a different input set off benefit.

 

Costof theHousingUnit 80,00,000 80,00,000
Costof Construction@50%-Assumed 40,00,000 40,00,000
DeveloperAlreadySpent – Assumed 30,00,000 30,00,000
GST toDeveloper@18%-Assumed 1,80,000 1,80,000
 
  Scenario-I Scenario-II
OutstandingwithBuyer 10,00,000 60,00,000
GST Payable@12% 1,20,000 7,20,000
PassableBenefits 1,20,000 1,80,000
ITC Benefit to Buyer Full Partial

 

The troubling part for developers is that, they themselves are left in the quandary to ascertain regarding the ITC benefits they would be getting from their vendors. For new projects or projects in early stages of construction, it may be relatively easier, but developers are left with significant challenges on how to rework contracts with existing customers in case of partly paid for projects well ahead into their construction, say 50%.

The valuation of land in the payment of taxes is another major challenge for developers who are expected to pass on the ITC benefits to buyers. As proposed earlier, stamp duty has not been summed up in GST. Hence, if the government doesn’t come out with the abatement of the land value in the valuation of taxable amount, it will lead to double taxation of the land being transferred to the buyer during execution of the project. “In case of a joint development project, total taxable value of land will be a matter of concern. In the coming times, this should get addressed by authorities and courts. The buyers may end up paying higher cost in absence of abatement of the land.

Right now, there is no transparent formula whereby a customer can ascertain what benefit he can get. It hinges on developer’s capacity to get the ITC for input taxes for themselves first and then willingly pass the same to buyers, separately for individual projects. Hence it will be given only when it is available with developers in actual terms.

 

Anti-profiteering Provisions in GST Law

To ensure that manufacturers, developers and service providers pass on the benefit to the final customer, the Government has included an anti-profiteering clause in the GST bill under section 171 of GST law. This clause clearly states that it is mandatory to pass on the benefit tax reduction due to input tax credit to the final customer.

 

 

CBESDirective

•Section171oftheCentralGSTActprovides thatany reductioninrateoftax onany supplyofgoods or

servicesorthebenefitofinputtaxcreditwillbepassedontotherecipientbywayofcommensuratereduction inprices

 

Typical

Procedure

•Asperthestructure,thecomplaints ofprofiteering wouldfirst cometotheStanding Committeecomprising

tax officialsfromstatesandtheCentre

•It wouldforwardthecomplaintto theDirectorateofSafeguards(DGS)for investigation,which is likelytotakeabout2-3monthstocompletetheinquiry

•Oncompletionofinvestigation,thereport wouldbesubmittedtotheanti-profiteeringauthoritywhichwoulddecide onthepenalty. Wheretheconsumercannotbeidentified,therecoveredamountshallbe depositedintheConsumerWelfareFundasprovidedunderSection57 oftheCentralGST(CGST)andStateGST(SGST)Acts,

 

•A periodof8-11months hasbeenprovidedforthewholeprocessinvolvingscreeningofthecomplaintand subsequentinvestigationandaction, ifany,bytheanti-profiteeringauthority.

Anti-

profiteeringAuthoritySet-up

•A5memberanti-profiteeringauthoritywill besetuptodecide onlevyingpenaltyifbusinessesdonot pass

onthebenefitofprice reductiontoconsumersunderGST.

• Theauthority,tobeheadedby aretiredsecretary-levelofficer,cantakesuomotuaction,besidesactingon complaintsofprofiteering

Time-

Frame

 

TheAnti-profiteeringprovisionwill haveasunsetdateof2 Years

 

There is no concrete mechanism to compel developers to pass the benefits. While theanti-profiteering guidelines serve as a deterrent, but it remains to be seen how many actually comply with the law in an honest manner. Sadly, if they choose not to, it is the buyers who have to suffer and go through 8-11 months long time to get the justice.

From buyer’s perspective, how do they ensure that 100% benefit is passed on to them? Where they can verify the input tax credit details verified for their individual projects and calculate the benefit available to them. At present, while their liabilities in terms of higher GST on subsequent instalments are fixed, their benefits are not fixed or guaranteed.

Already many confused buyers are writing to developers asking for clarity on their available benefits in response to developer’s mails stating that going forward 12% GST is to be charged on future instalments. That is where there is scope for disputes & litigations, if developers are unable to provide satisfactory answers.

While, ITC measure has the potential to be a definitive catalyst for bringing down the real-estate prices, there is urgent need to safeguard the buyer’s interest more than framing the guidelines for developers. A detailed mechanism to ensure the smooth implementation of ITC facility is warranted to educated average home buyers about the process & implementation of ITC to make it, what it is envisaged for.

Excerpts – A Liases Foras Real -estate Ratings and Research Pvt. Ltd Report

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