SEAMLESS FLOW OF INPUT TAX CREDIT: AN ILLUSION FOR BUILDERS

[CASanjay Kumawat]

Introduction

One of the fundamental features of GST is seamless flow of input credit across the chain (from the manufacture of goods or provider of services till it is consumed) and across the Country. Input Tax Credit (ITC) is the backbone of the GST regime. GST is nothing but a value added tax on goods & services combined.

In this article, an attempt is made to analyse one very important aspect of GST and its implication on the real estate industry (on builders).

Taxability and exemption

According to paragraph 5(b) of the Schedule-II of the CGST Act, 2017 read with section 7 of the CGST Act, 2017, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier is to be considered as supply of service.

Accordingly, if entire or part of the consideration is received before, earlier of obtaining the completion certificate or first occupation certificate then such activity is to be considered as supply of construction of immovable property service.

In other case, if entire consideration is received after, earlier of obtaining the completion certificate or first occupation certificate then such activity is to be considered as neither supply of goods nor supply of services.

According to paragraph 5 of the Schedule-II of the CGST Act, 2017 read with section 7 of the CGST Act, 2017, sale of land and, subject to clause (b) of paragraph 5 of the Schedule-II, sale of building shall be treated neither as a supply of goods nor a supply of services. Therefore, sale of immovable property (flats/complex) after receipt of completion certificate or occupancy certificate by the builder shall not be subject to GST.

Relevant provisions for Input Tax Credit

     Section 2(119) of the CGST Act, 2017: “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

     Section 16(1) of the CGST Act, 2017: Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

     Section 16(4) of the CGST Act, 2017: A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

     Section 17(2) of the CGST Act, 2017: Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

     Section 17(3) of the CGST Act, 2017: The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

     Section 17(5) of the CGST Act, 2017: Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

1. ………………
2. ………………

3. works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

4. goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

**************Rest are not relevant******************

Analysis of ITC provisions from the point of the Builder

Section 16(1) of the CGST Act, 2017 provides that a registered person can take the input tax credit of tax paid on procurement of goods and/or services to be used or intended to be used in the course or furtherance of the business. Therefore, the tax paid on inputs utilized for construction of residential or commercial complex should be available to builder.

But for the purpose of availment of ITC, section 17(5) of the CGST Act, 2017 overrides to the rights of the registered person to claim credit in certain cases.

Accordingly, the 3 major restrictions applicable to builders are-

1. Section 17(5)(c) of the CGST Act, 2017: Works contract service is received by the builder for construction of an immovable property except where it is an input service for further supply of works contract service. (In other words, until unless input services are used for further supply of works contract service, credit is not allowed to be taken by the builder.)

2. Section 17(5)(d) of the CGST Act, 2017: If goods or services or both received by a builder 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.

3. Section 17(2) read with section 17(3) of the CGST Act, 2017: Common inputs/input services/capital goods are used for supplying both works contract service and sale of constructed building, the eligibility of credit shall be restricted to the proportion attributable to works contract service/construction service and not on the land component.

Accordingly, from the combined reading of the restrictions, as given in section 17, and time limit to avail credit, as given in section 16(4) of the CGST Act, 2017 as discussed above, following points can be drawn for the builders:

1. The builder can’t avail input tax credit till the time he finds a buyer otherwise it will result in constructing in his own account.

It may be noted that credit shall be allowed only to the extent of outward taxable supply or sale of flats to the respective buyer and not on the whole project.

2. The builder can’t take input tax credit after the time period prescribed under section 16(4) of the CGST Act, 2017, i.e., approx. 1 year from the date of invoice of goods and/or services.

Accordingly, for instance, if a builder of a project which normally takes long period, let’s say, 5 years, to complete and he finds the buyer at the end of the 4^th year, then in that case builder can avail the credit only in respect of the goods and/or services purchased in the 3^rd year beginning only and balance credit for the 1^st year and 2^nd year will lapse. 

3. Builder is required to reverse the common credit which is attributable to the portion of land during the sale of such constructed property.

4. It is important to note that if the entire credit is availed from the start of construction till its completion with the hope of prospective buyers, for the flats unsold after obtaining occupancy certificate, there shall be a requirement to reverse the entire credit attributable to those flats.

Further, there is no mechanism has been provided under GST to reverse the credit availed during the previous years by the registered person, accordingly, the liability may be required to be discharged through cash by the builder.

5. If the builder is constructing an office space for his business then in that case also he can’t avail input tax credit on the input supply of goods and or services.

Therefore, in view of the above discussion, it can be said that the main objective of GST, i.e., seamless flow of credit, is an illusion for the builders. Existing provisions of input tax credit will lead to various litigation and assessment related disputes. Further, management of the separate books of accounts for project wise/ credit wise/ flats wise/common utility wise will lead to new and biggest headache for the builders. If the Government does not relax any of the aforementioned restrictions, then the GST may burden the real-estate industry with major Input Tax credit being unavailable.