Impact of GST on Construction Industry: Construction and real estate has been a booming sector in India, which is facing a major slowdown in the aftermath of demonetisation. It has always been a sector riddled with litigation owing to multiplicity of taxes and dual administration mechanism; thereby exposing it to the conundrums of both Central and State levies. Currently, certain activities in this sector command a cumulative tax levy on effectively 140% of the actual transaction value owing to cascading effect. Further there are long standing issues which have not been concluded till date. now check more details for "Impact of GST on Construction Industry, Works Contract Provisions"from below....
Impact of GST on Construction Industry
Relevant Changes to Ponder UponAvailability of Input Tax Credit for Construction of Immovable Property: Under the current tax regime, Cenvat Credit on inputs used for construction of a building or a civil structure or any part thereof is restricted, however, the Cenvat Credit of input services and capital goods is permitted. It is imperative to mention here that Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”) restricts the Input Tax Credit (ITC) of goods (inputs and capital goods both) and input services only in the event when the goods and services are being used for construction of an immovable property (other than plant and machinery) by a taxable person on his own account including construction of such immovable property for furtherance of business. Therefore, it can be inferred that ITC is not restricted when goods and services are being used by a taxable person in the same line of business. Hence, under the GST regime builders/ developers would be eligible to take ITC on inputs which was earlier restricted.
WHAT IS A WORKS CONTRACT?
- Works Contract is
- a composite contract
- where there is transfer of property in goods along with supply of services
- which are interrelated with each other.
- An agreement of building, construction, manufacture, processing, fabrication, erection, installation, repair or commissioning of any movable or immovable property may be called a works contract.
Works Contract under GST
- WORKS CONTRACT HAS BEEN DEFINED IN SECTION 2(119) OF CGST ACT,
- contracts involving constructions of immovable properties are only kept within the purview of works contract under GST Law
- A contract in relation to movable property, however, would be treated as a ‘composite supply’ of goods or services depending on the principal supply.
Increase in cost of property:The Hon’ble Supreme Court in the case of K Raheja Development Corporation vs State of Karnataka (2005) 141 STC 298 (SC) upheld by the larger bench in Larsen & Tourbo Ltd vs state of Karnataka (2013) 65 VST 1 (SC) para 101,Para 115 of the said order clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the state Government. However, this is overturned in the GST regime by virtue of clause 5(b) of Schedule II in which it is mandatory to pay the entire consideration after occupation or completion certificate to avail exemption from GST. Meaning thereby in the construction linked payment cases GST is leviable on the full value of sale irrespective of the stage of construction status. Impact on working capital in case of supplies from unregistered persons: If the registered person purchases goods or procures services from any unregistered supplier then as per Section 9(4) of the CGST Act, 2017 he would be required to pay GST from his own pocket under reverse charge mechanism in a month and would be eligible for ITC on the same in next month.
Taxability of Transfer Development Rights (TDR)a) Transfer of land development rights by the landowner to the builder/ developer: - TDRs being a benefit arising from the land, thus the same shall be considered as a benefit arising out of an immovable property as defined under Section 3(26) of General Clause Act, 1987, therefore the same is neither taxable under the Service Tax Law nor taxable under VAT regime. Now, as per entry no. 5 of the Schedule –III to the CGST, 2017, only sale of land and building is neither supply of goods nor supply of services. Thus, it needs to be clarified by the Government whether the benefit arising out of such land and building would be covered under the ambit of entry no. 5 of the Schedule –III to the CGST, 2017.
- from landowner, in the form of land/development rights:- In this case the builder/ developer has already received the consideration in the form of transfer of development rights prior to the issuance of completion certificate by the competent authority, therefore the same is taxable under Section 66E of Finance Act 1994.
- from other buyers:-In this case, if the builder/ developer receive any consideration prior to the issuance of completion certificate by the competent authority, then the same is taxable under Section 66E of Finance Act 1994 and if the entire consideration is received after the issuance of completion certificate by the competent authority, then the transaction is not taxable.
Works Contract Services
Chargeability pertaining to Works Contract under existing law and GST regimeChanges in GST vis a vis earlier laws
|Activity||Chargeability under VAT||Chargeability under Service Tax||Chargeability under GST|
|Works Contract relating to immovable property||On goods or specified portion as goods||On service or specified portion as service||Entirely as service|
|Works Contract relating to movable property||On goods or specified portion as goods||On service or specified portion as service||Depends upon which is the principal supply treating such works contract as a composite supply|
Reversal of ITC under Works Contract:If the builder has a project in which there are 1000 flats. However due to market conditions or for any other reason he is able to sell only 800 flats till the time he receives the completion certificate. In this case, he will have to reverse the credit taken on the balance 200 units as upon receipt of completion certificate, these flats would become building and would be covered under entry no 5 of schedule III of the CGST Act, 2017. In this scenario, he may be liable to pay interest on such reversal of credits for the period starting from the date of completion certificate till the date of actual reversal at the prescribed rates.
Scope widened for ITC under GSTThere is one welcome provision in the GST Law that the criteria fortaking credits of taxes is made enlarged and liberalised. Now all input and /or input services which are used or intended to be used in the course of furtherance of business, credit of taxes charged on such input / input services would be available without making any correlation with the output supply. This change will help increase the business efficiencies and cost effectiveness.
Impact of restricting ITC benefit for Assets for Lease
Transitional Challenges Under GSTIn construction industry stock in hand comprise of the following namely:
- Building Raw Material and Components
- Land Stock
- Transfer Development Right Stock
- Work in progress
- Stock in Trade –Flats /Finished Products
Analysis of Section 140 transitional provisions
|Section||Registered person shall be entitled to take||Remarks|
|140(1) other than composition||CENVAT credit carried forward in the return furnished by him under existing law.||Conditions:|
1. the said credit is admissible under GST law. (Section 17(5) (c) and (d) which restrict input credit of works contract or construction activity if used by end user only.) or
2. the registered person has filed all his returns for the last six months or
3. credit shall not relate to goods manufactured and cleared under such exemption notifications.
|140(2) other than composition||Unavailed CENVAT credit in respect of capital goods, not carried forward in a return not furnished by him under existing law.||Conditions:|
1. the said credit is admissible under GST law. (Section 17(5) (c) and (d) which restrict input credit of works contract or construction activity if used for end user only.)
|140(3) Applicable in 8 special category of person including works contract or construction activity.||credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day||Conditions:|
1. such inputs or goods are used or intended to be used for making taxable supplies under GST;
2. said registered person is eligible for input tax credit on such inputs under GST;
3. said registered person is in possession of invoice or other prescribed documents;
4. invoices or other prescribed documents were issued not earlier than twelve months; and
5. supplier of services is not eligible for any abatement under GST:
|140(4)||This section allows CENVAT credit of point 1 & 3 above if manufacturer or service provider engaged in taxable as well as exempted activity both.||Refer point no 1 and 3 above.|
|140(6) Applicable where person paying tax at a fixed rate or paying a fixed Amount||credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock||Conditions:|
1. such inputs or goods are used or intended to be used for making taxable supplies under GST;
2. said registered person is not paying tax under section 10;
3. said registered person is eligible for input tax credit on such inputs under GST;
4. said registered person is in possession of invoice or other prescribed documents; and
5. such invoices or other prescribed documents were issued not earlier than twelve months: