The GST Council in its 34
th meeting has approved operational details for implementation of its recommendation to lower effective GST rates. The main topic of discussion for this council meeting revolved around tax rates applicability for housing construction projects and the rules that govern transitioning to new GST rates from old rates.
With fewer working days left, a notification on these decisions is still not placed before the public for consumption and analysis purposes. Decisions of the council meeting conveyed by way of the press release were confusing and lacked legal backing. We have identified some of the vital issues that emerge from the press release.
Option for ongoing projects
The GST Council decided to provide a one-time option for ongoing projects where construction and bookings started before 1st April 2019. This one-time option will allow the promoters to continue tax payment at old rates of 8 percent or 12 percent with Input tax credit (“ITC”).
Clarity on the definition of the “ongoing projects” has not been given yet, as the press release only states about projects where construction and booking both have started. In many of the projects construction and booking would have begun but no actual bookings would have been received, in cases of soft launch developer may have started collecting money without initiating the construction on the ground and in some cases developer would be in the planning stage but no construction would have started on the ground. What needs to be seen is the legal meaning of “on-going projects”. Lack of clarity would give tax authorities all the right to disallow tax credit in cases of such “ongoing projects”. This would increase the tax risk on companies burdening them with high costs of litigation.
Also, where a project consists of multiple phases wherein phase one has been launched and construction/booking has begun, but in remaining phases, no physical construction/booking has started, whether the option to opt for continuation of the existing scheme would be available or not? What needs to be seen is the definition of “ongoing projects”, whether it would be considered project wise, phase-wise or company wise.
During the construction phase of a project, commercial area/residential area undergo a change due to governmental, technical or economic compulsions. In such case what tax treatment would be adopted is not clear.
A popular assumption is that no deduction on account of land value would be admissible in case taxpayer opts for lower tax rates, however, this is only our assumption. The press release is silent on the matter related to computation of value based on which tax rate would be applicable.
Conditions for availing new GST rates benefits
The GST Council has provided numerous conditions for claiming lower rates of taxes one of which is 80 percent of the input goods and services for the construction are to be purchased from registered suppliers. It is difficult for companies to keep track of 80 percent threshold and what is more painful is proving the same to tax authorities in the event of any investigation. Also, what needs to be seen is whether this condition of 80 percent needs to be satisfied on a monthly basis/ quarterly basis/ annual basis.
If a developer does not purchase 80 percent of inputs and services from the registered person, in that case, the tax on such shortfall in purchases from the registered person shall be paid by the builder at the rate of 18 percent on reverse charge basis. The government though has restricted the tax credit, but it has ensured flow of tax revenues by keeping this threshold of 80 percent.
Definition of this 80 percent threshold limit could be a game changer. Clarity is needed on whether it shall include cost allocations from distinct entities, cost allocations from ISD, payment of employee costs, procurement from pure agents and payment of finance costs also.
Transition scheme for ongoing projects with new tax rates
For ongoing projects that are willing to opt for the new tax rates, a transition scheme for ITC will be required, as decided broadly it will be done on pro-rata basis. The GST Council approved a transition formula for residential projects which will be determined based on the percentage of flats booked and invoicing done.
It is easier said than done, stakeholders would need specific rules for the determination of the transitional ITC, as it can’t be left open to whims and fancies of the tax officer.
Builders would feel a pinch in case they have already passed on the benefits of tax credits to the customers on existing estimates in anticipation that ITC will be available in future, which is in line with the requirement of anti-profiteering provisions.
We hope that the government would come up with all relevant notifications resolving all the abovementioned issues and clear the ambiguity.
Rajat Mohan is partner, AMRG & Associates. The views are personal.