Home Taxes GST GST ON REAL ESTATE – ANTI PROFITEERING IS THE BIG AGENDA

GST ON REAL ESTATE – ANTI PROFITEERING IS THE BIG AGENDA

September 10, 2018

GST ON REAL ESTATE – ANTI PROFITEERING IS THE BIG AGENDA

By CA Ankit Gulgulia (Jain)

Yesterday, in the evening CBEC issued a PRESS RELEASE No. F. No.296/07/2017-CX.9 dated 15^thJune, 2017 which clearly suggests that government is going to provide strong teeth to Anti Profiteering Clause under GST especially in Real Estate to ensure the GST does not leads to increase in Prices. Increase in Price is surely not only a Tax Matter but a very well Political Matter also therefore we understand strong carding to Anti Profiteering by CBEC and Department officials.

Recommended Read:- Anti Profiteering Provisions under CGST, 2017

The Press release suggests that the people who have booked flats and made part payment are being asked to make entire payment before 1st July 2017 or to face higher tax incidence for payment made after 1st July 2017 by the Builders / Developers is against the GST law. More Clearly to say it is against the so framed Section 171 of CGST, 2017 i.e. Anti Profiteering for the reasons as prescribed below.

Construction of flats, complex, buildings will have a lower incidence of GST as compared to a plethora of central and state indirect taxes suffered by them under the existing regime.

Central Excise duty is payable on most construction material @12.5%. It is higher in case of cement.In addition, VAT is also payable on construction material @12.5% to 14.5% in most of the States. In addition, construction material also presently suffers Entry Tax levied by the States.

Input Tax Credit of the above taxes is not currently allowed for payment of Service Tax. Credit of these taxes is also not available for payment of VAT on construction of flats etc. under composition scheme. Thus, there is cascading of input taxes on constructed flats, etc.

As a result, incidence of Central Excise duty, VAT, Entry Tax, etc. on construction material is also currently borne by the builders, which they pass on to the customers as part of the price charged from them. This is not visible to the customer as it forms a part of the cost of the flat.

The current headline rate of service tax on construction of flats, residences, offices etc. is 4.5%. Over and above this, VAT @1% under composition scheme is also charged. The buyer only looks at the headline rate of 5.5%. In other cities/states, where VAT is levied under the composition scheme @2% or above, the headline rate visible to the customer is above 6.5%.

What the customer does not see is the embedded taxes on account of cascading and sticking of input taxes in the cost of the flat, etc.

This will change under GST. Under GST, full input credit would be available for offsetting the headline rate of 12%. As a result, the input taxes embedded in the flat will not (& should not) form a part of the cost of the flat. The input credits should take care of the headline rate of 12% and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed.

The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/ installments. It is, therefore, advised to all builders / construction companies that in the flats under construction, they should not ask customers to pay higher tax rate on installments to be received after imposition of GST.

Despite this clarity on law position, if any builder resorts to such practice,the same can be deemed to be profiteering under section 171 of GST law.

—

Author’s Comment :-

A) Clearly, the government understands that the increase in direct rate of GST i.e. 12% vs. the earlier combined rate under Service tax and VAT is considerably high so the increase in price will be significant and corresponding Input tax credit must match somewhat to reduce the prices. This is easier said than done since the credit unlocking will Developer to Developers and so will the reduction in Prices (on percentage basis) on account of Anti Profiteering.