5 Flaws in NAA Methodology for Computing the Anti Profiteering Demands on Builders and Developers
Both Director General Anti Profiteering (DGAP) and National Anti Profiteering (NAA or NAPA) has been busy offlate in deciding the quantum of profiteering by Developers and Builders across India more specially in Delhi NCR. Plethora of Developers are under scrutiny and most of them have been found guilty of profiteering.
Section 171 was inserted in the CGST Act. It provides that any reduction in rate of tax or benefit of Input Tax Credit (hereinafter referred to as ‘ITC’) shall be passed on to the recipient by way of commensurate reduction in the price.
Section 171 also provides that the Central Government will constitute an authority to examine the profiteering. Accordingly, the National Anti-Profiteering Authority (hereinafter referred to as ‘NAPA’) was constituted with great pomp and show. The taxpayers were informed by the government through various advertisements to pass on the eligible benefit.
There had been various complaints by the customers against big brands as well. The NAPA came heavily on such companies wherein huge amounts were computed in different industries, especially in FMCG Sector and Real Estate Sector. However, in these matters various contentions had been raised by the suppliers.
I am assuming, you have basic understanding of anti profiteering and thereby not rediscussing the basics here again. In any way to rebrush the basics, you can revisit my earlier blog on this matter on link below.
Recommended Read:- https://charteredonline.in/gst-anti-profiteering-real-estate-calculation/
Perspective of Suppliers
Suppliers have challenged the orders of NAPA in the different High Courts on various grounds including the constitutional validity of Section 171, absence of judicial member in NAPA, GST law acting as price regulator or price controller in a free market economy, etc.
Besides the above contentions, there have been wide range of issues which are raised by taxpayers in different industries. The basic fundamental question which has been raised by all is regarding twin problems faced by them – how to compute the benefit and how to pass on the benefit?
The present article attempts to deal with nitty-gritty of various issues faced in real estate sector in this area
Methodology ‘determined’ by NAPA in Real Estate
A standard method being adopted by the NAA is becoming unreasonable for developers
A perusal of various orders issued by the NAA on the passing of tax credit benefit by the developers seems to indicate that the NAA has adopted a standard method of identifying the benefit of the tax credit – which is based on the difference between the ratio of tax credit to turnover in the pre and post GST regime.
In most orders, such computations are made typically for the period under investigation and do not cover the entire tenure of a project or time of receipt of occupancy/completion certificate. For the pre-GST regime, the computations made in various orders have considered CENVAT credit of Service tax and Value Added Tax (‘VAT’, only in some cases and the corresponding turnover pertaining to area sold to arrive at a ratio of a tax credit.
Similarly, for the post-GST regime, the ratio of total GST credits (including transitional credits in some cases) to turnover pertaining to area sold (for which any consideration is received in the post-GST period) have been considered. The benefit of the tax credit, treated as profiteering, has been broadly computed by applying the ratio of such differential credit to the post-GST turnover. This methodology, however, seeks to compute benefit to be passed on to various customers on an average basis and without considering various factors such as the stage of construction at which a contract with a particular customer was entered, schedule for milestone payments, change in rate of tax on procurements in pre and post GST regime, etc.
Considering the peculiar business practices and long tenure of projects, the methodologies and principles adopted by the NAA for computation of profiteering for a real estate project are found unreasonable by various developers. Computation of profiteering and corresponding benefit to be passed on only for a specific period (viz., period under investigation) and at a given point in time seems to be inaccurate since eventual tax credits for a project are subject to considerable changes due to several factors such as unsold inventory at the end of the project, subsequent change in rate of tax and corresponding impact of tax credits, etc. However, the argument of computing the benefit for the entire project only at the time of receipt of occupancy/completion certificate has been specifically rejected by the NAA in various cases.
5 Flaws in the Computation Methodology
A) Comparing Apples with Oranges
The two major components of the formulae, i.e., credit and turnover cannot be compared due to the simple reason that there is no correlation between turnover and credit. The turnover is dependent upon the marketing strategy adopted by the developer. Credit is directly linked to the cost of the construction of the project.
The credit availability in a Real Estate Project might differ from any other manufacturing business or a one-time service contract. The project life-cycle of a Real Estate Project may range from 3-4 years and during such a period developer may continue to construct the building and avail the credit of taxes paid in respect of the cost incurred towards the construction.
A developer might not be able to sell the units at the start of the project. The sales might happen anytime during the construction of the project or even after the completion of the project and, accordingly, the turnover is reflected in the periodic returns. On the contrary, schemes might be operated by the developers wherein the major payments would be received and reflected in the returns nearer to the completion of the Project.
The effect of availability of credit in different phases of the project life-cycle depending upon the business arrangements adopted by different developers; the same method cannot be applied to all the projects to arrive at an equitable profiteered amount in proportion to the turnover which is attained only after the completion of the project.
B) Increase in Credit Benefit of Credit
The above mechanism also takes into account increase in rate of tax on inward supplies which leads to consequential increase in credit as benefit of ITC.
C) No Fixity in Pattern
In addition to the above, there is no fixed pattern in respect of the period considered by NAPA while taking the figures of “Pre-GST” and “GST” period. Generally, NAPA is taking the figures of pre-GST period as April 2016 to June 2017 and GST period is taken as the date nearest to the date of investigation by DGAP. Usage of different periods in the above formulae has resulted into profiteering at whims and fancies of the NAPA.
D) GST Collected on Profiteered Amount is paid to Department so how that be Profiteering
NAPA has also time and again considered even the GST collected by developer on the profiteered amount as part of profiteering only. The excess GST collected on the so called “profiteered amount” is not retained by developer, rather it is deposited to the government and it should not be termed as profiteering.
E) The fine line between discount and profiteering
The NAA has also sought to distinguish between ‘discount’ and ‘profiteering’ in various cases where developers have claimed to have already passed benefit by way of credit notes issued for discount. Such disallowance only on the basis of description included in a credit note without a detailed understanding of the nature of reduction seems to be high handed. Further, in some other cases, the difference in computation methodology adopted by developers and the NAA has led to situations where despite the passing of benefit in excess of the computation made by the NAA, profiteering has been identified qua specific segment of customers due to difference in the amount of benefit passed to individual customers.
Recourse & Way Ahead for Developers
The steady stream of NAA orders for developers is continuing and the issues, as well as concerns discussed above, is leading to a multiplicity of litigation.
The only recourse against an order of NAA is to file a writ petition before the High Court and hence, a lot of matters in this regard are now before the High Courts. Further, In my view the matter will be only settled when it lands up in Supreme Court.
In retrospect, it would have been a lot better if a standard method or guidelines of computation of profiteering were prescribed in advance and in consultation with the industry. While the time to do so has already passed, one can now only hope for better consideration of practical concerns and inputs of developers while computing profiteering amounts.