Recent rulings by National Anti-Profiteering Agency have made it clear that citing practical difficulties for inability in passing on the profits is not acceptable to authorities. Profit, if accrued, needs to be passed on
The last couple of months have seen a lot of action on the Goods & Services Tax (GST) front. Apart from rulings pronounced by the National Anti-Profiteering Authority, there have also been notifications, circulars and FAQs released by the government to clear any ambiguity on the issue.
In its recent ruling, the National Anti-Profiteering Agency (NAA) had held that excuses such as uncertainties associated with the GST regime cannot be used to deny homebuyers benefits of a lower tax rate. What this means is that if a real estate developer has benefited from the introduction of GST in terms of lower rate of tax, or additional input tax credits (ITC), the benefits should be passed on to homebuyers.
In the second week of May, the Central Board of Indirect Taxes and Customs (CBIC) had issued the second set of FAQs for real estate sector, wherein it said that builders will not be able to adjust the accumulated credits in ongoing projects in case they opt for lower new GST rate of five percent for normal and a percent for affordable housing.
Homebuyers too will have to pay 12 percent GST on the balance amount due to the builder if the housing project has been granted completion certificate by March 31, CBIC said.
Builders who have received completion certificate for an ongoing project before April 1 will have to charge 12 percent GST from buyers on the balance amount due towards purchase of the flat.
The GST Council had in March permitted real estate developers to shift to the five percent GST rate for residential units and a percent for affordable housing without the benefit of input tax credit from April 1.
For the ongoing projects, builders have been given the option to either continue in 12 percent GST slab with ITC (eight percent for affordable housing), or opt for 5 percent GST rate (one percent for affordable housing) without ITC and communicate to their respective jurisdictional officers the same by May 20.
Here are some recent rulings pronounced by the NAA, which have held that the developer must pass on the benefit on account of GST to homebuyers.
Salarpuria Real Estate Pvt case
The applicant or the homebuyer Sahil Mehta had purchased a flat in the East Crest, Bengaluru project launched by Salarpuria Real Estate Pvt. The unit was booked before GST came into force.
The Directorate General of Anti-Profiteering (DGAP) in its report highlighted the following: The respondent had accepted the fact that he had profiteered post-GST. However, due to non-availability of computation, the benefit could not be passed on.
The report had determined a profiteering of 1.45 percent on the transaction value.
The respondent had raised the following points in his defence: The project did not fall under the affordable housing category and hence, being a residential project, the normal rate of GST was applicable at the rate of 12 percent. He contended that since a large portion of the work had been undertaken by sub-contractors, details of ITC were not available with the respondent.
After considering the legal provisions and facts of the case, the National Anti-Profiteering Authority (NAA) held that the contention of the respondent that computation of the benefit or loss could not be done before completion of the project is not tenable.
Since the respondent had regularly availed the benefit of additional ITC, he cannot be allowed to enrich himself at the cost of homebuyers and keep them waiting till the project was completed. The authority agreed with the findings of the DGAP and directed the respondent to pass on the benefit to the applicant and other buyers.
Case of Puri Constructions
The applicants or the buyers in the matter, Pallavi Gulati and Abhimanyu Gulati, had purchased a flat in Anand Vilas Project. The unit was booked before GST came into force.
DGAP in its report said the respondent had completed around 60 percent of the project work using inputs which were liable to higher GST at the rate of 18-28 percent due to which additional ITC benefit had accrued to him.
It also stated that the benefit of additional ITC was more than the increase in the rate of tax, which showed that the net benefit of ITC had accrued to the respondent and had not been passed to the buyer.
The builder in his defence claimed that the buyer had withdrawn the complaint, alleging that the respondent had not passed on the benefit of ITC to him, which showed that he was satisfied with the explanation given. He claimed that the GST rate had changed on various goods and services and with the reduction in rates on over 200 products, ITC would also be reduced. Hence, accurate computation of the benefit would be possible only once the project is completed
The NAA held that the submission of the respondent that the buyer had withdrawn the complaint, hence the investigation conducted against him should have been dropped would not hold good as there is no provision in the GST Act to withdraw the complaint once it has been made and therefore the DGAP has rightly perused the investigation. NAA further held that additional ITC had accrued to the respondent and agreed with the findings of the DGAP. It directed the builder to pass on the benefit to all eligible homebuyers.
Eldeco Infrastructure & Properties case
The applicant or the buyer in this case, Varun Goel, had purchased a house in the Eldeco County, Sonipat project launched by the builder. The unit was bought before GST came into force.
DGAP in its report highlighted that the respondent had accepted the fact that he has profiteered post-GST and suo-moto computed the benefit at two percent of the amount paid under the GST regime. The report had determined a profiteering of 2.84 percent on the transaction value.
In his defence, the builder argued that the project was completed in most aspects in pre-GST era and there were nominal purchases during the GST regime. Also, service tax or GST should not applicable on sale of building since the sale was made prior to receipt of the completion certificate and that the same shall be treated as supply of construction services, liable to service tax or GST.
NAA upheld the contention of the respondent that computation of the benefit or loss has already been passed on to the buyers with interest would not release them of their liability of payment of penalty.
Accordingly, the authority agreeing with the findings of the DGAP directed the respondent to pass on the benefit to the applicant and other buyers to the extent reported in the findings and directed the Commissioner of CGST/SGST of Haryana to monitor the said order.
Analysis of each of these cases shows that the real estate service providers have turned a blind eye to the increase in the total credit pool and have focused only on the benefit to be passed on in case of a rate reduction. Moreover, the absence of computational machinery has also handicapped real estate stakeholders to compute the benefit that needs to be passed on, says real estate tax experts.
A reasonable method casted-off by the DGAP is to calculate the percentage benefit on ITC to the taxable turnover. Moreover, the benefit has been computed by DGAP, not just for the applicant, but also for the other homebuyers to whom such benefit was supposed to be passed on, they say.
“With this and some other recent NAA rulings, it is amply clear that citing practical difficulties for inability in computing or passing on the profits is not acceptable to authorities. Profit, if accrued needs to be passed on,” says Harpreet Singh, Partner, KPMG.
“There are enough rulings now, to make the homebuyers aware that, builders who have gained on account of additional input tax credits, need to pass on the same to them,” he adds.