Impact of gst on The Real estate sector Annual Tax Conference 2017 12th August, 2017 Kolkata S Venkataramani Chartered Accountant

definitions Section 2(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply; Section 2(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Scope of supply [Section 7(1)] For the purposes of the GST Laws, the expression “supply” includes–– all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; import of services for a consideration whether or not in the course or furtherance of business; the activities specified in Schedule I, made or agreed to be made without a consideration; and the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Schedule I (relevant entries) ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.

Schedule II (relevant entries) ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES 2. Land and Building (a) any lease, tenancy, easement, licence to occupy land is a supply of services; (b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

Schedule II (relevant entries) (cont.) 5. Supply of services: The following shall be treated as supply of services, namely: (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. Note: “Construction" includes additions, alterations, replacements or remodelling of any existing civil structure 6. Composite supply: The following composite supplies shall be treated as a supply of services, namely:— (a) works contract as defined in clause (119) of section 2.

Schedule III (relevant entry) Section 7(2)(a) Scope of supply: Notwithstanding anything contained in sub- section (1), activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES 5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Section 17: Apportionment of credit & blocked credits Where the goods/services are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the ITC as is attributable to the said taxable supplies including zero-rated supplies. The value of exempt supply for this purpose (determined in the prescribed manner) and shall include: supplies on which the recipient is liable to pay tax on reverse charge basis; transactions in securities; sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Section 17: Apportionment of credit & blocked credits Section 17(5)(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service; Section 17(5)(d) goods and/or services received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods and/or services are used in the course or furtherance of business. Explanation: The expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Critical matters needing evaluation Whether the activity is a works contract or a composite supply? If it is a works contract – 18% In other cases, tax rate based on principal supply; Where there is no SINGLE principal supply, but the contract value is for a single price, regarded as mixed supply attracting highest rate of tax amongst the supplies involved. 1

Critical matters needing evaluation In case of a JDA between a land-owner and developer: Supply incudes barter, exchange Tax shall be payable at the time of supply – earlier of invoice and payment When does time of supply arise in case of JDAs? Any lease, tenancy, easement, licence to occupy land is a supply of services [Schedule II 2(a)] – impact on land owner? It is better to opt for revenue-sharing arrangement? 2

Critical matters needing evaluation Tax rate: 18% under HSN 9954 (construction services) 18% -- Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, involving transfer of property in land/ undivided share of land (“UDI”), as the case may be, the value of supply of service and goods portion in such supply shall be: Total amount charged for supply ( – ) value of land/UDI. Total value = Consideration for service + Amount charged for transfer of land/UDI. Value of land/UDI deemed to be 1/3 of the total amount. No refund of accumulated ITC. 3

Critical matters needing evaluation Reduction in tax liability in case of cancellations? CREDIT NOTE: Where a tax invoice has been issued for a supply and: the taxable value/ tax charged exceeds the taxable value/ tax payable in respect of such supply; or where the goods supplied are returned by the recipient; or where goods and/or services supplied are found to be deficient. Declare the details in the monthly return but not later than September of year following year in which such supply was made Section 31(6): Where the SUPPLY OF SERVICES CEASES under a contract before completion of supply, an invoice shall be issued at the time of cessation to the extent of the supply made before such cessation. 4

Critical matters needing evaluation Availability of transitional credit of excise u/s 140(3)? Available only on inputs or inputs contained in semi-finished goods or finished goods held in stock; Not available for capital goods; Scheme of 40% / 60% credits based on supplies not available to suppliers of services. 5 In terms of Kerala Advisory 3 on Works Contract: Category Eligibility / Condition The number of flats for which advance has been received Entire ITC on local purchases made through invoice from 01-04-2017 to 30-06-2017. No. of flats completed but no prospective buyer No ITC The number of flats capitalized. Eligibility of ITC in case of semi-finished Apartments. (In an Apartment consisting of 100 flats, only 60 flats are completed) Eligible to avail 60% of ITC.

Critical matters needing evaluation Illustration:- AB Construction Co. is constructing an apartment with 100 flats @ estimated cost of Rs.100 crore. The project commenced 2 years back. The contractor had effected materials purchased against tax invoice for Rs.25 crore, from compounded dealers for Rs.5 crore and Rs.2 crore from unregistered dealers from 01-07-2016 to 30-06-2017. Portion of materials procured during the period was consumed and closing work in progress as on 30-06-2017 is Rs.60 crore. The materials remaining in stock is only Rs.5 crore including purchases from compounding dealer of Rs 1 crore, and Rs. 1 crore relates to prior to 31-3-2017. It is assumed that advance has been received for all 100 flats. Closing material of 5 crore: Eligible to carry forward the balance ITC paid on Rs 3 crore for the closing stock of the materials (provided the Seller uploads the supply in Returns and pays tax and the Contractor has tax invoice). Closing WIP of Rs 60 crore: No ITC is allowable since VAT is to be paid.

Critical matters needing evaluation Section 142(2)(b): Downward price revisions post July 01 Supplier of service may issue to the recipient a credit note within 30 days of price revision For the purposes of GST Laws, such credit note deemed to have been issued in respect of an outward supply made under GST Laws. Supplier allowed to reduce his tax liability on issue of credit note only if the recipient of the credit note has reduced his ITC corresponding to such reduction of tax liability. Clause does not address cases where no ITC availed by recipient. 6

Critical matters needing evaluation Section 142(11)(c): Supply under GST Law Where tax was paid on any supply both under the VAT and Service Tax Laws, GST shall be leviable; The supplier shall be entitled to take credit of VAT or ST paid under the earlier laws to the extent of supplies made after the July 01; Builders / developers to identify the value of completed construction up to June 30. 7

Critical matters needing evaluation In terms of Kerala Advisory 3 on Works Contract: Applicability of Tax Rate on Payments: Work completion Tax liability Works completed and full payment received before 30.06.2017 VAT rate Works completed before 30.06.2017 and part payment received before 30.06.2017 Work completed before 30.06.2017 but full payment received after 01.07.2017 Works completed and entire payment received after 01-07-2017 GST rate Part work completed before 30.06.2017 VAT rate for works completed up to 30.06.2017; GST rate for remaining works Works executed post 01.07.2017 and advance received before Agreement executed before 1.07.2017; works commenced and payments received in GST period

Critical matters needing evaluation Time of supply Time of supply shall be EARLIER OF date of receipt of payment or issue of invoice/due date for issue of invoice. Section 31(5): Timing for invoices for continuous supply of services: Where payment due date ascertainable from contract: Such date Else: Before/ at the time of receipt of payment Where payment is linked to the completion of an event: Such date Note: Period of 30 days post completion of service as is applicable to other services, not available in case of continuous supplies. 8

Critical matters needing evaluation Non-sale dispatches: Supply even if made without consideration: Permanent transfer/disposal of business assets where ITC has been availed on such assets. ITC availed under GST Law alone / earlier laws? Business assets not defined under GST Laws ITC ineligible on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples – double whammy? Supply of goods and/or services between related persons or between distinct persons (GST registrations having same PAN / establishments not having registration in other Sates), when made in the course or furtherance of business Effect on stock transfers, cross-charges 9

Highlights of Kerala Advisory – 3 : CIRCULAR No Highlights of Kerala Advisory – 3 : CIRCULAR No. C1-24614/16/CT E office 11737/17 Dated. 18th July, 2017 With regard to un-utilized advance tax paid, it can be claimed by way of refund. To prove the quantum of work completed as on 30-06-2017 and to reclaim VAT paid, file accounts audited by CAs for Quarter I of 2017-18 showing details of closing WIP and also item-wise stock details. Project-wise details to be furnished as on 30-06-2017: Total no. of flats; No. of flats on which advance received; No. of flats on which advance not received; No. of flats remaining unsold (completed or not); No. of flats capitalized.

Critical matters needing evaluation No composition scheme; Carried forward deductions w.r.t sub-contractors – lost; Retention money – impact due to ITC reversal for non-payment within 180 days; Waivers – Consideration includes any payment made or to be made; Anti-profiteering measure – revaluation of flat prices; Negotiations with vendors – for downward price revisions; Vendor evaluation – Credit available only on matching; Transitional credits – only SGST credits; minimal CGST credits (if any).

Critical matters needing consideration No more deduction-based turnover computation – outward supplies taxable; credit available on inward supplies; Reconciliation statements to be ready – required for matching purposes, statement reconciling returns & financials to be submitted at the time of furnishing annual return; Taxability of supplies effected (inward / outward) during defect liability period; RCM applicable on inward supplies from unregistered persons (including service providers); Tax leviable on interest on delayed payment – to be included in transaction value (i.e., tax rate as applicable to the supply); Evaluate effecting inter-State inward supplies to avail IGST credits.

Crucial issues Where project half-completed prior to July 01 – Whether GST leviable on the completed portion? If not, will part project attract different tax rate? Valuation in case of supplies to related persons? – Can there be an open market value at all? Existing sub-contractor deductions carried forward – status in GST? Will ratio of L&T ruling hold good under the GST Law? Option for taxation on receipt basis? Valuation in relation to projects located in areas where land value very high – e.g. metro cities?

Crucial issues Is GST payable at the rate of construction services even in case of other related supplies? If agreement provides for recoveries from customers – is GST payable even if no amount actually collected? –e.g. cancellation charges How to compute amount of reversals due to unsold flat; Is credit available in case of construction on own account, purely for commercial use – e.g. Malls? Is interior works for furnishing works contract liable to 18% or composite supply liable to 28%? Change in tax rate – increase in tax collected alone acceptable under anti-profiteering measure?

Thank you! S Venkataramani `