GST ISSUES - REAL ESTATE AND WORKS CONTRACT Decoding the regulation…. CA Ankit Chande JDT & Associates Aurangabad 01st December,2018

CONTENTS FOR THE DAY GST – An Overview Pre and Post GST Impact Issues – Case Studies Issues – Transitional Credit Other issues

An Overview of Works Contract Taxability of Works Contract Under Previous Tax Regime : Various provisions were in place to separately determine the value of taxable goods and taxable services in the total consideration of a works contract. VAT was charged on the value of sale of goods component and Service Tax was charged on the value of service component. Works Contract under GST : Defined in Section 2(119) of the Act. "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 Contracts involving constructions of immovable properties are only kept within the purview of works contract under GST Law A contract in relation to movable property, however, would be treated as a ‘composite supply’ of goods or services depending on the principal supply.

An Overview of Works Contract As per Section 9 of the CGST Act, 2017, CGST is levied on all intra-State supplies of goods or services or both, except on alcoholic liquor for human consumption. To have understanding of this section, it is important that three major definitions be examined – Goods, Services and Supply. “Goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply - (Sec.2(52) of CGST Act) “Services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged - (Sec.2(102) of CGST Act)

An Overview of Works Contract “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.

An Overview of Works Contract Clause 6(a) of Schedule II deems the following to be supply of services : works contract as defined in clause (119) of section 2 Clause 5(b) of Schedule II deems the following to be supply of services : “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."

An Overview of Works Contract Section 7(2) overrides the definition of supply given as per Section 7(1) of the CGST Act 2017. As per this sub-section, the activities or transactions specified in Schedule III are to be treated as neither supply of goods nor supply of services.  Para 5 of the said Schedule III states as the following : "Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building“

An Overview of Works Contract Input Tax Credit in respect of works Contract As per Section 17 (5) (c) of CGST Act 2017 Input Tax Credit shall not be available in respect of the following, namely: “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” The restriction does not apply to plant and machinery and also in case the input services are further used for supply of Works Contract service under GST (Contractor can avail the ITC in respect of services availed from the sub-contractor

Works Contract Services Chargeability pertaining to Works Contract under earlier law and GST regime. Changes in GST law vis-à-vis earlier laws Activity Chargeability under VAT Chargeability under Service Tax Chargeability under GST A Works Contract relating to Immovable Property. On goods or specified portion as goods. On service or specified portion as service. Entirely as service B Works Contract relating to Movable Property. On services or specified portion as services. Depends upon which is the principal supply treating such works contract as a composite supply.

An Overview of Construction Services Particulars Service Tax VAT Total GST Sale of Flats and Units – Under Construction 4.5% 1% 5.5% 18% (1/3rd Reduction of land) Joints Development – Owner Area 4.5% to 6% Nil Rehabilitation of Flats 6%

Issues – Case Studies Case – 1: Volks Wagon is a developer who has undertaken a project wherein they are making 2 BHK and 3 BHK units. The Company has following concerns after amendment made in GST rates vide Notification 01/2018 – Central Tax (Rate) dated 25.01.2018. What are the parameters to decide whether a project is covered under affordable housing? Is there any specific procedure to be followed for claiming the project under affordable housing? Does it make a difference if the project is initiated before the 2017 (specifically because affordable housing was launched only from March 2017) Whether existing projects will be covered under benefit of affordable housing. The company also has various other projects which are constructed (ranging from 5% to 80%), whether the exemption shall be available to such projects.

Issues – Case Studies Case – 1: Reference to following construction services in the said Notification ; Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to - Low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March, 2017 “ In above case, it will attract concessional rate of 8% ( provided the value of the undivided share of land is included in the price of the house.)

Issues – Case Studies Case – 1: Whether the housing project qualifies as affordable housing project or not, shall be determined by the builder/ developer as per the definition of affordable housing given in the above mentioned notification. “Affordable housing” has been defined under F.No.13/6/2009-INF as a housing project using at least 50% of the Floor Area Ratio (FAR)/Floor Space Index (FSI) for dwelling units with carpet area of not more than 60 square meters. “Carpet Area “ shall have meaning assigned to it in clause (k) of Section 2 of RERA Act,2016 No certificate from any authority is required.(Circular F No 354/52/2018 dated 7th May ,2018)

Issues – Case Studies Case – 1: Deciding Point of Taxation and Rate of tax : Construction of houses is normally a continuous supply of service [section 2(33) of CGST Act, 2017]. In case of continuous supply of service, invoice shall be issued on or before the due date of payment or the date of receipt of payment by the supplier or completion of an event to which payment is linked. [Section 31(5) of COST Act, 2017]. The time of supply of the service shall be determined accordingly under section 13 of the CGST Act. As a portion of continuous supply of service, time of supply of which is on 25th January, 2018 (the date of issue of notification prescribing concessional GST) or later shall be eligible for the concessional rate of GST post 25.01.2018. (The Point of Taxation and the payment received – both should fall post 25.01.2018)

Issues – Case Studies Case – 2: Where the builder has collected higher GST from the buyer post notification for projects which are eligible for the concessional rate of GST, the excess can be adjusted by the builder against his future GST liability (by issue of credit notes). The GST liability on the date of filing of return by the builder gets proportionate reduced on account of credit note issued. [Credit notes can be issued by the builder/developer, when the tax charged in a tax invoice is found to exceed the tax payable in respect of such supply, under section 34 of CGST Act. The same shall contain the particulars prescribed under rule 53 of CGST Rules including name and address of the recipient of the flat.]

Issues – Case Studies Case – 2: BMW has undertaken residential building project and taken booking for Flats from various buyers . However , the project has been delayed on account of various reasons .On this ground various customers decide on cancelling the flats already booked. One such cancellation by a customer took place as under : Amount received upto 30.06.2017 = Rs.50 lacs Amount received from July 2017 to March 2018 = Rs. 1 crore. Cancellation of flat took place in October 2018. What will happen in cases where service tax and VAT is already paid? Whether such tax will be adjusted against GST paid? Whether the said amount can be claimed as refund? If yes, whether by Builder or by Customer and what shall be challenges with respect to the same?

Issues – Case Studies Reference to provisions of Section 142(2)(b)of CGST Act,2017 (Transitional Provisions): Where, in pursuance of a contract entered into prior to the appointed day, the price of any goods or services or both is revised downwards on or after the appointed day, the registered person who had removed or provided such goods or services or both may issue to the recipient a credit note, containing such particulars as may be prescribed, within thirty days of such price revision and for the purposes of this Act such credit note shall be deemed to have been issued in respect of an outward supply made under this Act. Can cancellation of contract be construed as downward revision ?

Issues – Case Studies Reference to provisions of Section 34 of CGST Act,2017 : Credit note to be issued in cases where – Taxable value/tax charged in invoice exceeds the actual taxable value/tax payable in respect of such services, Goods supplied are returned by the recipient, Where goods or services or both supplied are found to be deficient. Credit notes to be declared in returns latest by September following end of the financial year in which supply is made. Is it possible to rectify later ? Refund mechanism not available ? Any other way out

Issues – Case Studies Case – 3: PQR Limited has undertaken a project where most of the flats are sold by them before receiving of OC. However, certain flats remain unsold as on the date of receipt of OC. The issue arises with respect to claim of Input Tax Credit as under: What shall be the manner for reversal of Input Tax Credit? What should be the timing to reverse the Input Tax Credit ?

Issues – Case Studies Case – 3: Application of Rule 6 of CCR 2004 vis-a-vis Rule 42/43 of CGST Rules. Reversal – area based or value based ? Rule 6 of Cenvat Credit Rules,2004 : Rule 6(2) - Maintain separate accounts for services used in the manufacture of dutiable goods as well of exempted goods and services used in the provision of taxable and exempted services and take credit of only those inputs and input services which are exclusively used in the manufacture of dutiable goods or provision of taxable services. Rule 6(3) – Pay 6%/7% of value of exempted goods or exempted services. Pay amount as per the formula prescribed under Rule 6(3A).

Issues – Case Studies Case – 3: Formula prescribed under Rule 6(3A) : Reversal = Common Credit * Value of Exempted services and goods during the Financial year Total turnover of exempted and non-exempted goods and services during the financial year Common credit means credit other than ineligible , exclusively used for non-exempted goods/services and exclusively used for exempted goods/services.

Issues – Case Studies Case – 3: Rule 42 of CGST Rules,2017 – Reversal of ITC (Inputs and Input Services) being partly used for the purpose of business and partly for other purpose (including exempt supplies): The intention of the law is to restrict such credit which is used in provision of exempt supplies. The formula for the same as prescribed is as under : Amount of ITC to be reversed as attributable to exempt supplies = Common Credit * Aggregate value of exempt supplies during the tax period Total Turnover in the State of registered person during the tax period Common credit includes ITC exclusively related to taxable supply + ITC related to taxable as well as exempted supply. In short it excludes ITC exclusively related to supplies other than taxable supplies and Ineligible credits as per Section 17(5).

Issues – Case Studies Case – 3: M/s Alembic Ltd Shreno Ltd vs. C.C.E & S.T Vadodara – I. (2018-VIL-708-CESTAT-AHM) Held that entitlement to credit has to be examined only at the time of receipt of input service and once it is found to be availed at a time when output service is wholly taxable, and the said credit is availed legitimately, the same cannot be denied and/or recovered unless specific machinery provisions are made in this regard. At the time of taking credit, there is no existence of any exempted service, therefore, there is no application of Rule 6.

Issues – Case Studies Case – 6: Particulars Details Project Start Date 1-7-2017 Date of Occupation Certificate 1-7-2018 Input Credit claimed before OC 10,00,000 Input credit for July 2018 5,00,000 Area Sold before OC 4000 sq ft Area unsold as on OC 6000 sq ft Turnover of old demand notes for July 2018 2,00,000 Turnover of sale after OC Flats for July 2018 20,00,000 Credit for July 2018 (5 lac*2 lac/22 lacs) 45454

Issues – Case Studies Case – 4: ABC Limited is a developer and has undertaken a Joint Development Project with a Landowner. They have entered into a Joint Development agreement whereby the parties have agreed that 40% of the flats shall be allotted to the land owner and the balance 60% flats shall belong to the developer. Whether GST is payable in respect of flats/units allotted to the landowner? In case GST is payable, at what value GST would be payable? What should be considered as Point of Taxation for payment of GST? Will it make any difference if the Joint Development agreement was made on 01.04.2015 and the possession of such flats is given on 01.05.2018,whether GST is still payable on such flats? If yes, the extent of applicability of GST?

Issues – Case Studies There are three transactions undertaken : Supply of development right by landowner to developer. Allotment of units by Developer to the landowner. Tripartiate agreement with the end customer wherein landowner shall transfer undivided share of land and developer shall provide construction service. Sale of units by landowner. Term “Supply” read with Schedule II (Activities or transactions to be treated as supply of Goods/Supply of Services) and Schedule III (Activities or transactions which shall be treated neither as a supply of goods nor a supply of services).

Issues – Valuation As per CBEC circular dated 10-2-2012, the valuation of flats given free to landowner should be on basis of similar services. Stated here – since the value of land/development rights in the land may not be ascertainable ordinarily, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the normal buyers. In case the prices of the flats undergo change over a period of sale, the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. The issue was again discussed by High Level Committee set up by Ministry of Finance. On basis of their opinion, it was clarified that valuation of flats given to land owner should be on basis of value of similar/identical flats or on basis of cost plus profit, as stated in circular dated 10-2-2012 - CBEC Instruction No. 354/311/2015-TRU dated 20-1-2016.

Issues – Valuation Is the value of construction of similar flats given to others comparable with flats given free to land owner etc ? As per circular, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the normal customers. The value neither closely nor substantially resembles the value of construction of flats given free. This value cannot include value of land, while open market value of similar flats includes value of land also.

Issues – Case Studies Hyderabad Tribunal in case of Vasantha Green Projects (2018-VIL-343-CESTAT-HYD) held that If the consideration towards the acquisition of the land has been included in the value of the villas sold to prospective customers and appropriate service tax liability has been discharged the same value, it cannot be again made liable to service tax under the premise that sale value of the villas given to land owners is a consideration on which service tax liability was not discharged. The amount attributable to the consideration received in the form of land rights from the land owner stands included in the value of villas sold to prospective customer which would mean that whatever consideration was received in form of developmental right was considered in assessable value. If once the service tax liability has been discharged on the gross amount, demand of service tax on the same amount again would amount to double taxation.

Issues – Valuation Valuation : Consideration not being in money ,15(1) is not possible since price is not sole consideration. Need to refer to Section 15(4) CGST Act,2017. Rule 30 of CGST Rules,20170 Value of supply of goods or services or both based on cost (Rule 30) Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Issues – Valuation Residual method for determination of value of supply of goods or services or both (Rule 31) Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter. Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.

Issues – Time of Supply Time of supply governed by Section 13 of CGST Act,2017 Reference to Notification No. 04/2018 - Central Tax (Rate) dated 25.01.2018 : (a) registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and (b) registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights, As registered person in whose case liability to pay central tax on supply…………………………………………..above, shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights . by entering into a conveyance deed or similar instrument (for example allotment letter).

Issues – Case Studies Case – 5: A landlord owns a residential building. He plans to provide such residential building on rent to an Educational Institution, who in turn will use such building as a hostel. Whether GST shall be applicable on renting of such residential property? It may important to highlight that the educational institution shall be collecting an amount from student as hostel fees. Reference to Entry 12 of Exemption Notification No.12/2017 – Central Tax (Rate) dated 28.06.2017 – “Services by way of renting of residential dwelling for use as residence.” Entry worded similar to Negative list entry under service tax

Issues - Transitional Credit Repercussions of Internal Circular No.1A of 2018 dated 01.01.2018 : Builder paying tax under Composition scheme @1% entitled to take the credit of VAT in respect of inputs held in stock as on 30.06.2017 subject to prescribed conditions – Actual Quantification needed. What about inputs contained in semi-finished goods i.e. WIP and FG ? Definition of Goods for a toss ? As per Section 2(52) of MGST Act , goods means every kind of movable property other than money and securities but includes…… As per circular, goods does not include a building under construction being permanent attached to earth i.e. immoveable property. The building whether semi – finished or finished and which remains unsold on 30.06.2017cannot be treated as goods.

Issues - Transitional Credit Sr. No. Details Qty. in Bags Amount (Rs.) VAT @ 13.5% (Rs.) (1) Opening Stock of Cement as on 1st July 2017 Rs. 300 per Bag 2000 6,00,000 81,000 (2) ADD: Cement purchase during the period 01.07.2016 to 30.06.2017 Rs. 300 per Bag 6000 18,00,000 2,43,000 (3) LESS: Cement lying in stock as on 30.06.2017 @ Rs.300 per Bag. 3000 9,00,000 1,21,500 (4) Proportionate value of cement contained in Work in Progress for 40 flats. 5000*40/50=4000. Cement pertaining to within one year and beyond one year. 4000 12,00,000 1,62,000 (5) Cement contained in semi-finished goods or finished goods in the under construction of 40 flats [2-3] (Where invoice date is within one year period i.e. after 1st June 2016) 81,500 (6) Cement lying in stock as on 30.06.2017 @ Rs.300 per Bag.

Other Issues Anti Profiteering – Pre GST Contract and New contracts - Mechanism to calculate. - New contract after GST can be covered in anti Profiteering ? Retention money – time limit of 180 days - Interest from date of availment unlike Service tax law - Judgement in respect of Thermax Engineering Construction Co.Ltd vs CCE (2018- TIOL-141-CESTAT-MUM)

“Thank You” Journey begins…..