TRANSITIONAL ISSUES RELATING TO BUILDERS UNDER THE GST ACT

 

CA. M. Ramachandra Murthy

 

Under the existing law, Works Contract receipts are taxable both under the local VAT Act (herein after referred to as ‘VAT Act’) and under Chapter V of the Finance Act, 1994 (hereinafter referred to as “Service Tax Act”). Under the GST Act, works contract activity including constructing and selling buildings, complex etc. is treated as supply of service only, as per Schedule II to the CGST Act and SGST Act.

 

Under the existing law, the turnover relating to the value of supply of goods in execution of the works contract is liable to tax under the VAT Act and the remaining portion of the consideration is liable to tax under the Service Tax Act. There is also facility to pay tax under composition scheme under the VAT Act and pay service tax by availing the abatement method as per Notification 26/2012 under the Service Tax Act. However, when tax is paid under composition method under the VAT Act or by availing abatement under the Service Tax Act, no input tax credit is allowed to the works contractor on the inputs used in the execution of contract. Under the VAT Act, in case of builders the rate of tax is 1.25% of the total consideration received or receivable and on all other contracts it is 5% on the total consideration received or receivable and similarly under the Service Tax Act for construction and selling of buildings along with land the applicable rate of tax is 4.5% and for different types of works contracts there are different abatement rates depending upon the nature of contract. For the builders who opted for composition scheme or abatement method, input tax credit is available on the capital goods and input services under the Service tax Act, but ITC is not available under the VAT Act.

 

In case of builders who are in the business of constructing and selling apartments etc. and opting for composition scheme, VAT is required to be paid at the time of registration of the flats. In case of builders there is no need to pay VAT on the Advances received from the prospective buyers of the flats, whereas under the Service Tax Act, tax is required to be paid even on the advance receipt of the abated consideration with restrictions on claiming of input tax credit on materials.

 

From 1.7.2017 onwards GST is going to replace the existing law of service tax and VAT. In case of semi-finished flats which are under construction no VAT is paid on the advances whereas service tax is paid. From the 1st July, 2017 onwards the consideration relating to these semi-finished flats would be liable to tax under the CGST and SGST Acts. Transitional provisions are made under both the Acts relating to these types of business activities, which are discussed hereunder.

 

CGST Act:

 

Section 140 (2): credit relating to capital goods:

 

According to this sub Section, input tax credit relating to un-availed CENVAT credit relating to Capital Goods which is not carried forward in the return furnished under the existing law is allowed as CGST credit in the electronic credit ledger of the builder provided the said capital goods are eligible for claiming as input tax credit under the CGST Act as well as under the existing law. Hence the builders are entitled to take 50% balance of input tax credit on the capital goods which are purchased during the year 2016-17 in their CGST electronic credit ledger provided they have taken 50% credit under the existing law.

 

Section 140 (3): credit relating to closing stock:

 

The above sub section reads as under.

 

“(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012—Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:––

 

(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;

(ii) the said registered person is eligible for input tax credit on such inputs under this Act;

(iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;

(iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and

(v) the supplier of services is not eligible for any abatement under this Act:

 

Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.

 

According to the above sub Section, a builder who availed the benefit of Notification No. 26/2012 up to 30.6.2017 is entitled to take credit of eligible duties in his electronic credit ledger in respects of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to conditions. Eligible duties here mainly refer to Central Excise Duty and Additional Duty of excise, which are relating to inputs in stock, inputs contained in semi-finished or finished goods held in stock.

 

Under the CGST Act, ‘input’ is defined under Section 2 (59), to mean, “any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business”. As the builders use cement, steel, tiles, electrical goods, plumbing materials, all construction materials etc., in construction activity, they are eligible to claim the credit relating to these goods, which are held in stock with them as on 1.7.2017 subject to satisfying all the conditions laid down under Section 140 (3). The credit is available only when the builder is eligible to claim input tax credit under the CGST Act, and when used the same in making a taxable supply. He should also be in possession of invoice or other document evidencing payment of duty under the existing law and the stock is from out of the purchases made within 12 months prior to 1.7.2017. On satisfying all the above conditions, the builder is eligible to claim the eligible duty amount mentioned in invoice relating to the closing stock as GST credit in their electronic credit ledger.

 

If the builder is not in possession of invoice or any other document evidencing the payment of duty under the existing law, he is not allowed any credit under the GST Act as the proviso to Section 140 (3) clearly omitted, supplier of services and hence the specific percentages mentioned in the rules is not applicable to them.

 

As regards the goods available as closing stock as on 1.7.2017 there is no problem and the provisions are very clear relating to the goods held in closing stock. However, the builders have the semi-finished/finished structures which are yet to be sold or pending for registration and these are generally mentioned as closing work in progress in the books of account. Whether the benefit provided under Section 140 (3) is applicable to the closing work or not, is not clearly understood from the language of the Section. Section 140 (3) is talking about inputs contained in semi-finished goods or finished goods held in stock. Once the goods are used in the execution of construction work they become part of immovable property and lose their identity as goods. Hence there is an ambiguity on whether semi-finished or finished goods mentioned in Section 140 (3) cover the semi-finished structures and finished structures. However, under the GST Act, the builders are liable to pay GST when such semi-finished structures are completed and sold to the prospective buyers of the building. Under the GST Act builders are allowed to take input tax credit on the purchase of goods including capital goods used in the execution of the construction activity and the entire consideration received is liable to tax. In such a situation if the credit on the inputs which are used in constructing the semi-finished/finished structure prior to GST under the existing law is not allowed it will be against the concept of GST. Hence in my understanding the words ‘credit of eligible duties in respect of inputs held in stock’ would also cover the closing work in progress of builders as this is nothing but stock for sale in the hands of the builders. The authorities may hold a different view. Hence the inputs used in the semi-finished/finished structure which are meant for sale under the GST regime are also eligible for input tax credit and the same can be claimed as credit in the electronic credit ledger under the GST Act subject to satisfying other conditions discussed supra.

 

SGST Act:

 

In case of builders who opted for composition scheme for payment of VAT under the existing law, they are not allowed to take input tax credit including the input tax credit relating to capital goods. Hence Section 140 (1) and (2) are not applicable to builders who opted for composition scheme.

 

Section 140 (6) : credit on inputs held in stock and inputs contained in semi-finished or finished goods held in stock

 

The above Section reads as under:

 

“(6) A registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the existing law shall be entitled to take, in his electronic credit ledger, credit of value added tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:––

 

(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;

(ii) the said registered person is not paying tax under section 10;

(iii) the said registered person is eligible for input tax credit on such inputs under this Act;

(iv) the said registered person is in possession of invoice or other prescribed documents evidencing payment of tax under the existing law in respect of inputs; and

(v) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.”

 

Builders who are registered under the VAT Act and who opted for composition scheme of payment of VAT at a fixed rate of 1.25% in lieu of the tax payable under the VAT Act are eligible to claim the benefit extended under this section relating to the input tax credit in respect of inputs held in stock and inputs contained in semi-finished or finished goods on 1.7.2017 subject to the other conditions. Here the credit is relating to the VAT component in the tax invoice relating to the eligible stocks. Regarding closing stock in goods there is no ambiguity and the builder is eligible to claim the VAT component mentioned in the invoice as credit in his electronic credit ledger subject to the other conditions that the said goods are for use in business for making taxable supplies, and that he is in possession of tax invoice showing the VAT component and the stocks are not older than 12 months prior to 1.7.2017. Regarding work in progress, as already discussed, there is an ambiguity and in my opinion the eligible credit relating to the purchases made within 12 months prior to 1.7.2017 and which are used in construction of the semi-finished structure is available as the builder is liable to pay tax on the total value of the consideration under the GST Act on the supply made from 1.7.2017.

 

Credit relating to inputs and input services received after 1.7.2017 for which duty or tax is paid under the existing law:

 

According to Section 140 (5) of the CGST Act and Section 140 (5) of the SGST Act, for the purchases made under the existing law by paying Central Excise, VAT or service tax but no credit is claimed in the returns filed under the existing law due to non receipt of the goods or services, the builders are eligible to claim the same as credit in the electronic credit ledgers under the GST Act subject to the conditions that builder is required to account for the receipt of the goods or services in the books of accounts within 30 days from 1.7.2017 and also he is required to file a statement as prescribed in respect of credit that has been taken under this sub-section.

 

Liability to tax under the GST Act: Sections 142 (10) and (11) of CGST Act, Sections 142 (9) and (10) of SGST Act.

 

1.      The goods or services or both supplied on or after 1.7.2017 in pursuance of a contract entered into prior to 1.7.2017 shall be liable to tax under the provisions of the GST Act.

 

2.      Notwithstanding anything contained in Section 12 relating to time of supply of goods, no tax shall be payable on goods under the GST Act to the extent the tax was leviable on the said goods under the existing VAT Act.

 

3.      Notwithstanding anything contained in Section 13 relating to time of supply of services, no tax shall be payable on services under the GST Act to the extent the tax was leviable on the said services under the existing Service Tax Act.

 

4.      Where tax was paid on any supply both under the VAT Act and Service Tax Act, tax shall be leviable under the GST Act and the taxable person shall be entitled to take credit of VAT or Service Tax paid under the existing law to the extent of supplies made after 1.7.2017.

 

(Views expressed are strictly personal)