GST Impact on Construction and Real Estate contracts

Summary:

• Construction, installation, etc contracts in respect of immovable property (i.e. building, complexes, civil structure, roads, bridges, etc) falls under the definition of Works Contract;

• These contracts are treated to be service.

• It is necessary to determine whether a particular contract is Goods or Services. Reason being there are separate set of rules such as point of taxation, place of provision of supply.

• In a particular contract either "CGST & SGST" (Intra state) shall be charged or IGST(Inter state) shall be charged. IGST shall be sum total of tax rates of CGST & SGST.

• EMIs, or advance payment made for the purchase of under-construction houses will attract the GST.

• "Supply of land" and "buildings of which whole of consideration is received after completion certificate or possession (a relief to construction companies)" will be however out of the purview of GST. Such contracts will continue to attract the stamp duty.

• Tax rate is estimated to be 18% (combined "CGST+SGST" or "IGST")(The provisions given below are of CGST Act. SGST act shall be on same lines as CGST Act. IGST is integration for the two. Place of supply has taken from it)

• Transitional provisions for smooth flow of credit for already tax paid stocks and for contracts on which output tax have already been paid provided in act.

• Construction companies shall be required to obtain casual taxable person registration in states they provide services but are not registered.

• Concept of ISD maintained where there is centralized billing.

• Input tax credit of GST shall be available only for sub work contracts and not for pure labour or material contracts and tax must have been paid by sub work contractor (similar to 26AS in Income Tax).

Construction, building, maintenance contracts, etc are works Contract and which are considered to services:

Works Contract is given under Section 2 (119) which provides,

"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""

Interpretations from section 2(119):
Therefore the definition of works contract encompasses 12 types of contracts in respect of any immovable property:

• Building;
• Construction;
• Fabrication;
• Completion;
• Erection;
• Installation;
• Fitting out;
• Improvement;
• Modification
• Repair,
• Maintenance;
• Renovation;
• Alteration;
• and Commissioning.

Under-construction shall be Services and land not taxable:

Clause 5(b) of Second Schedule which provides following shall be shall 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.

Explanation - For the purposes of this clause -

(1) the expression "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force……..; 
(2) the expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure"

Clause 5 of Third Schedule which provides: Sale of land, subject to clause (b) of paragraph 5 of Schedule II, and sale of building, shall neither be a goods or services.

Interpretations from combined reading of both clauses:

• Where consideration in respect of construction of  complex, building, civil structure or part of it  whether "even a part" or "wholly" is received before issuance of completion certificate, then whole of consideration shall be considered as service, taxable under the act;

• Therefore, supply of "land" and "buildings where whole of consideration is received after certificate or possession", then no tax shall be levied.

• Whether or not to actually sold i.e. where a consideration has been received and ultimately not sold, shall be taxable as service under the act, subject to receipt of consideration as above.

• Moreover, construction for these clauses includes additions, alteration, replacement or modeling of any existing civil structure.

• Where in respect of civil structure (for ex. Roads, bridges, railways), even if whole of consideration is received after issuance of certificate, tax can be levied as it is neither a land nor building.

Therefore, contracts for construction, building, modification, installation of immovable property (building, civil structure, railways, bridge, roads, etc) shall be considered to be services.

Stock Transfers:

Since, transfer of inputs/ capital equipments from one site to another is quite common in this sector. Therefore, construction companies operating from multiple locations in different states, then it would require to pay GST on stock/ Assets transfers from its premises in one state to its premises in another state. Further, in case construction companies are having multiple business verticals within the state and if a construction companies opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when made within the same state.

Multiple Registrations by way of casual taxable person:

Concept of centralized registration for all the projects will end and construction companies having a site in multiple States would required to obtain registration in each State from where the construction activity/ supplies are being undertaken even though the project is for a very small period or for a small value. Registrations can be obtained permanently or temporarily as casual taxable person.

Input Service Distributor:

Section 2(61), is a Input Service Distributor (ISD) is an office of supplier which receives tax invoice towards receipts of input services and distributes the credit of CGST/SGST to its own "recipient office of credit" who is the supplier under the same PAN as that of ISD.

Interpretations:

• A business may have one central office and several other offices at various locations for smooth distribution of credit in respect of goods or services.

• Tax invoices are raised by the supplier on central office only, consequently, input tax credit gets accumulated at central office and supply takes place from other locations.

• Distribution of credit of input tax will be done by central office to its other offices proportionately basis turnover during the period, who have used the input services or where attributable to a particular recipient then to that only.

• Existing ISDs (under service tax) shall be required to obtain fresh registration under GST.

• Possible to have multiple ISD.

Transitional provisions in respect of Input Credits:

• Credit of Service Tax: Must be reflected in the last service tax returns. Service tax credit pertaining to inputs in stock can also be availed.

• Excise Duty/ CVD: Since, currently construction companies are not availing the credit of excise duty & therefore, construction companies need to ascertain the value of stock as on the appointed day and based on the availability of the invoice, credit can be availed.

• VAT/ SAD: Similarly, if a construction companies is not availing the credit of VAT/SAD currently due to restriction in the state VAT law or due to being in the composition scheme, then the credit can be availed based on the ascertainment of stock as on appointed day.

However, if the credit of VAT is being currently availed then the same needs to be properly reflected in the last VAT return to transfer such credits to the GST regime.

• Entry Tax: Credit of same kept in stock can be availed subject to possession of appropriate documents against the GST payable post appointed day.

Section 169 relating to transitional credit on stocks also provides for deemed credit at rates to be prescribed in the absence of duty/ tax paying documents.
Appointed date means that on which provisions of GST act shall come into effect. Most probably 1st July, 2017.

Transitional provisions in respect of provision of services or receipt of payment post GST:

• Section 142(10) provides the goods or services or both supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day shall be liable to tax under the provisions of GST Act.

• Provided that where, entire tax has already been paid, it shall not be payable again.

Returns under GST:

Returns under GST shall be as under:

• Therefore, if the construction companies has a registered premises, minimum 37 returns shall be filed in a year(3 monthly and 1 annually) per state.

• Where a construction companies has a ISD there is a separate return.

• However, 24 returns out of above shall be prefilled and isn"t time consuming.

• Annual return is not required for casual taxable person and ISD.

Meaning of Place of supply and tax chargeability:

Relevancy of place of supply provision is that the tax goes to the state where the services are consumed.

Place of supply in case of immovable property shall be the location of immovable property.

As per section 12(3)(a) and section 13(4), services directly in relation to an immovable property, including…..….and ancillary to construction contract shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.

Tax Chargeability:

• In a particular contract either "CGST & SGST" shall be charged or IGST shall be charged. IGST shall be sum total of tax rates of CGST & SGST.

• CGST, SGST & IGST stands for Central GST, State GST and Integrated GST respectively. 

• Tax can be charged CGST/SGST(if Intra State) or IGST(if Interstate).

• CGST/SGST is charged where the location of supplier and place of supply is within the same states.

• IGST is charged where location of supplier and place of supply are different states.

Tax Chargeability in respect to immovable property:

• Only CGST/SGST shall be charged.

• Credits shall also be of CGST/SGST, subject to where there is ISD which distributes credits.

Concept of Casual taxable person, section 2(20):

"casual taxable person" means a person who occasionally undertakes contracts in a State or a Union territory where he has no fixed place of business;

Therefore,

• If a person takes a contract in the same state where he is registered or has a fixed establishment, he shall charge CGST/SGST as location of supplier and place of supply is in same state.

• If a person takes a contract in different state, then he will have to register as a casual taxable person, and then also he shall charge CGST/SGST as location of supplier (casual taxable person) and place of supply is in the same state.

• Further, if ISD distributes credit, then also IGST can be set off against, 1st against CGST and then against SGST.

Example: Shiva takes a contract for construction immovable property. Shiva has business in Delhi but immovable property shall be in Mumbai. Shiva has also sub contracted a work. Determine which tax shiva shall charge and whether input credit shall be available to for sub contract. What would be the position if invoice are received at central office being in Delhi registered as ISD.

In this case shiva even though had the premises in Delhi, shall have to register as a casual taxable person in Mumbai. Once he is registered, his location and place of supply shall be in same state. Therefore he shall charge CGST & SGST and on the same lines his sub contractor shall charge CGST & SGST which is available as credit to shiva.

If there would have been a central office registered as ISD, then the sub works contractor bills as IGST and this IGST shall be distributed to Mumbai office, who shall claim it as setoff against CGST & SGST.

Meaning of Point of Taxation:

Time of supply of goods determines time, when the tax (GST) will be levied. GST is levied on supply whether goods or services. Now, let us take example of supply of service. In a service contract various events are involved i.e. invoice issuance, payment receipt, rendering of services, etc. Now when will be the tax levied on this service contract whether at time of invoice issuance, receipt of payment, rendering of services?

Example: If it provided that tax shall be paid at time of receipt of advance, then if tax is paid later while the services is rendered, then there shall be liability to pay interest.

Impact of it in respect of immovable property would be that, generally the real estate companies pays tax on receipt basis, however GST requires timely payment based on the earlier of the events. Further, most of the immovable property contracts falls under Continuous supply of services.

Earlier of the following, section 13(2):

1. Where invoice issued within prescribed time, date of issue of invoice or receipt of payment whichever is earlier;

2. Where it invoice not issued within prescribed time, date of provision of service or receipt of payment whichever is earlier;

3. Date on which the recipient shows provision of services in his books of accounts where above 2 doesn"t apply.

Continuous supply of services

Section 31(5) "continuous supply of services" means a supply of services continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations.

Section 31(5) prescribes period for issue of invoice in Continuous supply of services:

1. Where due date of payment is ascertainable from contract, invoice shall be issued on or before that due date;

2. Where due date of payment is not ascertainable from contract, invoice shall be issued on or before receipt of payment.

3. Where the payment is linked to completion of event, invoice shall be issued on or before such completion.

Example:

Shiva entered into contract for construction of a immovable property. The terms of the contract are as under. Therefore taxable amount shall be:

Input Tax Credit:

Section 17(5)(c) & 17(5)(d) provides input tax credit shall not be available where:

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;

Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Section 16(2) provides conditions for availing credit:

• Possession of invoice;
• Receipt of services;
• Tax should have been paid to government;
• Return should have been furnished(monthly return due date 20th)

Interpretation:

• No credit shall be allowed to construction companies on goods or service received for construction of an immovable property.

• Credit is allowed only where construction companies will receive works contract services from sub work contractor and tax has been paid to the government by sub work contractor among other conditions.

• Therefore, where a construction companies purchases raw material or award pure labour contracts, the same shall not be eligible as input tax credit.

Question.
In a contract for sale of a building along with land, shiva has obtained following goods and services:

The property was located at Mumbai. The supplier has establishment at Delhi. The contract provided for payment of advance for Rs.5lacs on 01.02.2018. Further, a invoice amounting Rs.7 lacs was issued basis of continuing service contract terms. on 01.04.2018. Supplier for sub contract has paid the tax on 31.05.2018 to government. The property construction was completed on 01.07.2018.  The above property was sold for Rs.20 lacs.

Compute the tax payable, due date of payments, credit admissible and credit denied. Assume tax rates to be 18% for services and 12% for goods. Also state nature of tax(whether IGST or SGST/CGST).

What would be your answer had the whole consideration was paid on 02.08.2018 i.e. after receipt of completion certificate.

Answer:

There has been non allow ability of credits to the tune of Rs.96K. Tax payable in this contract is 17 lacs*18%=3.06 lacs plus 96k, the credit of which was denied therefore total tax payable is 4.02 lacs.

Therefore, total tax burden has been 4.02/20 lacs which equals 20.10%. Moreover, there is additional implication of stamp duty also.

If the entire consideration was received after completion certificate, there shall be no applicability of GST. No GST shall be payable in that case.

Notes:

• Tax payable shall be CGST & SGST. The reason is even though the supplier was located at other state, supplier shall be required to take registration as casual taxable person in Maharashtra. Once the location of supplier after taking casual taxable person registration and place of supply which is Maharashtra only being location of immovable property, contract shall be intra state and this levied CGST & SGST.

• Sub contractor shall also charge supplier CGST & SGST on the same lines.

• Sub contract shall be treated to work contract service as in relation to immovable property and therefore applied tax rate of services.

• Credit for sub contract shall be available once the supplier pays the tax to government.

• There shall be no allowability of credits for pure labour charges and for materials.

Issues:

• As per the valuation rule, value of land has not been excluded; therefore there are chances that GST can be levied on land also.

• There are chances that credit can be allowed later on goods or services but as per the current provisions it is not allowed.

Refer previous articles:

• GST - A detailed explanation with examples!
• Taxability of software under indirect tax law and GST
• Guide to Foreign Contribution (Regulation) Act, 2010(FCRA)
• Provisions of MAT & AMT

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The author can also be reached at ca.shivashish@gmail.com

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