GST: Anti-profiteering and issues concerning affordable housing

Kapil Sharma

With the roll out of the Goods and Services Tax (GST) with effect from July 1, 2017, there has been a paradigm shift in the indirect taxation in India.

With the introduction of GST, the ultimate expectation of stakeholders of the real estate sector was reduction in the effective tax rate, the benefits of which could be passed on to the home buyers making houses affordable.

In order to successfully achieve this aim, the government enforced Section 171 of the CGST Act containing provisions relating to anti-profiteering. This was to ensure that the benefit of reduction in tax resulted in lowering of cost of goods/services in the hands of consumers.

Section 171 deals with passing on the benefit of reduction in the rate of tax and the second pertaining to the passing on the benefit of input tax credit (ITC).

It is pertinent to note that the GST authorities had been receiving complaints by home buyers against the real estate developers across India for not passing on the benefit of the increased input tax credit to the customers by way of commensurate reduction in prices as required under Section 171.

In light of such countless apprehensions, a group of states’ finance ministers has recommended the GST Council to lower the GST rate on residential properties to 5 percent and 3 percent for those under affordable housing. The Council is expected to discuss the proposal in its meeting on February 24.

Impact of anti-profiteering on the realty sector

Under the service tax regime, credit of service tax charged on procurement of input services was available to the developer or builder.

Further, the developers were eligible to take credit of VAT charged on procurement of goods under the regular scheme. However, the credit of taxes such as excise duty, entry tax etc. which were leviable on procurement of goods was not available to them.

For the affordable housing scheme, since the service tax was also exempt, the benefit of taxes paid on procurement of services was not available to the developers.

However, the introduction of GST opened up the input credit pool in respect to taxes paid on procurement of goods and services. This led to significant savings on the tax front.

The focus of the scheme therefore was to pass on the increased benefit in the hands of developers (i.e. saving in tax cost) to the buyers. But if the developers did not reduce the costs, the same may be deemed to be profiteering under Section 171.

Developers claim credit on input costs such as steel, cement and sand used for under construction buildings to offset the GST liabilities.

Eligibility of input tax credit for real estate developers depend on whether the apartments are sold before receipt of occupation certificate and the proportion of activities completed in a project before and after July 1, 2017.

For buyers, it is not possible to ascertain the amount of reduction in the price of a unit. As an alternative, home buyers can have a cost accountant or chartered accountant certifying that the anti-profiteering computation has been done and that the benefit due to the buyers has been given.

Anti-profiteering on projects launched in the pre-GST regime

The GST regime has led to confusion among buyers on whether the benefit of anti-profiteering will be available to those who had booked under-construction flats under the pre-GST regime on an agreed price.

Construction service is a continuous activity and generally the collection from the buyers occurs on completion of various milestones. The developers are required to compute the GST savings on the residual construction cost as on the transitional date i.e. on the date of entering the GST regime.

Post ascertaining such savings, the same should be passed on to the customers by recalibrating the price of units in terms of Section 171 of the CGST Act which can be adjusted with the future instalments.

A dispute may arise that the actual amount of saving can only be worked out at the end of the project and it is not feasible to pass on the saving without realising it. To overcome this issue, some developers may adopt a practice to reckon the saving provisionally on reasonable basis initially, and the same can be followed by the final intimation or adjustment to the buyers at a later stage.

It is worth noting that though the government is issuing various press releases, FAQs, advertisements to encourage developers to pass on the maximum savings to the unit-buyers by way of commensurate reduction in prices, it has still not suggested any definite criterion to compute the said savings. Due to this, the developers are facing a challenge in computing the amount of benefit to be passed on the unit buyers.

Anti-profiteering in projects launched under the GST regime

For projects launched during the GST regime, the prices need to be re-defined in the light of the anti-profiteering provision and the same shall apply to the entire housing unit. Such prices should indicate the reduced price which shall be arrived at after taking into account the quantum of savings under the GST regime and accordingly, the benefit should flow to the consumer through revised pricing structure.

However, the subsequent benefits floated by the government for developers should be passed on to the buyers in light of anti-profiteering provision.

Anti-profiteering on affordable housing projects

From the aspect of anti-profiteering applicability on the affordable housing projects, it is clear that the price of unit shall stand reduced to the extent of increase in the benefit available to the developers.

To substantiate, even the government policy on affordable housing has said time and again that the price shall be reduced (to the extent of increase in input tax credit) and the buyers should get some relief from the developers.

To cite an example, if the price of the unit launched prior to July 7, 2017 was Rs 4,000 per sq. ft., an amount arrived at keeping in mind the tax of goods and service which went into the construction of the unit. And assuming that the cost was Rs 1,800 per square feet for construction and the average tax cost was approximately in the range of 15 percent which works out to be Rs 270 per square feet, this Rs 270 per square feet is the anti-profiteering amount, the amount that needs to passed on to the buyers.

It cannot be denied that the reduction in cost owing to availability of credit on account of stock in hand, work-in-progress and unfinished work shall result in overall savings in the tax cost which should be passed on to the buyers by way of reduction in prices of their units.

The open issue in our understanding remains about the bookings which have been made post July 7, 2017 wherein the price is controlled by the affordable housing policy - whether in such cases it is correct to assume that the developers have accrued the benefit on account of savings in tax cost.

For passing on the above contemplated benefit, the argument given by the developer has been that there has been an increase in the cost of construction post GST implementation which has made it difficult to redeem the above benefit from the sub-contractor.

In simple words, the benefit of Rs 270 as cited in the example above, is to be sought from the various sub-contractors which post GST has become a challenge as the sub-contractors are not passing on such benefit to the developers.

Furthermore, the contention of developers is that the price has already been fixed and there is no flexibility provided under the scheme of the affordable policy to raise the price level. From the buyers prospective therefore, there is no loss which has been incurred as the price pre and post GST for the unit remains the same.

From the buyers’ perspective, the point to note is that the outer ceiling of the price has been restricted under the affordable housing policy and if developers launch the project within that range, then the saving in tax cost leads to savings in the cost of the unit which by law should be passed on to the buyers.

In the example cited above, the amount of Rs 270 realised by the developer should be passed on to the buyers as retaining any sum from the said amount should lead to unjust benefit to the developer which he is not entitled to.

Interestingly, in both, normal projects and affordable housing projects, there are no clear guidelines about how anti-profiteering provisions would work for the units which are sold post July 1, 2017.

While buyers are of the view that the price of residential units ought to come down as there is better tax efficiency post GST, developers opine that prices are driven by the market and other forces and hence, the prices can be revised for the sale of the unit post July 1, 2017.

To support the above view, the developers have been citing that the anti-profiteering scheme is applicable to the units booked prior to July 1, 2017 wherein the unjust benefit should not be retained by developers and should be passed on to the buyers.

For the units which are booked post July 1, 2017, the prices and other factors have been determined keeping in mind the new tax regime and in such a case the savings in tax cost does not actually arise.

What remains to be seen is whether the authority which is pro-active in conducting investigation shall team up with the ministry of finance to lay down some clear parameters about how such provisions shall implemented.

In the absence of clearly defined guidelines, neither the applicability of such provision can be ensured, nor the manner in which such benefit is to be arrived, at can be computed with reasonable certainty.