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    Ind AS 16on Property Plant and Equipment and a difference between AS 10 Accounting for Fixed assets and AS 6 on Depreciation Accounting

     

    On March 2016, MCA issued the Companies (Accounting Standards) Amendment Rules, 2016 and following are key amendment with revised AS 10, Property, Plant and Equipment (PP&E).

     

    AS 6, Depreciation Accounting requirements for depreciation are now incorporated in revised AS 10.

     

    AS 10, PP&E is largely aligned with Ind AS10, PP&E. Key new concepts in the standards are as follows:

     

    Cost of an item of property, plant and equipment would be cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalized in accordance with AS16 Borrowing cost.

     

    Component accounting would be mandatory ( in line with Schedule II to the Companies Act, 2013 ( 2013 Act)

     

    The depreciation method applied to asset would be required to be reviewed at least at each financial year end. If there is a change in the method , then such change would be accounted for as a change in accounting estimate in accordance with AS 5, Net profit or loss for the period, Prior period items and changes in Accounting policies.

     

    Transitional Provisions

     

    For the revisions where specific transitional provisions have not been prescribed, the requirements of AS 5 for changes in accounting policies shall apply i.e. companies will be required to apply the changes retrospectively.

     

    Following are the transitional provisions:

     

    AS 10

     

    Where an entity has in past recognised an expenditure in the statement of profit and loss which is eligible to be included as a part of the cost of a project for construction property, plant and equipment in accordance with the requirements of paragraph 9 of AS 10, it may do so retrospectively for such a project. The effect of such retrospective application of this requirement should be recognised net-of –tax in revenue reserves.

     

    Where one or more items of property , plant and equipment have been acquired in exchange for a non

     

    – monetary asset or assets, or a combination of monetary and non – monetary assets, then the initial measurement of an item of property, plant and equipment acquired in an exchange of assets transaction should be applied prospectively only to transactions entered into after AS 10 becomes mandatory.

     

     

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    On the date of AS 10 becoming mandatory, the spare parts, which hitherto were being treated as inventory under AS 2 and are now required to be capitalized in accordance with the requirements of AS 10, should be capitalized at their respective carrying amounts. The spare parts so capitalized should be depreciated over their remaining useful lives prospectively as per the requirement of AS 10.

     

    The revaluation model should be applied prospectively as per the revised guidance. In case any entity does not adopt the revaluation model as its accounting policy but the carrying amount of item(s) property, plant and equipment reflects any previous revaluation, then it should adjust the amount outstanding in the revaluation reserve against the carrying amount of that item. However, the carrying amount of that item should never be less then residual value and any excess of the amount outstanding as revaluation reserve over the carrying amount of that should be adjusted in revenue reserves.

     

    Difference between Ind AS 16 on Property, Plant and Equipment, existing AS 10 on Accounting for Fixed Assets and AS 6 on Depreciation Accounting

     

    1. Existing AS 10 specifically excludes accounting for real estate developers from its scope, whereas Ind AS 16 does not exclude such developers from its scope.

     

    1. Ind AS 16, apart from defining the term property, plant and equipment, also lays down the following criteria which should be satisfied for recognition of items of property, plant and equipment i.e:

     

    • it is probable that future economic benefits associated with the item will flow to the entity, and

     

    • the cost of the item can be measured reliably.

     

    Existing AS 10 does not lay down any specific recognition criteria for recognition of a fixed asset. As per the standard, any item which meets the definition of a fixed asset should be recognised as a fixed asset.

     

    1. As per Ind AS 16, initial costs as well as the subsequent costs are evaluated on the same recognition principles to determine whether the same should be recognised as an item of property, plant and equipment. Existing AS 10 on the other hand, prescribes separate recognition principles for subsequent expenditure. As per existing AS 10, subsequent expenditures related to an item of fixed asset are capitalized only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance. (Paragraph 7 of Ind AS 16 and Paragraph 12 of existing AS 10)

     

    1. Ind AS 16 requires that major spare parts qualify as property, plant and equipment when an entity expects to use them during more than one period and when they can be used only in connection with an item of property, plant and equipment. As per existing AS 10, only those spares are required to be capitalized which can be used only in connection with a fixed asset and whose use is expected to be irregular. (Paragraph 8 of Ind AS 16 and Paragraph 8.2 of existing AS 10)

     

    1. Ind AS 16 is based on the component approach. Under this approach, each major part of an item of property plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. As a corollary, cost of replacing such parts is capitalized, if recognition criteria are met with consequent derecognition of carrying amount of the replaced part. The cost of replacing those parts which have not been depreciated separately is also capitalised with the consequent

     

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    Changes in Accounitng Standard - IND AS 16

     

     

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    derecognition of the replaced parts. If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed.

     

    Existing AS 10, however, does not mandatorily require full adoption of the component approach. It recognizes the said approach in only one paragraph by stating that accounting for a tangible fixed asset may be improved if total cost thereof is allocated to its various parts. Apart from this, neither existing AS 10 nor existing AS 6 deals with the aspects such as separate depreciation of components, capitalizing the cost of replacement, etc. (Paragraphs 43, 70 of Ind AS 16 and paragraph 8.3 of Existing AS 10)

     

    1. Ind AS 16 requires that the cost of major inspections should be capitalised with consequent derecognition of any remaining carrying amount of the cost of the previous inspection. Existing AS 10 does not deal with this aspect. (Paragraph 14 of Ind AS 16)

     

    1. In line with the requirement of Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets, for creating a provision towards the costs of dismantling and removing the item of property plant and equipment and restoring the site on which it is located at the time the item is acquired or constructed, Ind AS 16 requires that the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located should be included in the cost of the respective item of property plant and equipment. Existing AS 10 does not contain any such requirement. (Paragraphs16

    (c) and 18 of Ind AS 16)

     

    1. Ind AS 16 requires an entity to choose either the cost model or the revaluation model as its accounting policy and to apply that policy to an entire class of property plant and equipment. It requires that under revaluation model, revaluation be made with reference to the fair value of items of property plant and equipment. It also requires that revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.

     

    Existing AS 10 recognizes revaluation of fixed assets. However, the revaluation approach adopted therein is ad hoc in nature, as it does not require the adoption of fair value basis as its accounting policy or revaluation of assets with regularity. It also provides an option for selection of assets within a class for revaluation on systematic basis. (Paragraphs 29 and 31 of Ind AS 16 and paragraph 27 of existing AS 10)

     

    1. Ind AS 16 provides that the revaluation surplus included in equity in respect of an item of property plant and equipment may be transferred to the retained earnings when the asset is derecognized. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between the depreciation based on the revalued carrying amount of the asset and depreciation based on its original cost. Transfers from revaluation surplus to the retained earnings are not made through profit or loss. (Paragraph 41 of Ind AS 16)

     

    As compared to the above, neither existing AS 10 nor existing AS 6 deals with the transfers from revaluation surplus. To deal with this aspect, the Institute issued a Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets. The Guidance Note provides that if a company has

     

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    Changes in Accounitng Standard - IND AS 16

     

     

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    transferred the difference between the revalued figure and the book value of fixed assets to the ‘Revaluation Reserve’ and has charged the additional depreciation related thereto to its profit and loss account, it is possible to transfer an amount equivalent to accumulated additional depreciation from the revaluation reserve to the profit and loss account or to the general reserve as the circumstances may permit, provided suitable disclosure is made in the accounts. However, the said Guidance Note also recognises that it would be prudent not to charge the additional depreciation arising due to revaluation against the revaluation reserve.

     

    1. With regard to self-constructed assets, Ind AS 16, specifically states that the cost of abnormal amounts of wasted material, labour, or other resources incurred in the construction of an asset is not included in the cost of the assets. Existing AS 10 while dealing with self-constructed fixed assets does not mention the same. (Paragraph 22 of Ind AS 16)

     

    1. Ind AS 16 provides that the cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with Ind AS 16. Similarly, the concept of cash price equivalent has been followed in case of disposal of fixed assets also. Existing AS 10 does not contain this requirement. (Paragraphs 23 and 72 of Ind AS 16)

     

    1. Existing AS 10 specifically deals with the fixed assets owned by the entity jointly with others. Ind AS 16 does not specifically deal with this aspect as these would basically be covered by Ind AS 31 as jointly controlled assets. (Paragraph 15.2 of existing AS 10)

     

    1. Existing AS 10 specifically deals with the situation where several assets are purchased for a consolidated price. It provides that the consideration should be apportioned to the various assets on the basis of their respective fair values. However, Ind AS 16 does not specifically deal with this situation. (Paragraph 15.3 of existing AS 10)

     

    1. Ind AS 16 requires that the residual value and useful life of an asset be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate in accordance with AS 5. Under existing AS 6, such a review is not obligatory as it simply provides that useful life of an asset may be reviewed periodically. (Paragraph 51 of Ind AS 16)

     

    1. Ind AS 16 requires that the depreciation method applied to an asset should be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method should be changed to reflect the changed pattern. In existing AS 6, change in depreciation method can be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements. (Paragraph 61 of Ind AS 16)

     

    1. Ind AS 16 requires that change in depreciation method should be considered as a change in accounting estimate and treated accordingly. In existing AS 6, it is considered as a change in accounting policy and treated accordingly. (Paragraph 61 of Ind AS 16)

     

     

     

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    Changes in Accounitng Standard - IND AS 16

     

     

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    1. Ind AS 16 requires that compensation from third parties for items of property, plant and equipment that were impaired, lost or given up should be included in the statement of profit and loss when the compensation becomes receivable. Existing AS 10 does not specifically deal with this aspect. (Paragraph 65 of Ind AS 16)

     

    1. Ind AS 16 specifically provides that gains arising on de-recognition of an item of property, plant and equipment should not be treated as revenue as defined in AS 9. Existing AS 10 is silent on this aspect. (Paragraph 68 of Ind AS 16)

     

    1. Ind AS 16 deals with the situation where entities hold the items of property, plant and equipment for rental to others and subsequently sell the same. No such provision is there in existing AS 10. (Paragraph 68A of Ind AS 16)

     

    1. Ind AS 16 does not deal with the assets ‘held for sale’ because the treatment of such assets is covered in Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations. Existing AS 10 deals with accounting for items of fixed assets retired from active use and held for sale.

     

    1. Ind AS 16 requires that if property, plant and equipment is acquired in exchange for a non-monetary asset, it should be recognised at its fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The existing standard requires that when a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. It may be appropriate to consider also the fair market value of the asset acquired if this is more clearly evident. Existing AS 10 also prescribes an alternative accounting treatment that is sometimes used for an exchange of assets, particularly when the assets exchanged are similar, is to record the asset acquired at the net book value of the asset given up; in each case an adjustment is made for any balancing receipt or payment of cash or other consideration.

     

    1. Ind AS 16 includes Appendix A which addresses how the changes in the measurement of an existing decommissioning, restoration and similar liability that result from changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle the obligation, or a change in the discount rate, shall be accounted for.

     

    The disclosure requirements of Ind AS 16 are significantly elaborate as compared to AS 10/AS 6. New AS 10 has come into force on March 30th, 2016

    The Finance (No 2) Act (FA), 2009 introduced provisions in the Indian Income-tax Law (ITL) that empowered the Central Board of Direct Taxes (CBDT), the apex Indian Tax Administration, to issue transfer pricing “safe harbor” rules. A “safe harbor” is defined in the ITL as circumstances in which the Tax Authority shall accept the transfer price declared by the taxpayer. The CBDT on 14 August 2013 released draft safe harbor rules for public comments. After considering comments of various stake holders, on 18 September 2013, the CBDT issued the final safe harbor rules.

     

    These rules provide minimum operating profit margins in relation to operating expenses a taxpayer is expected to earn for certain categories of international transactions, such as provision of software development services, information technology enabled services, (ITES), knowledge process outsourcing (KPO) services, contract research and development (R&D) services, manufacture and export of automotive components etc. that will be acceptable to the Tax Authority. The rules also provide acceptable norms for certain categories of financial transactions such as intra-group loans made or guarantees provided to nonresident affiliates of anIndian taxpayer.The CBDT, issued transfer pricing (TP) safe harbour rules on 18 September 2013, applicable for five years beginning from financial year (FY) 2012-13 to FY 2016-17. A “safe harbour” is defined in the Indian Income tax law (ITL) as circumstances in which the tax authority shall accept the transfer price declared by the taxpayer.

     

    The CBDT, vide notification 46/2017 dated 7 June 2017, has now amended the safe harbour rules by extending the applicability to an additional category of international transaction as well revising the applicable price/margins that would be accepted as arm’s length. The safe harbour provisions are now extended up to FY 2018-19 with certain modifications in thresholds for the eligible international transactions. For FY 2016-17, the taxpayer has the option to opt for the safe harbours under the old rules or the amended rules, whichever is more beneficial. As per the amended rules, a new category of international transaction for receipt of low value-adding intra-group services has been added. In general, the amended rules seek to make the safe harbour rules more attractive for eligible taxpayers with the objective of reducing TP litigation.

     

    International transactions and applicable safe harbour transfer price

     

    The transfer price declared by an eligible taxpayer shall be accepted by the tax authorities for the below mentioned eligible international transactions subject to the ceilings/circumstances stated as under:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Eligible international transaction

    Up to FY 2016-17

     

    From FY 2016-17 to 2018-19

     

     

     

     

     

     

    Threshold limit prescribed

    Safe harbour

    Threshold limit

    Safe harbour margin

    margin

    prescribed

     

     

     

     

     

     

     

     

     

     

     

     

    P r o v i s i o n

    o f  s o f t w a r e Up to INR 5

    20 % or more on Up to INR 1

    17 % or more on

    development services other than

    billion

    total  operating billion

    total  operating

    contract research & development

     

    costs

     

     

    costs

    (R&D) services with insignificant

     

     

     

     

     

    risks

     

     

     

     

     

     

     

     

     

     

    Above INR 5 billion

    22 % or more on Above  INR

    1 18 % or more on total operating

     

     

    total  operating billion but up to costs

     

     

     

    costs

    INR 2 billion

     

     

     

     

     

     

     

     

    Provision  of  information Up  to  INR  5

    20 % or more on Up to INR 1

    17 % or more on

    technology

    enabled  services billion

    total  operating billion

    total  operating

    (ITES) with insignificant risks

     

    costs

     

     

    costs

     

     

     

     

     

    Above INR 5 billion

    22 % or more on

    Above  INR

    1 18 % or more on total operating

     

     

    total  operating

    billion up to INR costs

     

     

     

    costs

    2 billion

     

     

     

     

    Amendment Safe Harbor Rules

     

     

    Provision of knowledge process No Threshold outsourcing (KPO) services with insignificant risks

     

     

    25 % or more on Up to INR 2

    I) 24 % or more on

     

    total  operating billion

    total

    operating

     

    costs;

    and

    the

     

    costs

    employee cost in

     

     

    relation

    to

    the

     

     

    Operating cost is

     

     

    at  least

    60  %;

     

     

    ii) 21 % or more

     

     

    o n

    t o t a l

     

     

    operating

    costs;

     

     

    a n d

     

    t h e

     

     

    employee cost in

     

     

    relation

    to

    the

     

     

    Operating cost is

     

     

    40 % or more but

     

     

    less than 60 %; or

     

     

    iii) 18 % or more

     

     

    o n

    t o t a l

     

     

    operating

    costs;

     

     

    a n d

     

    t h e

     

     

    employee cost in

     

     

    relation

    to

    the

     

     

    Operating

    cost

     

     

    does not exceed

     

     

    40%

     

     

     

     

     

     

     

     

     

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    Amendment

     

    Advancing of intra-group loan to Up to INR 500

     

    • non-resident wholly owned million subsidiary (WOS)

     

    The Interest rate NA

    d e c l a r e d

    i n

    relation to

    the

    international

    transaction,

    is

    e q u a l

    t o

    o r

    greater than the

    base

    rate

    of

    State

    Bank

    of

    India (SBI) as of

    30 June of the

    r e l e v a n t

    previous

    year

    plus  150

    basis

    points.

     

     

     

     

    Safe Harbor Rules


     

    Above INR 500 million

    The  Interest

    rate

    declared  in NA

     

    relation  to

    the

    international

     

    transaction is equal to or greater

     

    than the base rate of SBI as of 30

     

    June of the

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Implications:

     

    • If safe harbour opted, taxpayer not entitled to make any comparability adjustments nor avail benefit of the prescribed variation.

     

    • Taxpayer required to comply with TP documentation & Form 3CEB filing requirements even if they opt for the safe harbour rules.

     

    • Form 3CEFA to be furnished for the initial year to exercise safe harbour option. Option exercised to remain in force for lesser of the period specified in Form 3CEFA

     

    • Relatively simplified audit process prescribed for taxpayers opting for safe harbour in respect of eligible transactions

     

    • Ineligible to invoke MAP if taxpayer’s safe harbour option is accepted

     

    The other key aspects relating to the amended rules are as follows:

     

    • A definition has been provided for low value adding services.

     

    • To claim eligibility under the safe harbour rules for receipt of low value adding services, the allocation methodology needs to be certified by an Accountant as defined the rules.

     

    • The definition of contract R&D services relating to software development has amended to exclude services which involve making available source code to carry out routine functions.

     

    • Definition of employee costs has been provided.

     

    • Definition of operating costs and operating income has been expanded to include costs relating to stock based compensation provided to employees and reimbursement of expenses.

     

    • For the FY 2016-17, the taxpayer has the option to opt for the safe harbours under the old rules or the amended rules whichever is more beneficial.

     

    Most of the other provisions, including those relating to maintenance of documentation and compliance procedures continue to apply under the amended rules.

     

    Key Topics Covered:

    • GST
    • DEBT EQUITY ADVISORY
    • FEMA
    • DIRECT TAXES
    • SERVICE TAX

    Updates

    • COMPANIES ACT, 2013
    • FEMA
    • INCOME TAX

    Key Topics Covered:

    • INTERNATIONAL TAXATION
    • GST
    • FEMA
    • DIRECT TAX
    • AN ANALYSIS

    With GST implementation around the corner, a look on the transitional items pertaining to builders engaged in construction of residential or complex is paramount. As all the readers would by this time know that the proposed rate of GST on supplies made by construction of complex, building, civil structure or a part thereof, intended for sale to buyer, wholly or partly is 12% with a condition that the value of land is included in the amount charged from the recipient. The proposed rate has also has a remark that full input tax credit can be availed.

     

    With this in place, we have tried to analyse certain important aspects which have to be taken care while moving into the GST regime from the current regime. The article is majorly divided into two segments, one dealing with the income and other dealing with the credits.

     

    Aspects to be considered:

     

    1. Taxation under GST;
    2. Treatment for Works Completed prior to GST;
    3. Treatment of Advances received prior to appointed day for the supplies to be made post GST;
    4. Treatment of transactions with Land Owners in light of Joint Development Agreement;
    5. Availment of Credit of Excise Duties paid on Inputs;
    6. Availment of Credit of Value Added Tax paid on Inputs;
    7. Availment of Credit of Excise Duties paid on Capital Goods;
    8. Availment of Credit of Value Added Tax paid on Capital Goods;
    9. Carry Forward of Credit of Service Tax paid on Input Services;
    10. Carry Forward of Credit of Excise Duty paid on Capital Goods;
    11. Credits in Transit;
    12. Advances received but no service is provided eventually;
    13. Anti – Profiteering

     

    1. Taxation under GST:

     

    1. If a person is engaged in making supplies of construction of complex, building, civil structure or part thereof, including a complex or building intended for sale to 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 is subjected to GST. However, the phrase ‘first occupation’ has not been defined in the GST laws. It is assumed that the said phrase applies to situation where there are multiple towers in a residential complex and one of the tower is ready to occupy and hence the project does not get the completion certificate. In such a scenario, the phrase ‘first occupation’ might be used.

     

     

     

     

     

     

     

     

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    1. Only if the entire consideration is received by the supplier post completion certificate or its first occupation whichever is earlier, then such transaction is outside the ambit of GST, since it shall be treated as a transaction in sale of building. The transaction of sale of building is specified in Schedule III to Central Goods & Services Tax Act, 2017 (for brevity ‘CGST’) which deals with supplies which are neither goods nor services. Section 7(2) of CGST deals with transactions which are neither supply of goods nor supply of services, wherein Schedule III is mentioned.

     

    1. Hence, the transaction of supply of construction services in relation to complex/building shall be falling in the ambit of Section 7(1), in a case only where the consideration is received prior to completion certificate or first occupation whichever is earlier. Further, as per Schedule II read with Section 7(1)(d), the activity of supply of construction services in relation to complex/building shall be treated as supply of services.

     

    1. The proposed rate of GST on such supply of services as a result of GST council meeting on 19th May, 17 is 12% with a condition that the amount charged from the recipient of supply shall include the value of land. Further, the builder shall be eligible to full credit with no refund of overflow of input tax.

     

    1. Hence, the builder can avail the credit of GST paid on all eligible inputs, input services and capital goods which are used for the purposes of making such supplies. Section 17(5) deals with certain credits which are not eligible for availment. Apart from such credits, a builder can avail all credits and use the same against the GST payable.

     

    Certain Assumptions:

     

    1. Let us assume that GST is being rolled out from July 1st, 2017 and the preceding day would be 30th June, 2017.

     

    1. Let us consider ABC Limited, a builder who is engaged in construction of residential complex consisting of 150 flats. ABC Limited has entered a joint development agreement with land owners and as per the said agreement land owner is entitled for 50 flats.

     

    1. Assume that 30% of the works are completed as on 30th June, 17 in respect of the total 150 flats.

     

    1. Among 100 flats pertaining to the builder, let us assume that the builder has received advances against 60 flats as on 30th June, 17. Among 60 flats, let us assume that against 40 flats, the advances paid by the recipient are equivalent to the stage of completion and for 10 flats, the advances are more than the stage of completion of works and remaining 10 flats, the advances are received less than the stage of completion.

     

     

     

     

     

     

     

     

     

     

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    Challenges and Opportunities for Builders in Transition to GST

     

     

     

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    150 (30% Stage of Completion)

     

    50 (Land

    100 (Builder)

    Owner)

     

    60 (Advances Received)

     

     

    40 (30% of             10 (50% of              10 (20% of

    consideration)    consideration)     consideration)

     

    1. Treatment for Works Completed prior to GST:

     

    1. This is the instance where the 40 flats are falling, that is to say, the advance received from such 40 customers is equivalent to the stage of completion as on 30th June, 17. The service taxon such considerations was already paid under the current laws since the advances are subjected to tax irrespective whether supply is initiated or not. Now, let us see what the transitional provisions under CGST Act specify for such situations.

     

    1. As per Section 142(11)(c) of CGST Act, where tax was paid on any supply both under value added tax and under Chapter V of Finance Act, 1994, tax shall be leviable under this Act and the taxable person shall be entitled to take credit of value added tax or service tax paid under the existing law to the extent of supplies made after the appointed day and such credit shall be calculated in such manner as may be prescribed.

     

    1. From the highlighted portion, it can be understood that Section 142(11)(c) specifies that the credit of already paid taxes shall be taken only to the extent of supplies being made post appointed day. In other words, if part of the supply is completed prior to the appointed day, there shall not be any adjustments required to such extent.

     

    1. Accordingly, there cannot be any GST on such 40 flats where advances received prior to appointed day match with the stage of completion as per the contract.

     

    1. Further, as far as the 10 flats are concerned, where advances received are falling short of the stage of completion, the above rationale would be applicable since the part of supply has happened prior to the appointed day and the builder is responsible to pay service tax on such short fall of advance in light of Point of Taxation Rules, 2011.

     

    1. The above treatment shall apply in case of VAT laws also. There is no requirement to pay VAT on such completed portions, since in majority of states, VAT is also required to be paid on advances.

     

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    1. However, in the state of Andhra Pradesh and Telangana, VAT is required to be paid when the builder registers such flats to the customer before the Office of Sub-Registrar (brought through a circular) and not at the time of advances. If proper set of provisions are not made for such states, there is a probability for loss of revenue in terms of VAT since the registration might happen post appointed day and circular issued insisting to pay VAT at the time of registration might not be in force on such date. Hence, we have to wait and see how the transaction shall be treated under VAT laws of Andhra Pradesh and Telangana.

     

    1. Further, the said advances for the works completed but tax not being paid under the existing laws, shall be taxed at GST rates in terms of Section 142(9) of SGST Act, where by the customer has to shell out more amount in form of tax (6% of SGST compared to 1.25% of VAT).

     

    1. Treatment of Advances received prior to appointed day for the supplies to be made post GST:

     

    1. This is the instance where the 10 flats would fall, where advances received from them is more than the stage of completion as on the appointed day. The stage of completion is 30%, whereas the advances received are 50% of the entire consideration. In such a scenario, we have to treat the transaction as per Section 142(11)(c) of CGST Act.

     

    1. As reproduced above, Section 142(11)(c) covers this exact situation. ABC Limited is required to pay service tax on such advances as per the current Point of Taxation Rules, 2011. ABC Limited now has to identify the service tax component pertaining to the advances for which supply is being made post appointed day, that is in our example, on 20% (50% - 30%) and take the credit of the same.

     

    1. ABC Limited has to charge GST on such 20% of the supplies made post appointed day at 12% and take the set – off of the credit of service tax already paid on such 20%. Hence, builders who are planning to take advances under the current law to benefit the customer because of lower tax incidence has to be careful, since such supplies would attract tax under GST regime.

     

    1. The above treatment shall apply in case of VAT laws also. Since VAT is also required to be paid on advances, ABC Limited shall take the credit of VAT paid on such advances and pay GST on such portions where supplies are made post GST.

     

    1. As discussed earlier, however, in the state of Andhra Pradesh and Telangana, VAT is required to be paid when the builder registers such flats to the customer before the Office of Sub-Registrar (brought through a circular) and not at the time of advances. Hence, there might be a chance where the builder might state that they do not fall under the ambit of Section 142(11)(c) since the said section talks about supply where VAT and service tax was paid. The builders might take an argument that since only service tax was paid and VAT was not paid, Section 142(11)(c) cannot be made applicable to them and advances received from the customers for supplies to be made post GST shall be treated in terms of Section 142(11)(a) and 142(11)(b).

     

     

     

     

     

     

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    • As per the Section 142(11)(a) and (b), there cannot be any VAT/service tax once the said sale/service was already subjected to tax under Value Added Tax or Finance Act, 1994. Since the advances are subjected to VAT and service tax under the current laws, the stand that they take that there cannot be any further tax under GST is bright.

     

    • However, it has to be understood that the payment of VAT at the time of registration is only a procedural thing and cannot be a hindrance for satisfaction of Section 142 (11) (c). Hence, we are of the opinion that the builder cannot take recourse to payment methodology specified for VAT under the current laws and take shelter of Section 142 (11) (a)/(b).

     

    1. Treatment of transactions with Land Owners in light of Joint Development Agreement:

     

    1. Majority of the constructions of complexes, today we see, are the result of development agreements entered by builders with the land owners. Under the current service tax laws, the services provided by builder to land owner in light of joint development agreement attracts service tax, since consideration includes non-monetary consideration, in this case, the land which is foregone by the land owner for completed flats. For detail understanding of the taxation of joint development agreements under the service tax law, please refer to http://sbsandco.com/wp-content/uploads/2014/08/Feb2015-e-Journal.pdf

     

    1. However, the valuation of the services provided to the land owner and the point of taxation for such services is not clearly spelt out in the law. There was a circular issued by CBEC vide 151/2/2012 – ST dated 10th Feb, 2012 detailing the valuation to be adopted by the builder for the constructions services provided to the land owner. Ignoring the legal validity of the circular, the circular also has tried to lay out the time when the builder has to pay service tax on such transaction. The circular states the point of taxation for such services provided by builder to the land owners is the point of time when the possession or right in the property of the flats belonging to the land owner are transferred to the land owner by entering into a conveyance deed or similar instrument (for example allotment letter).

     

    1. Normally, the builder enters another agreement with land owners called as supplementary agreement, wherein such agreement details the flats belonging to the builder and land owner. In some case, the supplementary agreement forms part of the joint development agreement itself. The date of such agreement is normally deemed as point of completion of services provided by builder to the land owner irrespective of the fact, the construction of flats belonging to the land owners has been initiated or not.

     

    1. Now, the question before us, in the example, we have taken ABC Limited has completed 30% of completion prior to the appointed day in respect of flats belonging to the land owner. If ABC Limited has entered the supplementary agreement with land owners prior to appointed day, what should be the treatment of such transaction? Let us assume that ABC Limited has paid service tax on the construction services provided to the land owner since supplementary agreement is entered prior to the appointed day.

     

     

     

     

     

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    1. The point of taxation of such services to land owners is deemed to happen before appointed day as per the current Point of Taxation Rules, 2011. However, the stage of completion with respect to such flats is 30%, that is to say, post appointed day, there would be supplies to the extent of 70%. Whether, this would be treated in terms of Section 142(11)(c) or Section 142(11)(b)?

     

    1. If we assume that service is completed prior to appointed day because the supplementary agreement is entered prior to the appointed day, then the builder can take the shelter of Section 142(11)(b), which states that there cannot be any tax under GST laws to the extent, the tax was leviable on the said services under Chapter V of Finance Act, 1994. Since the transaction with the land owners is subjected to tax under the current laws and builder has paid service tax on such transaction, one line of argument can be taken as there would not be any further tax under GST laws for the supplies to be made post appointed day to land owners to extent of 70%.

     

    1. Alternatively, the GST authorities can state that the transaction falls under the ambit of Section 142(11)(c), by which the builder has to take the credit of service tax already paid on the land owner’s share and charge GST on the supplies made post appointed day to the extent of 70% (as 30% is completed prior to appointed day in our example).

     

    1. In such case, the builder might take a stand that Section 142(11)(c) is not applicable to the transactions between the builder and land owner, since as discussed earlier, the pre-requisite for a transaction to fall under 142(11)(c) is that the transaction is subjected to both VAT and service tax. However, the transaction between the builder and land owner is not subjected to VAT since the VAT laws does not cover the non-monetary/barter transactions.

     

    1. However, if we closely see the language used in Section 142(11)(c), there is a chance for another interpretation. The exact text of such section is reproduced ‘where tax was paid on any supply both under the Value Added Tax Act and under Chapter V of the Finance Act, 1994, tax shall be leviable under this Act and the taxable person shall be entitled to take credit of value added tax or service tax paid under the existing law to the extent of supplies made after the appointed day and such credit shall be calculated in such manner as may be prescribed’

     

    1. The opening part of the section talks about that the service tax and VAT has to be paid on such supply, whereas the middle part of the section talks about the availment of service tax or VAT, by which we can infer that the ‘and’in the opening part can be interpreted as ‘or’.The intention of the legislature might be where the supply is taxable both under VAT and service tax but not necessarily tax as required to be paid.

     

    1. From the above, it is evident that the transactions with the land owner where the point of taxation has exhausted in the earlier law but supplies are being made in current law, the taxation would be litigative because of the language used in the section. We have to wait and see the clarifications to be issued to put rest to the ambiguity involved.

     

    1. Further, keeping the Circular 151 ibid aside, the builder gets non-monetary consideration from the land owners, moment the development agreement is entered. The development agreement contains the percentage of built up area belonging to the land owners and builders. The supplementary agreement only specifies the flats that belongs to the land owners and builders

     

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    and hence the supplementary agreement need not be taken as point in time when the service is deemed to be completed. The entering of development agreement can be taken as the point in time when the service is deemed to be completed.

     

    1. Hence, if the development agreement is entered prior to the appointed day and the supplementary agreement is entered post appointed day, the builder can take the recourse to Section 142 (11)(b) of CGST Act to the extent works completed as on the day preceding the appointed day.

     

    1. Availment of Credit of Excise Duties paid on Inputs:

     

    38.Under the current law, the credit of excise duty paid on inputs used for construction of complex is not allowed vide the Cenvat Credit Rules, 2004. This is for the reason that the builder pays service tax only on 30% of the gross amount charged vide Notification No 26/2012-ST dated 20.06.2012, which comes with a condition that credit of input services and capital goods can only be availed. Hence, builders were not entitled to credit of excise duty paid on inputs used for construction.

     

    1. However, under GST laws, the proposed rate is 12% on the total value and credit of eligible input tax is available. Hence, the question comes, whether the builder is eligible to avail the credit of inputs which are used for making supplies post GST? The transitional provisions provide for availment of credit in certain circumstances which is discussed hereunder.

     

    1. As per Section 140(3) of CGST Act, if registered person who is engaged in provision of works contract services and availing the benefit of Notification No 26/2012-ST dated 20.06.2012, can avail the credit of excise duty in respect of inputs held in stock and inputs in semi-finished or finished goods held in stock on the appointed day subject to certain conditions. We will deal with conditions at a later stage, while we continue to discuss about the eligible credits.

     

    1. Hence, the builder can avail the credit of excise duty which is embedded in the inputs held in stock, inputs contained in semi-finished or finished goods which are used for making supplies post appointed day. That is to say, the builder has to adopt the treatment as specified in the Para B, C and D in the article and decide what is the quantum of supplies being made post GST. Once such quantum is available, the credit to such extent of supplies which are being made post GST can be availed. Further, Section 140 (10) specifies that there will be rules in place to decide the quantum of such credit which is eligible under Section 140 (3).

     

    1. The builder has to be cautious in availing the credit of duties which are contained in inputs, semi-finished or finished goods which are used for making supplies post GST. All duties are not eligible. Only such duties which are specified vide Explanation 1 to Section 140 are eligible. Now, let us proceed to understand the conditions with which this benefit of credit of excise duty paid on inputs is eligible. The conditions mentioned in Section 140 (3) are as under:

     

     

     

     

     

     

     

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    a.such inputs/goods are used or intended to be used for making taxable supplies under GST; b.said registered person is eligible for input tax credit on such inputs under GST;

     

    1. said registered person is in possession of invoice/tax paying doc in respect of inputs; d.invoices were issued not earlier than 12 months immediately preceding appointed day; e.supplier of services is not eligible for any abatement under this Act

     

    1. Only if the builder satisfies all the above conditions, then he is eligible to take credit of eligible duties on inputs contained in stock/WIP/FG as on the appointed day. Now, let us analyse whether the builder satisfies all the above conditions or not.

     

    Such Inputs/Goods are used or intended to be used for making taxable supplies under GST:

     

    44.The builder shall invariably use such inputs/goods which are in stock/WIP/FG for making taxable supplies under GST. The proposed rate of GST on such transactions is 12%, hence we can conclude that the supplies made post GST are taxable and hence accordingly this condition gets satisfied.

     

    Said registered person is eligible for input tax credit on such inputs under GST:

     

    1. The builder has to check, whether the inputs on which he is going to avail credit of eligible duties, are eligible under GST or not. Section 17(5) of CGST Act deals with items on which credit is not eligible for availment of input tax. If such inputs on which builder is intending to avail credit under Section 140 (3) are falling under Section 17(5), he cannot avail credit.

     

    1. Section 17(5)(d) deals with ‘goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in course or furtherance of business’.

     

    1. The above clause puts restriction on goods which are used for construction of an immovable property. Since the construction of complex which is sold prior to completion certificate is not an immovable property transaction, the credit of goods which are used can be availed.

     

    Said registered person is in possession of invoice/tax paying doc in respect of inputs:

     

    48.The builder has to possess invoice or any other document evidencing payment of tax in order to avail the credit of eligible duties on inputs contained in stock/WIP/finished goods. If the supplier of services does not have such documents, the credit cannot be availed. Assume ABC Limited has purchased steel from first stage/second stage dealer and does not have excise paying document. In such case, the credit of steel lying in stock/WIP/finished goods cannot be availed. ABC Limited has to approach the first stage/second stage dealer for obtaining necessary documents to transfer such credit to GST regime.

     

    49.The proviso to Section 140(3) prescribes a scheme for availment of credits if the registered person does not have documents. But the said proviso is applicable only for persons other than manufacturer or supplier of services. Hence, there is no other alternative for builders to avail the credit if they do not possess invoices or tax paying docs.

     

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    Invoices were issued not earlier than 12 months immediately preceding appointed day:

     

    • The credit of such inputs pertaining to last 12 months immediately preceding the appointed day only can be availed. Hence, the builder has to identify the inputs pertaining to last 12 months and then segregate such inputs into inputs which are to be used for making supplies post GST and inputs which were already used for works prior to appointed day.

     

    • After such segregation, the builder can take credit pertaining to such inputs contained in stock/WIP/finished goods which are used for making supplies post appointed day subject to containing the duty paid docs or invoices.

     

    Supplier of services is not eligible for any abatement under this Act:

     

    1. The supplier of services should not be eligible for any abatement under the GST laws. If such supplier of services is eligible for abatement, then credit of eligible duties cannot be availed. Now, the question before us is, whether the builder is eligible for abatement under GST laws or not.

     

    1. The proposed rate of 12% on construction of complex is subjected to a condition that the amount charged from the recipient contains the value of land. Vide Schedule III, the transactions in sale of land are neither supply of goods or nor supply of services, that is to say there cannot be any GST on sale of land or land component in the supply. Hence, there should be an appropriate mechanism to make sure that the undivided share of land portion is not subjected to GST and accordingly there might be any abatement for builder to the extent of land value or the rate of 12% is post abatement.

     

    1. In absence of clarity regarding the abatement, we cannot comment whether the builder is eligible for credit or not. However, considering the intention of the legislature, because Section 140 (3), specifically covers the transactions of works contract service providers availed Notification No 26/2012-ST benefit, we might conclude that the builder is eligible for credit.

     

    1. Availment of Credit of Value Added Tax paid on Inputs:

     

    1. The builder can take the credit of eligible central duties (except CST) on input contained in stock/WIP/finished goods in light of Section 140 (3) of CGST Act. However, to take the credit of state taxes namely VAT, we have to see the transitional provisions under the respective State Goods & Services Tax (SGST) Act. In the current article, we are taking the provisions of Telangana State Goods & Services Tax Act, 2017 for analysing.

     

    1. Section 140 (3) of Telangana SGST Act specifies credits of taxes can be availed if the register person is engaged in sale of exempted goods or tax-free goods. Since the builder does not fall into either of such categories, the said section does not serve the purpose. However, the appropriate section for builders to avail the credit of VAT lying in inputs/WIP/finished goods is Section 140 (6).

     

     

     

     

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    1. Section 140 (6) of SGST Act specifies that a registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of tax payable under the Value Added Tax law, then the registered person shall be entitled to take credit of VAT in respect of inputs contained in stock/semi-finished/finished goods held in stock on the appointed day subject to certain conditions.

     

    1. The builder is paying VAT at a fixed rate of 1.25% on the total amount charged from the recipient and hence falls under the purview of Section 140 (6) of Telangana GST Act. Hence, the builder can avail the credit of VAT lying in inputs/WIP/Finished goods which are used for making supplies post GST. Further, as per Section 140 (7) of Telangana GST Act, the quantum of eligible VAT shall be specified by making appropriate rules.

     

    1. Availment of Credit of Excise Duties paid on Capital Goods:

     

    1. The builder shall be using many capital goods for providing the construction services. As per the service tax laws, a builder can avail the credit of excise duty on capital goods used for providing construction services. The definition of ‘capital goods’ for the purposes of transitional provisions has to be taken as per Cenvat Credit Rules, 2004 which is made clear vide Explanation to Section 142 of CGST Act.

     

    1. Hence, the builder if he has not availed the credit of capital goods, he can avail the credit of capital goods while filing the last returns under the service tax laws. If he has already availed the credit of capital goods, the same shall be sitting in the last returns filed under the service tax law and such credit shall be carried forward to GST regime by virtue of Section 140 (1) of CGST Act, 2017. However, one of the important condition to carry such credit to GST regime is that the credit of capital goods is to be eligible even under the GST laws. The builder has to check for examination of such credit before carrying it forward.

     

    1. As all of us are aware, the credit of excise duty on capital goods is available only to the extent of 50% in the year of receipt and the balance in the succeeding year as per the current Cenvat Credit Rules. Hence, capital goods procured during FY 17-18, only 50% of such credit shall be carried forward to the GST regime in light of Section 140 (1). In order to make the balance credit available in GST regime, Section 140 (2) has been introduced in the GST laws. Hence, by virtue of Section 140 (2), the balance credit of capital goods can be availed.

     

    1. Availment of Credit of VAT paid on Capital Goods:

     

    1. The Telangana and Andhra Pradesh Value Added Taxes does not make a distinction between the capital goods and inputs for availment. Hence, for such states, the credit of VAT paid on capital goods is eligible as credit of VAT paid on inputs and they can avail the credit either under Section 140 (1) (if the builder is in regular scheme) or under Section 140 (6) (if the builder is in composition scheme).

     

    1. For other states, where there is a distinction between the capital goods and inputs and timing difference exists for availment of credit on capital goods, in such states, adopting the rationale as discussed above for the purposes of excise duty on capital goods would be relevant.

     

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    1. Carry Forward of Credit of Service Tax paid on Input Services:

     

    1. As stated earlier, the builder is eligible to take credit of service tax paid on input services used for providing construction related services. He is eligible to take credit either he is paying service tax under Notification No 26/2012-ST dated 20.06.2012 or under Rule 2A of Service Tax (Determination of Value) Rules, 2006.

     

    1. Such availed credit will be normally shown in the ST-3 returns filed periodically. The credit disclosed in such ST-3 returns can be carried forward to GST regime under Section 140 (1) of CGST Act. However, such credit is subjected to certain conditions, which are as under:

     

    1. such carried forward credit should be eligible as ITC under GST;

     

    1. he has to furnish all returns for period of 6 months immediately preceding the appointed day under the existing law;

     

    66.Only if the builder satisfies all the above conditions, then he is eligible to take credit of service tax to the GST regime. Now, let us analyse whether the builder satisfies all the above conditions or not.

     

    Such carried forward credit should be eligible as ITC under GST:

     

    1. All credits are not eligible under the GST laws. Section 17(5) of CGST Act lays down certain restrictions on which credit is not eligible. The builder has to analyse the closing balance of cenvat credit of input services against the items under Section 17(5) and if the builder thinks certain items are not eligible under GST, the credit to such an extent should not be carried forward to GST regime.

     

    1. Hence, it has to be noted that the credit flow to GST regime is not automatic and involves understanding of eligible credits under GST laws. While doing the analysis of closing balance of credit against Section 17(5), the builder might adopt the first in first out basis. Hence, the credits which came last are deemed to be staying in the closing balance and those have to be seen for eligibility under Section 17(5).

     

    1. Where any sum of consideration is not received for certain flats and if the builder is of the intention that such flats shall be sold after obtaining occupation certificate, the credit to such an extent has to be reversed in terms of Rule 6 of Cenvatand the balance only to be carried forward to the GST regime.

     

    He has to furnish all returns for period of 6 months immediately preceding the appointed day under the existing law:

     

    1. The builder in order to carry forward the credit to GST regime, must have filed all the returns for a period of 6 months immediately preceding the appointed day. That is to say he has to file his ST-3 returns for the period of January 17 to June 17, assuming the appointed day is 01st July, 17.

     

     

     

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    1. The credit shall be allowed to be carried forward only if the returns for such period has been filed. Hence, appropriate care has to be taken to see that the last returns have been filed so that the carry forward would be smooth.

     

    1. Carry Forward of Credit of Excise Duty paid on Capital Goods:

     

    1. The discussion related to ‘Availment of Credit of Excise Duties paid on Capital Goods’ vide Para G can be referred.

     

    1. Credits in Transit:

     

    1. There might be an instance where the builder receives inputs or input services after appointed day for which duty or taxes were paid before appointed day. In such cases, the credit can be claimed by the builder under GST in light of Section 140 (5) of CGST Act subject to a condition that such transaction has been recorded in books of accounts within 30 days from the appointed day.

     

    1. However, this benefit is not applicable to capital goods in transit as the section restricts the availment to inputs and input services. We are expecting a suitable amendment to extend the benefits to the capital goods also.

     

    1. Advances received but no service is provided eventually:

     

    1. The builder might receive advances for booking of flats under the existing laws and service tax might be paid on such advances. However, eventually, customer might cancel the agreement after the appointed day and demand the amounts paid vide booking.

     

    1. In such cases, the builder has to be refund the amount to the customer and claim refund of service tax paid under the GST laws in light of Section 142 (5) of CGST Act.

     

    1. Anti – Profiteering:

     

    1. Section 171 of CGST Act deals with the concept of anti-profiteering. The section states that any reduction in rate of tax on any supply of goods or services or benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.

     

    1. Hence, builders who are availing the benefit of ITC under Sections 140 (3) or 140 (6) has to keep in mind such benefit has to be passed to the consumers by way of reduction in prices. In case the benefit is not passed, the committee responsible might take necessary actions.

     

     

     

     

     

     

     

     

     

     

     

     

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