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    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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    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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    Challenges and Opportunities for Builders in Transition to GST

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    What is BEPS? - Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies

     

    • That exploit gaps and mismatches in tax rules to make profits ‘erode' for tax purposes or

     

    • To shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid.

     

    What causes BEPS?

     

    • The interaction of domestic tax systems in cross border transactions may result in double taxation of same income / leave gaps, resulting in double non taxation of income. BEPS strategies take advantage of these gaps between tax systems in order to achieve double non-taxation.

     

    • Global corporate income tax (CIT) revenue losses estimated between 4% and 10% of global CIT revenues, i.e. USD 100 to 240 billion annually. Given developing countries’ greater reliance on CIT revenues, estimates of the impact on developing countries, as a percentage of GDP, are higher than for developed countries.

     

    India not a member of OECD, but actively engaged in taxation work of OECD. Since 2006, accorded the status of “Participant” / “Observer”. OECD and G20 countries working on equal footing on the BEPS project. Recommendations under BEPS Project made on basis of consensus arrived by 34 OECD Countries and 8 non-OECD G20 countries. India as an non-OECD G20 country, is an active participant in the BEPS project and as member of “Bureau Plus”, participated in the decision making process. India obliged to act on BEPS recommendations.

     

    BEPS Action Plans:

     

    The BEPS Project aims to provide governments with clear international solutions for fighting corporate tax planning strategies that exploit gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment. The OECD work is based on a BEPS Action Plan endorsed by the G20, which identified 15 key areas/action plans.

     

    With the adoption of the BEPS package, OECD and G20 countries, as well as all developing countries that have participated in its development, will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occurs. It is now time to focus on the upcoming challenges, which include supporting the implementation of the recommended changes in a consistent and coherent manner, monitoring the impact on double non-taxation and on double taxation, and designing a more inclusive framework to support implementation and carry out monitoring.

     

    Impact/Implication on the Business of MNC’s:

     

    • Identify the aspects of the Plan that have the greatest potential impact on their business models.

     

    • Stay informed about ongoing developments in the OECD and in the countries where they operate or invest.

     

     

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    An approach to hard-to-value intangibles was agreed to by the OECD and G20 and published in the Action 8-10 final report on of Base Erosion Profit Shifting (BEPS) plan in October 2015. The approach was then set out in Chapter VI of the OECD Transfer Pricing Guidelines.

     

    HTVI - Implementation guidance on hard-to-value intangibles:

     

    On 23 May 2017, the Organisation for Economic Co-operation and Development (OECD) released a discussion draft (the Discussion Draft or Draft) on the implementation guidance on hard-to-value intangibles (HTVI) in connection with Base Erosion and Profit Shifting (BEPS) Action 8. The Discussion Draft provides guidance on the implementation of the approach to HTVI.

     

    The HTVI approach is stipulated in the final report on transfer pricing under BEPS Actions 8-10 and formally incorporated into the OECD Transfer Pricing Guidelines.The Discussion Draft contains three sections that present

     

    • The principles that should underlie the implementation of the HTVI approach,
    • Three examples to clarify the implementation of the HTVI approach in different scenarios, and

     

    (iii)The interaction between the HTVI approach and the access to the mutual agreement procedure (MAP) under the applicable treaty. The guidance included in the Draft is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the HTVI approach.

     

     

     

     

     

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    BEPS - HTVI (Hard to Value Intangibles) - Implementation guidance

     

     

     

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    The proposals included in the Discussion Draft do not represent a consensus view of the OECD’s Committee on Fiscal Affairs, but were released in draft form in order to provide an opportunity for public comments, to be submitted by 30 June 2017.

     

    Principles that should underlie the implementation of the HTVI approach

     

    The HTVI approach authorizes tax administrations to use ex post evidence on the financial outcomes of an HTVI transaction (i.e., information gathered in hindsight about how valuable an intangible has turned out to be) as presumptive evidence on the appropriateness of the pricing arrangements. The Actions 8-10 Report also describes certain circumstances or safe harbors where such presumptive evidence may not be used. The ex post outcomes provide information on the determination of the valuation at the time of the transaction, but a potential revised valuation should not be based on actual income or cash flow without also taking into account the probability of such income or cash flow at the time of the transfer of the HTVI.

     

    The Discussion Draft discusses the impact of timing issues on the HTVI approach. In this respect, tax administrations should apply audit practices to identify and act upon HTVI transactions as early as possible. However, inherent to this approach, ex post outcomes relating to the transfer of the intangible may not be available shortly after the transaction. It is recognized that the elapsed time between the transaction and the moment the ex post outcomes become available to tax administrations may not always correspond with the audit cycles or administrative and statutory time periods, in particular for intangibles that will not be exploited commercially until years after the transaction.

     

    The guidance set forth in the Draft should not be used to delay or bypass a country’s normal audit procedures. Some countries may encounter difficulties in implementing the HTVI approach due to for example short audit cycles or statute of limitations. Such countries may consider targeted changes to procedures or legislation to counter these implementation difficulties, such as mandatory prompt notifications in the case of a HTVI transfer or an amendment of the normal statute of limitations.

     

    HTVI and the mutual agreement procedure

     

    The Actions 8-10 Report stresses the importance of permitting the resolution of cases of double taxation arising from the application of the HTVI approach through access to the MAP under the applicable treaty. The Discussion Draft should therefore be read in conjunction with the final report on BEPS Action 14 (Making Dispute Resolution Mechanisms More Effective).

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    In the recent times, controversy gloomed up over the applicability of service tax for services provided by Sub-Contractors on behalf of the Main Contractors to the SEZ units. Services provided by Main contractors to SEZ units are exempt from payment of service tax under Notification 12/2013-ST dated 01.07.2013. Majority of the Sub-Contractors are of the opinion that the services provided by them are consumed directly by the Developer or Co-developer or unit in SEZ unit and are exempted from payment of service tax. However, the Revenue Authorities are contending that these sub-contractors are liable to service tax especially in the absence of any specific exemption in this regard, as the services are directly provided to Main Contractors but not to SEZ units. 

    Analysis of the provisions in the Finance Act, 1994 and SEZ Act, 2005, 

    Section 26(1)(e) in CHAPTER VI of the SEZ Act - Special Fiscal Provisions for Special Economic Zones provides for “the exemption from service tax under Chapter-V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorised operations in a Special Economic Zone”. 

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    Section 2(14) of the Income Tax Act “Act”, defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession. 

    However, capital asset does not include stock in trade, personal effects subject to certain exceptions. 

    Transfer of securities - capital asset (or) stock-in-trade? 

    Gain arising on transfer of shares or any other securities is taxable. It can be taxable under the head of ‘Capital Gain’ or under the head of ‘Profits or Gains from Business or Profession’. 

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    Revised Registration Process of NBFC with Reserve Bank of India (RBI) 

    As per the statement given in First Bi-monthly Monetary Policy Statement - 2016-17, RBI has simplified and rationalised the process of registration of NEW NBFCs. The number of documents to be submitted has reduced from 45 to 7-8 documents. From the date of press release, non-deposit taking NBFCs (NBFC-ND) based on Sources of Funds & Customer Interface are classified as follows: 

    • Type I - NBFC-ND not accepting public funds / not intending to accept public funds in the future and not having customer interface / not intending to have customer interface in the future.
    • Type II - NBFC-ND accepting public funds/ intending to accept public funds in the future and/or having customer interface/intending to have customer interface in the future. 

    In case if Type I- NBFC-ND companies intend to avail public fund or intend to have customer interface in the future, they are required to take approval from Reserve Bank of India, Department of Non-Banking Regulation. 

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