In its first ruling against anti-profiteering in the real estate sector, the National Anti-Profiteering Authority (NAA) ordered a Gurgaon-based-developer, Pyramid Infratech to refund Rs 8.22 crore to 2,476 flat owners. The amount pertains to the benefit of Goods and Services Tax (GST) reduction the builder had not passed on to the homebuyers.
Experts say the order would compel builders to pass on the savings made on account of the additional input tax credit and protect buyers from any increase in the tax rate. In some cases, it may even lead to a reduction in the overall tax incidence on newly-constructed units.
The NAA passed the order on a complaint of profiteering filed by 109 homebuyers of two affordable housing projects -- Pyramid Infratech Urban Homes in sector 70A and 86 in Gurugram, Haryana.
The realty firm has been asked to refund or reduce Rs 8.22 crore from the buyers' last installment along with the interest of 18 percent per annum to be calculated from the date of the receipt of the excess amount from each buyer, within a period of 3 months.
In its order, the NAA said it is "absolutely clear" that excess input tax credit was available to Pyramid Infratech and the benefit was required to be passed on to the buyers.
"The Respondent (Pyramid Infratech) cannot appropriate this benefit as this is a concession given by the Government from its own tax revenue to reduce the prices being charged by the builders from the vulnerable section of society which cannot afford high-value apartments.
"The Respondent is not being asked to extend this benefit out of his own account and he is only liable to pass on the benefit of ITC to which he has become entitled by virtue of the grant of ITC on the Construction Service by the Government," the NAA order said.
The NAA said Pyramid Infratech shall "not only pass on the benefit ... to the 109 applicants who are before us, but to all the 2,476 buyers as they are identifiable".
The real estate firm had said since there was an increase in the cost of raw materials and also an increased burden of taxes of sub-contractors, there were no benefit of GST accrued to the buyers of the flats.
The Authority has said the developer is not legally correct in contending that there has been an increase in tax rate as earlier VAT was levied at 5.25 percent and after July 1, 2017, GST at 12 percent has been imposed (8 percent w.e.f. January 25, 2018), hence, no benefit could be passed on to applicants, while opining that, “Section 171 not only deals with passing on the benefit of reduction in the rate of tax but also deals with passing on the benefit of ITC.”
Perusing the buyer’s agreement, the NAA opines that sale consideration did not include taxes, surcharges, etc. and applicant was liable to pay all taxes, thus, “Respondent was obligated to pass on the benefit of ITC in terms of reduction in tax and hence he cannot appropriate the ITC which had become available to him on the GST which had been paid by the applicants.”
“Since the respondent has claimed that 75 percent construction had been done in post-GST era there was all the more scope for reduction in the cost of construction, moreover, a plea that cost factor should be taken into account is not justifiable absent any escalation clause in the agreement,” the NAA noted.
The NAA holds the builder was required to pass excess ITC available and “cannot appropriate this benefit as this is a concession given by the Government from its own tax revenue to reduce the prices being charged by the builders from the vulnerable section of society which cannot afford high-value apartments.”
The homebuyers in their complaint had said Pyramid Infratech had not passed on the benefit of lower tax arising out of availing of input tax credit (ITC) post rollout of the GST and hence has indulged in profiteering.
The NAA holds the builder liable for penalty u/s 122 of CGST Act, 2017 and directs Commissioner of State Tax, Haryana to ensure that amount profiteered by the developer is passed on to all the buyers and submit a report to the authority within four months:
“Some of the Builders were wrongly recovering the additional tax from homebuyers on the implementation of GST by stating that there has been an increase in the overall tax incidence. This may not be the right practice, as GST anti-profiteering provision also mandates passing of benefit of additional input tax credits to the buyers. This ruling would assuage the homebuyers from such adverse claims. ” said Harpreet Singh, Partner, Indirect taxes, KPMG.
“Clearly a positive order for homebuyers, as the builders would now be compelled to pass on savings made by them on account of additional input tax credits. This would not only protect homebuyers from any increase in tax rate, but it may, in some cases even result in a reduction of overall tax incidence on their newly constructed properties,” added Singh
GST came into effect from July 1, 2017. The effective rate of affordable housing was 12 percent initially and was reduced to 8 percent from January 25, 2018.