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GST anti-profiteering in realty sector: Price regulation vs profit regulation

The anti-profiteering mechanism is far from being fool proof

Moneycontrol Contributor @moneycontrolcom
Representative image
Representative image

Kapil Sharma

Ever since the rollout of the Goods and Services Tax (GST) law, we have received a mixed response from various stakeholders on various issues arising out of the introduction of the new law.

In order to smoothen the transition from erstwhile laws into GST regime, one of the many steps taken by the government was introduction of anti-profiteering mechanism. The mechanism was devised to focus on curbing unwarranted profiteering by the companies and ensuring that the benefits that accrue on account of commensurate reduction in prices due to transition from erstwhile tax regime into GST regime, are passed on to the ultimate customers. Also, proportionate input tax credit (ITC)is also made available to them, thereby protecting the interests of customers.

The concept of anti-profiteering is not unique to India. Other countries such as Malaysia, Australia, Canada, New Zealand had also introduced anti-profiteering provisions when the GST regime was introduced in their countries.

Whilst the intent behind the introduction of these provisions in GST law is good, serious doubts are cast with respect to the availability of enforcement in the absence of clearly laid provisions. To ensure that business entities comply with the anti-profiteering provisions, National Anti-Profiteering Authority (NAA) and state-level screening committees have been constituted.

For real estate buyers, the introduction of GST was anticipated to be a boon as it paved way for a single tax that is applied on the purchase price of the property. However, the real estate sector did not welcome it and was apprehensive of the applicability of the anti-profiteering provisions to the complex nature and structure of the industry.

Under the erstwhile tax regime, purchase of under-construction property attracted a total tax rate of 6 percent, (approximately) without income tax credit on goods. However, under the GST regime, under-construction property is charged at a rate of 12 percent with the corresponding ITC on goods.

Irrespective of increase in tax rate, real estate buyers anticipated a reduction in prices of property owing to the fact that facility of ITC (for the purchase of raw materials) was available to developers, thereby resulting in reduced prices. This was to be the scenario if all real estate developers were passing on the 100 percent ITC benefit to the ultimate buyers.

In reality, the picture so painted is far from rosy. While the mechanism of computing the benefit of increase in ITC was widely publicised, real estate developers, by and large, have not been compliant when it came to passing on the benefit on account of various reasons such as:

1. Difficulty in the computation of benefit with certainty.

2. Reluctance on part of contractors to provide the benefit of an increase in input tax credit.

3. Clear mechanism to compute and when to pass on the benefit.

4. Non-compliance by real estate industry at large.

It is also pertinent to note that apart from the guidelines enshrined in Section 171 of the CGST Act, there is no concrete mechanism to compel developers to pass on the benefits.

Further, the provision is silent as to what constitutes ‘commensurate reduction of prices’. There is nothing in the law that prevents developers from increasing the prices of property in a free economy. Hence, it is safe to say that anti-profiteering mechanism is certainly far from being fool-proof.

It, therefore, emerges that there is certainly an incongruity in the understanding between government, developers and consumers.

Given the non-compliance, deferment and difficulty faced in computing the amount, real estate developers are likely to be the among first few to bear the brunt of NAA for denying consumers the benefit of reduced tax burden under the GST.

The NAA has already begun its streak with a Gurgaon-based realty developer Pyramid Infratech for profiteering and not passing on ITC to the buyers of its housing project in the GST regime.

Though the matter is pending with the Delhi High Court on certain issues relating to computation of benefit, it would be fair to point out that the company has already agreed to pass on a certain amount to the customer on account of anti-profiteering. This clearly shows that the benefit of ITC was not passed by the developer after the rollout of GST.

The NAA has already initiated an investigation against various real estate developers across India for not providing the benefit of the increased input tax credit to the customers wherein the authorities have been following a similar practice to what has been adopted in the Pyramid case.

What is interesting to note is that when there is no defined approach for computing the benefit to be passed on and the parties have taken recourse to the judiciary for determining the appropriateness of method, how far will the entire scheme be of some benefit to the end consumers or home buyers.

The action on part of NAA certainly seems justified as non-passing of benefit tantamount to non-compliance of law. However, their approach needs a re-consideration on an overall basis. The entire controversy stems from the lack of a clear cut mechanism for computing benefits arising out of the said provisions.

It is crucial that 'commensurate reduction'  is clearly defined and detailed guidelines on how ITC can be translated into price changes are issued. Further, factors such as stage of completion, the pattern of procurement of goods, demands to be made among other things need consideration before arriving at a benefit.

It is evident that no straight jacket formula can be designed to arrive at a particular value of benefit. The exercise must be done on a case-to-case basis. However, unless the safety nets are mounted, it becomes difficult to comment on the reasonableness of approach of NAA. The focus must be on the regulation of unreasonable price changes rather than controlling price levels.

The author is Partner, Lakshmikumaran & Sridharan. Saumya Dubey, Associate at the firm also contributed to the article. Views are personal.
First Published on Jan 10, 2019 10:55 am
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