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Homebuyers cannot wait forever to get input tax credit: NAA

The National Anti-Profiteering Authority has directed the builder to pass on the benefit of the profiteered amount to the applicant, buyers and the land owner along with interest at 18 percent.

Vandana Ramnani @vandanaramnani1

The National Anti-Profiteering Authority (NAA) has rejected a real estate developer's plea that a project is market-driven and its pricing depended upon factors such as availability of hospitals, schools, public transport, pricing of competitors, demand and supply. The NAA has stated that, since flats are sold in instalments without waiting for project completion, homebuyers too cannot be made to wait endlessly to receive the benefit of input tax credit.

Upholding the case of profiteering against the developer, the NAA has directed the builder to pass on the benefit of the profiteered amount to the applicant, buyers and the land owner along with interest at 18 percent.

Sattva Developers submitted that the real estate business was market driven and the pricing of residential flats would be determined based on different parameters such as surrounding developments, facilities available like hospitals, schools, public transport, accessibility to railway station, airport and pricing of competitors etc.


The developer also claimed that the demand for homes and the supplier had also played a significant role in determining the cost of the flats. It contends that the real estate business is market-driven and spread over a period of four to five years, and its pricing depends on a number of factors

“The real estate business may be spread over a period of four to five years but it is also a fact that the flats are sold in instalments without waiting for completion of the project or the completion certificate. Hence the question of waiting endlessly to pass on the benefit of input tax credit to the buyer who has already paid the entire instalments is not justified and the provisions of the above section also do not provide that such benefit should be passed on completion of the project. It may also be emphasized that most of the real estate projects are not completed within the stipulated period of time,” the NAA order said.

The Director General of Anti-Profiteering (DGAP) estimated the ITC-to turnover ratio at 7.8 percent after the introduction of the GST, compared to 5.1 percent in the pre-GST period. Based on these calculations, the DGAP estimated the amount "profiteered" at around Rs 1 crore in the builder's Laurel Heights project, which was questioned by Sattva Developers. The builder is, therefore, ordered to pass on the gain from the "profiteered" amount to homebuyers, NAA said.

“The respondent has himself admitted that there has been benefit of ITC derived and the benefit has been passed on by him to all his customers with whom agreements had been entered into on or before June 30, 2017. The benefit has been computed at Rs 9 per sq ft and based on this calculation he has passed on the benefit of Rs 22 lakh to 221 flat buyers,” the order said.

The Authority has ordered the developer to reduce the prices to be realised from the buyers of the flats commensurate with the benefit of ITC received by him.

The NAA also noted that the developer had denied benefit of ITC to the buyers of the flats being constructed by him in his project Laurel Heights in contravention of the provisions of Section 171 (1) of the CGST Act 2017. Thus, the developer realised more price from the buyers than what he was entitled to collect and also compelled them to pay more GST on the additional realization than what they were required to pay. He did so by issuing incorrect invoices and has committed an offence under section 122 (1) (i) of the CGST Act 2017, the NAA noted.

In the last two years, the GST has been a major factor keeping homebuyers away from under construction apartments. While the overall cost of construction seems to have fallen under the GST regime on account of additional input tax credits for builders, the intent to pass on the benefit of lower cost of construction to the end-buyer appeared to have been missing in the market. Due to this, the finance ministry asked real estate dealers time and again to pass on the GST rate-cut benefits to homebuyers but to no avail.

In its recent ruling, the NAA has held that excuses such as uncertainties associated with the GST regime cannot be used to deny homebuyers benefits of a lower tax rate. What this means is that if a real estate developer has benefited from the introduction of GST in terms of lower rate of tax, or additional input tax credits (ITC), the benefits should be passed on to homebuyers.

“With this and some recent orders, it is now abundantly clear that the NAA is ensuring that benefits, if any, on account of GST necessarily reach the homebuyers.” said Harpreet Singh, Partner, KPMG

In the second week of May, the Central Board of Indirect Taxes and Customs (CBIC) issued the second set of FAQs for real estate sector, wherein it said that builders would not be able to adjust the accumulated credits in ongoing projects in case they opted for a lower new GST rate of 5 percent for normal and a percent for affordable housing.

Homebuyers too will have to pay 12 percent GST on the balance amount due to the builder if the housing project has been granted completion certificate by March 31, the CBIC said.

Builders who have received the completion certificate for an ongoing project before April 1 will have to charge 12 percent GST from buyers on the balance amount due towards purchase of the flat.

In March, the GST Council permitted real estate developers to shift to the 5 percent GST rate for residential units and 1 percent for affordable housing without the benefit of input tax credit from April 1.

For the ongoing projects, builders have been given the option to either continue in the 12 percent GST slab with ITC (8 percent for affordable housing), or opt for 5 percent GST rate (1 percent for affordable housing) without ITC and communicate to their respective jurisdictional officers the same by May 20.
First Published on Jun 18, 2019 08:46 am
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