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Yet another round of complications coming for Builders/Developers


Yet another round of complications coming for developers
(CA. Keshav R Garg, Partner, K D & Associates, Chandigarh)

Yesterday GST Council approved lower rate of tax for housing, some of the buyer might cheer for a while but for builder community there seems more troubles in near future. The reduction in rates for under construction houses has come with a clause that the developer shall not be allowed Input Tax Credit on his purchases. This not only invite mammoth calculations but also higher level of compliance complexity for them.


At the very outset the unsold stock which the builders would be carrying as on 31st March 2019 would become huge trouble. The input tax credit which has already been used against these unsold stock invites the reversal of the said credit resulting into payment of liability in cash. The government assumes that the corresponding credit would be lying in builders credit ledger against unsold stock. But that’s not the reality. Most of the builders had consumed credit without classifying it to number of flats being constructed. In a scenario where a builder is constructing 100 flats 60 of which he has already sold and 40 remains unsold, he shall now be liable to calculate credit utilised against these flats and reverse the same. Where the sufficient credit is available in electronic credit ledger, he might not have to arrange cash but if credit ledger has already been exhausted, he is inviting further liquidity crunch.

In most of the cases 90% payment is made upfront and 10% is paid on possession by the buyer. In such cases where the amount falls due after 01.04.2019, the builder shall be required to reverse input tax credit in respect of said payment. If the builder tries to makes the arrangement of payment before the effective date, he might fall in trap of anti-profiteering authorities. What happens to the amount falling due before 31.03.2019 but paid by client after that. There is relief for builders, the amount which have become due before effective date, there shall be no need to reverse the input tax credit.

Let us now understand the scenario of construction linked plan where the payment is made by the buyer based upon the construction of the property. The percentage of construction as worked according to AS 7 or certificate from competent authority would become the basis to decide the eligibility of input tax credit. The developer has to work out the percentage of project yet to be completed after 31.03.2019, on the basis of which input tax credit needs to be reversed, leading to additional cost for remaining project hitting his profit margins badly.

Story does not end here, the pindora box of capital goods will also open. The capital goods which has been bought for construction would also become ineligible for claim for input tax credit. The proportionate reduction in ITC against capital goods in terms of CGST Rules 2017 would also be required to be worked out. Since the capital goods involve huge expenditures, the reversal of input tax credit in their respect is going to be big hit for developer community. The capital goods standing as on 1st April 2019 is now going to create huge trouble for developers. Apart from the calculations, the builders should also be prepared for aggressive approach by department. The large number of searches, investigations, inspections are now to become new normal post general elections 2019.

From above understanding it is clearly evident that a temporary rise in properties in near future is certain. Whatever might happen to price, one this for sure, if you are builder, you must pull up your socks to face the another round of complexities awaiting you very soon.

Regards
CA. Keshav R Garg
98880 90008


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