By what method will Corporates be able to take advantage of the Input Tax Credit System in the GST Era?
Taken off on the first of July, GST has recorded a noteworthy change in India’s duty changes and has supplanted an extent of circuitous focal and state demands. This change is not just going to achieve a positive change for FMCG organizations yet has additionally figured out how to evacuate excess changes which faultfinders contended, have blunted financial intensity in the nation.
One such tremendous change is the end of falling impact of charges which was generally predominant in the past administration. With the presentation of information assess credit over the production network (from the assembling stage till it achieves the customer) and crosswise over state fringes, GST will make the progress simple and consistent for organizations and organizations with regards to guaranteeing input impose credit (ITC). How about we feature a portion of the fundamental purposes of ITC which will enable you in understanding all that you to need to think about how corporates remain to pick up from ITC under GST.
How is ITC set to profit organizations under GST?
Before we get into the low down, here are a few guidelines each association must follow keeping in mind the end goal to guarantee ITC under GST:
- Any association who expects on guaranteeing ITC must have every single supporting report, for example, impose receipt, charge note, supplementary receipt, and so on.
- ITC can be asserted just if the Input Tax has been paid through electronic money record or electronic credit record.
- For any merchandise which are gotten in parts, ITC can be asserted by that association simply after they have gotten the last parcel.
How about we us now abide into how organizations remain to profit:
- Generally, when an organization purchases crude materials to fabricate an item, the organization is subject to pay impose on it. Additionally, the organization likewise needs to pay assess on the completed great which brings about twofold tax collection. Under GST, organizations would now be able to decrease this assessment occurrence by essentially paying the rest of the expense risk. Also, If the duty paid on these sources of info work out to be higher than the expense on the yield, the abundance charge paid can be asserted as a discount. This diminishment, thusly, will help bring down the last cost of items and this advantage can be passed onto customers through lower costs.
- Automobile and customer durables producers would now be able to hurl a moan of alleviation as under GST, for change arrangements, the framework now concedes them extra time to convey forward info impose credit for 90 days, rather than the prior arrangement of 60 days.
- Under GST, input charge credit on products and enterprises not proposed to be utilized “over the span of business” or “for the encouragement of a business” won’t be qualified for ITC. It ought to entirely have been utilized just for business purposes. This essentially implies ITC can’t be guaranteed for merchandise and administrations utilized for individual purposes.
- In request to keep away from any potential fakes or income spillage for the administration, GST rules for asserting information charge credit has been fixed which involve that the purchaser can’t guarantee enter assess credit unless the provider has really paid the important duty or guaranteed input credit.
- ITC can be guaranteed just on the off chance that you are in the receipt of real merchandise and ventures as it were.
- Under GST, any organization engaging a business client or partner for lunch, or so far as that is concerned any great or administration with the end goal of corporate social duty, the organization will be qualified to assert the credit on assess paid. Be that as it may, for this situation, there are special cases to the case, for example, any commitment towards representative provident reserve and auto rent, which are not secured under ITC.
- Companies can benefit ITC on assessable and zero appraised supplies, for example, sends out.
- Shareholders of corporates additionally remain to increase attributable to the accessibility of ITC for merchandise and ventures as it will ease up money streams and which, thusly, will help in boosting better efficiencies for organizations all in all. Moreover, attributable to ITC, organizations likewise can profit by better funds and proficient and powerful sending of assets.
- Although rental taxis are still let well enough alone for the domain of GST, similarly as they were under CENVAT, GST permits ITC for the utilization of taxicab benefits by ladies for their security and for physically tested people as commanded by law. Likewise, any wellbeing or extra security for the individuals who work in risky callings is additionally material.
- For merchants and organizations, in the event that IGST has been paid for merchandise, a credit of 30 for every penny is allowed for those exhausted at 18 for each penny or above and 20 for each penny for things burdened at bring down rates.
The never ending litigation of taxation relating to works contracts, particularly in construction industry and more particularly & challenging in real estate industry, gets a fresh turn in GST regime. Let us travel through the recently retired regime of works contract in pre GST, to newly born GST regime, presently grappling with transitional issues. The subject is a little lengthy, hope you stay the length of present Article.
Works Contract under Pre-GST: Service Tax Law
The Service Tax Law was reincarnated on 1st July 2012 when the concept of Negative List came into being. In this Negative list Regime, a new sec 66E was introduced to specify certain services as “declared services” wherein two clauses (b) and (h) of Sec 66E dealt with cases of a Works Contract.
Clause (b) to sec 66E: Construction of a complex, building, civil structure including a complex or building indented for sale to a buyer except where the entire consideration is received after the completion certificate.
Clause (h) to sec 66E: Service portion in the execution of a Works Contract.
It is interesting to note that though the services declared in clause (b) relating to construction of complex as above very much falls within the meaning of Works Contract in clause (h), but still the legislature in its wisdom specifically also declared the construction of complex service separately in clause (b). It seems as if it has been done as an abundant caution to ensure that House Buyer Agreements (HBA)/ Builders Buyer Agreements (BBA) entered into by Real Estate developers with the prospective buyers of apartments, if in litigation are upheld as out of the meaning of Works Contracts under clause (h), still the Government can levy service tax under clause (b). However, the litigation went in favor of Government when the Supreme Court in the year 2013 upheld that such House Buyer Agreements by real estate developers does fall within the scope of Works Contracts, in the matter of L&T case, see full judgement at http://judis.nic.in/supremecourt/imgs1.aspx?filename=40833
In Pre-GST Service Tax law there were two notifications to deal with this valuation aspect of services from a Works Contract.
Valuation of Service portion in a Works Contract
It is to be noted that it is only the service portion of works contract/construction of complex, which can be the subject matter of service tax levy. A Works Contract is a composition of ‘Goods’ as well as ‘Services’ which are so intermingled with each other that it forms a Single Indivisible Composite Contract. Furthermore, in the case of House Buyers Agreement (HBA) executed by real estate developers, (which is also a Works Contract as upheld by Apex Court in L&T case supra), it is a composition of three things, undivided share in Land, Goods and Services, three of which are so intermingled that it forms a Single Indivisible Composite Contract. Thus the challenge is as to how to extract the value of service portion out of the Composite Value of such a Works Contract.
Notification No. 24/2012 dt 06.06.2012 amended rule 2A, dealt with works contracts covered in clause (h) of sec 66E i.e. other than real estate House Buyer Agreements (HBA).
(see full Notification No 24/2012 at http://www.cbec.gov.in/htdocs-servicetax/st-notifications/st-notifications-2012/st24-2012
Notification No. 26/2012 dt 20.06.2012 amended by Notification 08/2016 dealt with abatement in case of House buyers agreements (HBA) covered in clause (b) of sec 66E in case of Real Estate.
(see full Notification No.8/2016 at http://www.cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st08-2016.pdf
Broadly speaking in case of construction contract (original works) the valuation of service portion used to be taken at 40% and in case of real estate House Buyer Agreements (HBA) the value of service portion used to be taken at 30%.
Works Contract under Pre-GST: State VAT Laws
By and large all State Laws dealing with VAT defined Works Contract with quite a large scope including all the agreements of building construction, manufacture, processing, fabrications, erections, installations, fitting out, improvement, modification, repair, or commissioning of any Movable or Immovable property. All the State VAT Laws levied VAT on the value of Goods transferred in the course of executing the works contracts. All state VAT laws prescribed valuation rules to arrive at the value of Goods involved in the execution of works contracts and also notified an alternate way of composition scheme whereby in lieu of VAT, specific percentage of aggregate value of turnover was levied as composition levy. Most of the contractors as well as real estate developers used to opt for composition levy instead of going by valuation as per valuation rules. That is how the VAT liability used to be discharged till 30th June 2017.
Works Contract under GST Regime
Under GST regime the very difference of ‘Goods’ and ‘Services’ has been dispensed with. The concept of sale, manufacture and provision of service has gone and only a single concept of supply (whether of Goods or Services) has been brought in.
GST Law has come up with a new concept of “Composite Supply” which broadly means a supply consisting of two or more taxable supplies of goods or services or both or any combination thereof which are naturally bundled and supplied in conjunction with each other, one of which is principal supply.
Going by this definition of “Composite Supply” u/s 2(30) of the CGST Act, one can appreciate that all works contracts very much fall within the meaning of Composite Supply.
Further the concept of Works Contract has been redefined under the GST Law u/s 2(119) of CGST Act whereby the works contracts pertaining to movable property have been excluded from the definition of Works Contract and therefore only works contracts relating to immovable property fall within its statutory definition u/s 2(119). Thus in GST regime the hitherto concept of Works Contract gets bifurcated into
- Works Contract (Immovable Property) covered u/s 2(119) of CGST Act
- Works Contract (Movable Property) excluded from statutory definition of Works Contract and classified a Composite Supply u/s 2(30) of CGST Act.
Taxation of works contracts (Immovable Property) u/s 2(119)
Like under Pre GST Service Tax law, the GST Regime has come up with Schedule II (Para 5 & 6) to declare certain supplies to be treated as supply of services. The clauses (b) and (h) of erstwhile sec 66E have been reintroduced as clause (b) of Para 5 & clause (a) of Para 6 to schedule II of CGST Act.
Clause (b) of sec 66E pertaining to construction of complex services has become clause (b) of Para 5 of Schedule II
Clause (h) of sec 66E pertaining to works contract service has become clause (a) of Para 6 of schedule II
The appreciable improvement is that in case of real state, apart from completion certificate, the first occupation of the Complex has also been given the sanctity of completion of the project irrespective that completion certificate of the project is awaited, thus after actual occupation of the complex, there will be no liability of GST only because the completion certificate is awaited from competent authority where delay is a routine.
Hence the application of brute force to composite works contracts to extract the value of goods and services for the levy of VAT and Service Tax, is no longer required, as under GST regime the works contracts is essentially service by deeming provision of declared services incorporated under schedule II of GST regime.
Rate of Tax: The GST rate as per notified tariff via notification 11/2017-Central Tax (Rate) dated 28.06.2017 under CGST Act is 9% as per Serial No. 3. Equally 9% is the rate under SGST, thus a combined GST rate is 18%. However in case of Real Estate House Buyers Agreements (HBA) which involve value of Land also, there is a provision of abatement of 1/3rd value as per Para 2 of the aforesaid notification, thus the effective rate in case of Real Estate is 12%.
Input Tax Credit: Full ITC u/s 16 (CGST Act) will be available on all inward supply of Goods/Services including Goods/Services under reverse charge, used as inputs for supply of works contracts service as per ITC rules. Provided in case of Real estate any excess ITC over output GST liability, will not be eligible for any refund.
At times there is a doubt raised whether clause (c) and clause (d) of sec 17(5) which restrict the ITC in relation to an immovable property, would pose any problem in availment of ITC in construction & real estate industry as both industries deal in construction of immovable property only. The author’s view is abundantly clear that the aforesaid doubt is absolutely unfounded and clause (c)/(d) of sec 17(5) has no application and there is no restriction at all in availing ITC because of these clauses of sec 17(5).
Transition from Pre GST to GST regime
The transition provisions are provided under chapter XX of CGST Act. Broadly the ITC pertaining to stock as on 30 June 2017 is allowed to be carried forward under GST regime. There is no composition scheme under GST regime and the construction industry has to maintain all books of accounts and inward supply record, to claim ITC from output liability on execution of works contract classified as supply of service.
In case of Government contractors they need to close their sales invoices which practically consist of completion of measurement books (MB) in government (Contractee) records. The MB completed and recorded till 30 June 2017 will remain under Pre GST regime while the MB prepared from 1st July 2017 onwards will attract full rate of 18% GST under new regime. For Government contractors with low inventory of WIP as on 30th June 2017, it will lower their tax burdens as their ITC on stock as on 30th June 2017 is likely to be low impacting their cash flow in new regime. Further the construction contractors and particularly government contractors need to revisit their construction contracts to ascertain the burden of additional tax liability under GST and to renegotiate with contractee as per revised costing under GST regime.
Taxation of Works Contracts (Movable Property) u/s 2(30)
All works contracts relating to movable property are no longer a works contract under statutory scheme of GST but rather all such works contracts relating to movable property are simply a case of composite supply u/s 2(30) of CGST Act. Therefore the rate of GST will be decided on the basis of “Principle Supply” under such works contracts (movable property). If the principle supply is that of services then the applicable GST rate on respective service will apply, and if the principle supply is that of Goods, then the applicable GST rate of such principle supply of goods will apply. Thus in GST regime, the theory of dominance test is back under the nomenclature of principle supply.
Full ITC u/s 16 (CGST Act) will be available on all inward supply of Goods/Services including Goods/Services under reverse charge, used as inputs for supply of works contracts service as per ITC rules.
Now under GST regime there is no mandatory extraction from composite value of Contract, to arrive at the value of Goods and Services separately but rather it is an issue of classification of works contracts (movable property) on the basis of principle supply. Thus now under GST the entire works contract (movable property), either it is a supply of goods or supply of service as decided as per dominant test called as principle supply test.
So far as the works contract (immovable property) is concerned, it is essentially a supply of service by virtue of schedule II.
The Reverse Charge Mechanism (RCM) under GST Regime is two-fold.
Case1: Specified Supplies- Sec 9(3) of CGST Act
Case 2: Supplies from Unregistered Persons- Sec 9(4) of CGST Act
Case1: Specified Supplies- Sec 9(3) of CGST Act
Sec 9(3) authorizes the Government to notify the specific supplies of Goods and/or Services to be covered under Reverse Charge Mechanism (RCM) whereupon it is not the Supplier of Goods/Services who will be liable to pay GST, but instead it will be the Recipient of Goods/Services who will be liable to pay. Such Recipient of such notified Goods/Services is compulsorily required to take registration in GST as per the provisions of clause (iii) of Sec.24 of the CGST Act.
The Government exercising its above authority u/s 9(3) of the Act has already issued two notifications to specify the Goods/Services covered under RCM.
- Notification No. 4/2017- Central Tax (Rate) dated 28.06.2017 comprising of FIVE items of Supply of Goods. To see full Notification visit at http://www.cbec.gov.in/resources//htdocs-cbec/gst/Notification-for-reverse-charge-CGST.pdf
- Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017 comprising of NINE items of Supply of Services. To see full Notification visit at http://www.cbec.gov.in/resources//htdocs-cbec/gst/Notification13-CGST.pdf
Thus on these FOURTEEN items of Supply of Goods/Services, GST liability is to be paid and discharged by the Recipient of these Goods/Services under RCM u/s 9(3) of the Act.
Therefore every Recipient as specified in above Notification(s) pertaining to FOURTEEN items is mandatory required to get Registration u/s 24 of the Act irrespective of the fact whether his Output Supply is taxable or not, likewise whether or not his aggregate turnover of outward supply exceed 20 Lacs or not.
Here the Recipient of such specified Goods/Services who are otherwise not liable for Registration may plan their procurements in such a way so as to avoid liability under RCM, to the extent possible. For instance, one can plan to procure his inward supplies where the liability to pay freight to any Goods Transport Agency (GTA) is assigned on the part of Supplier only such that no payment is made to any GTA by the purchaser and thus he may avoid GST on such freight under RCM and resultant requirement of Registration u/s 24 of the Act.
Case 2: Supplies from Unregistered Persons- Sec 9(4) of CGST Act
While case 1 under section 9(3) deals with specified items of Supply (at present FOURTEEN items as per two Notifications supra) and clause (iii) of sec 24 correspondingly mandates compulsory Registration for the Recipient of these Specified Supplies, Case 2 incorporates another scenario of RCM u/s 9 (4) of the Act which comes into picture only when the Recipient of Goods/Services is a Registered person. Thus section 9(3) and 9(4) operates in a little different domain, whereas Sec 9(3) mandates Specified Supplies and correspondingly sec 24 mandates compulsory registration, sec 9(4) is dependent on the Registration of the Recipient and applies only if the Recipient is already registered under GST.
Sec 9 (4) provides that in case of all the supplies of all the Goods and/or Services (as contrasted with specified supplies in case 1) by a Registered Person from any person who is not Registered under GST, the liability of GST on all such inward supplies by the Registered person shall be paid and discharged by such Registered Person in the capacity of the Recipient of Goods/Services.
Thus as a general principle every Registered person should try to procure all his inward supplies of Goods as well as Services from registered persons only to avoid the compliance of RCM u/s 9(4) of the Act. However with each registered person there are bound to be certain petty supplies from unregistered suppliers which are unavoidable. To take care of such unavoidable petty supplies and to save such petty supplies from the rigor of RCM u/s 9(4), a Notification No. 8/2017-Central Tax (Rate) dated 28.06.2017 has been issued u/s 11 of the CGST Act, whereby intra-state supplies of Goods/ Services has been exempted from RCM under sec 9(4) provided that the aggregate value of such supplies from all such unregistered suppliers doesn’t exceed an outer limit of Rs. 5000 per day. To see full Notification visit at http://www.cbec.gov.in/resources//htdocs-cbec/gst/Exemption-from-reverse-charge-upto-Rs5000-per-day-CGST.pdf
After going through the provisions of sec 9(4) of the Act, one may wonder that the exemption limit of Rs.20 lacs from registration under GST is merely eyewash as in any case the levy of GST doesn’t spare any supply. It only shifts the liability from the Supplier to the Recipient if turnover is below 20 Lacs and otherwise if it is above 20 Lacs the liability is already there on the Supplier to pay GST. For instance, If a Registered Supplier takes a Factory Premises or Office Premises on Rent from a local individual who is not liable to be registered under GST as his aggregate turnover doesn’t exceed Rs.20 lacs, though that individual landlord will not pay any GST, but the Recipient being a Registered Supplier, shall pay GST on such rental outflow under RCM as per sec 9(4) of the Act. Thus, Government doesn’t lose a single penny of tax, on account of exemption limit.
Smart Move, someone has to pay.
Input Tax Credit (ITC) of GST paid on inward supplies of Goods/Services under RCM covered u/s 9(3)-Specified Inward Supplies as well as u/s 9(3)- Supplies from Unregistered Suppliers.
The GST paid under RCM as per sec 9(3)-Specified Supplies as well as sec 9(4)-Supplies from Unregistered Persons, both, shall qualify to be credited as ITC under sec. 16 of the Act. Here a question arises that these inward supplies will dominantly be without any Tax Invoice except in some cases of specified supplies u/s 9(3) where the supplier might have registration; then for such supplies without inward Tax Invoice, as to how the requirement of having a Tax Invoice will be fulfilled to avail ITC as per section 16(2) of the Act. The answer lies in clause (f) of sec 31 (1) which authorizes the Registered Person – the Recipient himself, to issue a Tax Invoice on self (consolidated daily self-invoice) in respect of Goods /Services received by him as covered under sec 9(3) as well u/s 9(4), wherever required. Thus the absence of Inward Tax Invoice is no hurdle in availing ITC of input tax paid under RCM- whether u/s 9(3) or 9(4) of the Act.
Further in case of regular supply (not covered under RCM) if the Recipient fails to pay the value of supply to the Supplier within 180 days from the date of Inward Invoice, the ITC originally availed is added to output tax liability along with interest thereon. However in case of inward supplies covered under RCM u/s 9(3) and/or sec 9(4), there is no such compulsion to pay the value of supply within 180 days and no liability of payment of ITC arises after non-payment beyond 180 days.
One may logically argue that this discrimination between Regular Inward Supply and RCM Inward Supply is arbitrary. While non-payment of value of RCM Supply does not burden the Recipient to pay the ITC availed then why such kind of liability arise while not paying the Regular Supply within 180 days, and particularly when input tax has been paid to the inward Supplier. This kind of unreasonable discrimination directs towards foreseeable litigation in writ courts.
Forward or Reverse- Pay Tax on each Rupee of Supply- Pay your Supplier in Time.
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Rental from Immovable Property in GST Regime
Under GST Regime, “renting of immovable property” is included in schedule II which defines it as supply of services on which the GST rate is 18%. However Entry no. 12 of exemption Notification no. 12/2017 dated 28.06.2017 exempts the services by way of renting of residential dwelling for use as residence, meaning thereby that if the residence dwelling is leased out for commercial purposes then no exemption will apply and the rental from such residential property being leased out for commercial activity shall be taxable to GST.
Supply is Interstate or Intrastate, a tricky proposition
The concept whether the supply is interstate or intrastate is new so far as services are concerned. In pre GST regime service tax was a Central Tax there was no State Tax on services. But in GST regime supply of services are subject to Central Tax as well as State Tax in the like manner as applicable in case of supply of goods. With this structural shift the need to bifurcate the supply of services into interstate supply and intrastate supply has arisen such that the portion of state tax can go to the State of consumption of services.
With this conceptual understanding let us now understand as to how the supply of service is classified into interstate or intrastate. For this purpose two co-ordinates are to be established, one is the “Place of Supply of Services” [refer to section 12 of IGST Act] and second is the “location of supplier of services” [refer to section 2(15) of IGST Act].
If these two coordinates, namely
(a ) The Place of supply of services, and
(b) The location of supplier of services.
Fall in two different States then it is an interstate supply and if both of these two coordinates fall in the same state then it is an intra-state (local) supply.
Now going by the above yardstick let us see what will happen to a case of rental from immovable property. Let us take an example of a landowner who is located in Delhi and owns an immovable commercial property in Mumbai which he has rented out there at. The question is whether the land owner will have to take GST registration in the State of Maharashtra which is undisputedly the place of supply or instead whether the land owner can take GST registration in Delhi which is his usual place of residence and treat it as interstate supply and accordingly charge IGST. For that let us examine the above two co-ordinates.
(a) Place of Supply
As per section 12(3) of IGST Act the place of supply of service in relation to an immovable property shall be the location at which the immovable property is located. Therefore in this case the place of supply is undisputedly Mumbai because the property is located thereat.
(b) Location of supplier
For this the reference is directed to section 2(15) of IGST Act. Section 2(15) contains four clauses (a),(b),(c),(d) to determine the location of the supplier of service.
Clause (a) says that location of a supplier means a place of business where from the supply is made. To fulfill this test we have to see whether the land owner is having any place of business in Mumbai just by having an immovable property thereat.
For the meaning of “place of business” reference is directed to section 2(85) of CGST Act which defines a “place of business” wherefrom a business is ordinarily carried on and/or where a warehouse or go down or any other place for storage of goods is located and/or books of accounts are maintained and/or the business through agent is carried on.
Just having an immovable property doesn’t qualify this test as per section 2(85) of CGST Act, so in our example there is no “place of business” of the landlord in Mumbai.
Now let us examine clause (b) whether the land lord is having fixed establishment in Mumbai and for that reference is directed to section 2(50) of CGST Act, wherein a fixed establishment is a place which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources. This test of having human and technical resources is also not qualified by just having immovable property at Mumbai. So Clause (b) has no application in our case.
Now let us examine Clause (c) of Sec 2(15) of IGST Act. It pertains to a supply of service from more than one establishment and thus has no application in our case.
Therefore our case finally falls in the residual clause (d) which says that in the absence of clause (a),(b),(c) being applicable, the location of usual place of residence shall be the location of the supplier of services within the meaning of clause (d) of sec 2(15) of IGST Act.
Therefore in our example the location of the landlord will be Delhi while the place of supply will be Mumbai and hence as per section 7 of IGST Act this will be an interstate supply subject to IGST and there is no need for the landlord to take GST registration in the Mumbai (State of Maharashtra)