Transitional credit to builders under GST Act
Query
The builders carrying on construction on their own for selling of premises are considered as contractors. Under earlier VAT regime they were liable to pay tax under VAT and service tax separately. Under VAT there were different methods available for discharge of liability. When GST came into operation from 1-7-2017, there are transitional provisions for taking credit of ITC involved in stock as on 30th June, 2017. The builders have claimed set off in relation to existing stock of raw materials like cement etc. as well as on the materials used in construction and constructed portion is lying as stock without sale. Now the authorities are raising issue that the constructed portion is in a nature of immovable property and not goods and hence transitional ITC is not eligible and asking for reversal of the same. Kindly explain whether above view is correct and what is the correct position?
Reply
It is true that to avoid double burden the GST Act has provided for carry forward of ITC lying in closing stock as on 30th June, 2017. The relevant provisions are referred to as transitional provisions. The said provisions are contained in chapter XX of GCST Act. There are different categories for claiming ITC. If any excess ITC or refund was as per any return as on 30th June, 2017, then it was to be carried forward without much difficulty. However under VAT era there were composition schemes for builders and generally such schemes were with the condition that the builders will not claim set off on the purchases. Therefore, in such cases, there were no occasions that the builders have claimed set off. Reference can be made to the typical 1% composition scheme available to builders under MVAT Act in Maharashtra. The builders were liable to pay tax at 1% on the agreement value or stamp duty value and the builders were not eligible for ITC. Such builders had stock as on 30-6-2017. It is also fact that under GST to the extent of work done in GST period, the taxable person has to pay the tax irrespective of the fact whether on the stock or purchases ITC is availed or not.
Under Transitional provisions, a scheme is made to allow ITC to the persons who were earlier paying tax at a fixed rate or at fixed amount. The builders, who were paying tax under composition, will fall under this category as they pay the tax at fixed rate. Section 140(6) is relevant for the said purpose. The said section is reproduced below for ready reference.
“(6) A registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the existing law shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely: (i) such inputs or goods are used or intended to be used for making taxable supplies under this Act; (ii) the said registered person is not paying tax under section 10; (iii) the said registered person is eligible for input tax credit on such inputs under this Act; (iv) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of inputs; and (v) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.”
Thus, the builders falling under above category are entitled to take ITC in respect of inputs. The term ‘Input’ is defined in section 2(59) of CGST Act as under:
“(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.”
‘Goods’ is defined in section 2(52) of CGST Act as under:
“(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;”
The objection appears to be based on above definitions. In respect of constructed portion in stock the authorities are interpreting that such stock is not in form of goods but immovable property and therefore not eligible for ITC under Section 140(6).
However the above view cannot be said to be justified. Any definition in taxing statute is subject to context.
For example, section 2 of the CGST Act, defining above terms, reads as under:
“2. In this Act, unless the context otherwise requires,––“
Thus, even under CGST Act, the definitions are subject to context. Reference can be made to the judgment of Hon. Supreme Court in case of Printers Mysore Ltd. (93 STC 95)(SC). In this case the issue was that the assessee wanted to purchase newsprint for printing and publishing newspaper against C form. The said claim was disallowed on the ground that newspaper is specifically excluded from the definition of ‘goods’ in CST Act. Since goods purchased against C form are required to be used in manufacture of goods for sale and since newspaper is not goods, the benefit of C form was denied. However Hon. Supreme Court upheld the claim of the assessee observing that the definition is to be read subject to context and the purpose of the Act. Similar position should apply in relation to interpretation of section 140(6).
Therefore, while applying interpretation to section 140(6), context is required to be seen. It is fact that the builders are liable under GST also. As per general understanding, if the constructed portion in stock is sold after 1-7-2017 before Occupation Certificate or first occupation, then such sale is liable to levy of GST in the category of ‘Service’. Thus, the constructed portion can be said to be floating stock so far as GST Act is concerned. Had it been categorised as immovable property then as a building, it would not have been covered under GST Act by virtue of entry 5 in Schedule III. Thus, even if in normal interpretation such constructed portion is considered to be immovable property, for the purpose of GST Act, it is goods and should remain eligible for ITC.
Further the transactions of the builders are in the category of ‘works contract’ and further specified as service under entry 5(b) of Schedule II to CGST Act. The definition of ‘works contract’ in section 2(119) of CGST Act is as under:
“(119) Works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.”
The definition provides that transfer of property can be as goods or in some other form. Thus, the nature of transfer of property in construction is as goods or in some other form amounting to goods. Therefore, considering the context and purpose, the constructed portion in stock can be considered as goods and not immovable property.
It is also settled principle of law that the provisions should be interpreted keeping in mind the purpose of the Act. The GST is based on principle of tax on value addition. There is no intention to levy double tax. The transitional provisions are meant to avoid double taxation and that is why the ITC is allowed on stock on which tax will be paid in the GST period. If such ITC is not allowed, there will be heavy unexpected burden on the builders. Therefore, there cannot be said to be intention to disallow ITC on the stock which is going to be sold under GST period.
Looking from all above angles it is fair and justifiable for the authorities to allow the ITC. Also legally the ITC is eligible as the provisions are to be read in the context and purpose of the Act.