Live Webcast Impact of GST on Construction Sector

Live Webcast Impact of GST on Construction Sector Institute of Chartered Accountants of India - ICAI CA Ashit Shah Chartered Accountant

2 Impact under Existing Law v Construction Sector attracts VAT as well as Service tax on the activity of Construction. v Such Construction activity is classified as “Works Contract - WC” as such activity involves transfer of property in the goods involved in execution of such contract as well as Services (Labour) is also involved in execution of such contract. v State Government (Entry 54 - List – II) have powers to levy tax on “goods” and Central Government (Entry 97 – List – I – Schedule VII) have powers to levy tax on “Services”.

3 Impact under Existing Law v It is always a matter of dispute about how to determine the value of goods and value of services involved in the execution of such construction contracts. v Courts have also not able to guide as to how to determine the correct value to discharge tax on goods as well as services. v Accordingly, Sector suffers a lot – (i) Charge higher amount of tax from the customer or clients; (ii) Government may demand more tax from the Dealers or Service providers; (iii) Paper demands are piling up before the Court of Law

4 Impact under Existing Law v Construction Sector have to procure “capital goods”, “inputs” and “input services” either from within India or from outside India, in order to provide Construction Services to client or customer. v At the time of procurement of goods and services, they have to pay – (i) Capital Goods - ED or CD, SAD & CVD and VAT or CST (ii) Inputs - ED or CD, SAD & CVD and VAT or CST (iii) Input Services – Service Tax v Payments of ED or CD & SAD and CST becomes “cost” to the sector as same is not Cenvatable.

5 Impact under Proposed GST law v Under GST regime, such construction activity is considered as “supply of services” and GST would be applicable on such transactions. v As major indirect taxes viz. Excise, VAT & CST and Service Tax Laws are subsumed in GST regime, hitherto duties and taxes under Excise and CST laws were not cenvat-able are now cenvat-able under GST regime.

6 Transitional Provisions under Proposed GST law

7 Treatment of ongoing existing Contracts v Services supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day shall be liable to tax under the provisions of this Act. (CGST + SGST) [S. 186] v Moreover, GST law further provides that tax in respect of the taxable supplies (Goods and Services) shall be payable under the earlier law to the extent the point of taxation in respect of such supplies arose before the appointed day. [S. 188 & 189] v Taxable person have to determine the value of work carried out by them immediately before the appointed day and discharge tax liability under existing law.

8 Receipt of advance but supplies after appointed date v No tax shall be payable on the supply of goods and/or services made on or after the appointed day – (i) where the consideration, whether in full or in part, for the said supply has been received prior to the appointed day; and (ii) duty or tax payable thereon has already been paid under the earlier law. [S. 187] If the rate of tax happens to be more under GST, it is advisable to receive the money in advance before appointed day and provide supplies after appointed date.

9 Input Service Distributor v Input Service Distributor (ISD) can distribute Input Tax credits available on account of any services received prior to the appointed date shall be eligible for distribution even if the invoice(s) relating to such services is received on or after the appointed day. [S. 190]

10 Centralized Registration v Taxable person having centralized registration under the earlier law has obtained a registration under this Act, such person shall be allowed to take, in his electronic credit ledger, (CGST Law), credit of the amount of cenvat credit, carried forward in a return, furnished under the earlier law by him, in respect of the period ending with the day immediately preceding the appointed day in such manner as may be prescribed. [S. 191] Credits would be carried forward only if such credits are eligible as admissible credits under GST Law. Credits may be transferred to any regisstred taxble person having same PAN for whih Centralized Registration was obtained under earlier law.

11 Reversal of Cenvat Credit v Rule 4(7) of Cenvat Credit Rules, 2004 provides that if value of services and service tax indicated on the invoice is not paid to the vendor within a period of 3 months from the date of its issue, service provider have to reverse the input tax credit availed by him. v GST law provides that taxable person can re-claim such credit in the GST regime, provided taxable person makes payment of invoice (value + tax) within 3 months from the appointed day. [S. 197] No such provision of re-credit of ITC which is reversed due to nonpayment of value of invoice and tax payable thereon within a period of 3 months under MGL. [Second Proviso to S. 16(2)]

12 Un-utilized Tax Credits at Returns Types of Credits v Service Tax, v Local VAT; v Entry Tax Not eligible for ED & CST Conditions Section v Amount of eligible credit carried forward as per earlier law, in return filed for the period ending immediately prior to appointed day. 167 v Such return cannot be filed later than 90 days after appointed date. v Such amounts should also be eligible for ITC under GST Law.

13 Un-utilized Tax Credits at Financial Statements Types of Credits Capital Goods Conditions Section v Un-availed CENVAT credit not carried forward in return filed for the period ending immediately prior to appointed day under earlier law; 168 v Such amounts should also be eligible for ITC under GST Law as well as under earlier law. Un-availed amount of Cenvat Credit in respect of Capital Goods = Aggregate amount of Cenvat Credit (-) Credit already availed in respect of Capital Goods in earlier return.

14 Tax Credits in Stocks (Inputs) Eligible Person Types of Credits RTP who is providing v Excise Duty – ED WCS and was availing v CVD & SAD benefit v Service Tax 26/2012 of N. No. Conditions ü Intended to be taxable supplies; used Section for making ü Passes the benefit of such credit by way of reduced prices to the recipient; ü Eligible for ITC on such inputs under GST; ü Possession of Invoice, evidencing payment of duty under earlier law; ü Invoices pertaining to credit are not issued earlier than 12 months immediately preceding appointed day. ü Supplier of services is not eligible for any abatement under the Act. 169

15 Tax Credits in Stocks (Inputs) Eligible Person Types of Credits Conditions Section 172 RTP discharging tax v Excise Duty – ED liability either paying v CVD & SAD tax at a fixed rate or v Service Tax ü Intended to be used for making taxable supplies; ü RTP not discharging tax liability under Composition Scheme under Act; paying a fixed amount v VAT ü Eligible for ITC on such inputs under GST; in lieu of tax payable v Entry Tax (not covered) under the earlier law [Rule 2 A(ii) Service of Tax (Determination of Value, Rules, 2006) & Section 42(3) of ü Possession of Invoice, evidencing payment of duty under earlier law; ü Invoices pertaining to credit are not issued earlier than 12 months immediately preceding appointed day. ü Inputs are eligible inputs under earlier law.

16 Tax Credits while goods are in Transit Eligible Person Types of Credits RTP is eligible to v Excise Duty – ED avail ITC in respect of v CVD & SAD inputs v Service Tax and inputs services received after v VAT the appointed date but v Entry Tax duty or tax is paid before the appointed date. Conditions Section ü Invoice or any other duty/tax paying document of the same was recorded in the books of accounts of such person within a period of thirty days from the appointed day: 171 ü Period of 30 days my be extended for a further period of 30 days on sufficient cause being shown to competent authority. ü RTP have to furnish a statement in such manner as may be prescribed, in respect of credits availed as above.

17 Registration v Schedule V of MGL provides that every supplier shall be liable to be registered under this Act in the State from where he makes a taxable supply of goods and/or services if his aggregate turnover in a financial year exceeds Rs. 20 Lakhs. v However, if such States are covered within Article 279 A (4)(g) of Constitution of India (COI) viz. States located at Northern Eastern States - Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland Tripura, limit of aggregate turnover in a financial year is Rs. 10 Lakhs. v “aggregate turnover” means the aggregate value of all taxable supplies, exempt supplies, exports of goods and/or services and inter-State supplies of a person having the same PAN, to be computed on all India basis and excludes taxes, if any, charged under the CGST Act, SGST Act and the IGST Act, as the case may be. [S.

18 Registration v Hence, contractor or builder having multi-State activities of works contracts, have an option either to have one principal place of business where control and management of the business is residing or have offices in each State where works contract activities are carried out. v In case, contractor or builder opts for registration of only one place of business for registration i. e. principal place of business, place of supply would be important factors to be kept in mind while determining whether a transaction is intra-state or inter-state transactions.

19 Place of Supply a. Location of the supplier as well as location of recipient is in India: Location of Supplier – Contractor or Builder Maharashtra Maharashtra Location of Recipient Location of of Services immovable property Maharashtra Gujarat Maharashtra Dubai Gujarat Dubai Intra-State / Inter-State Intra-State Inter-State SGST + CGST / IGST SGST +CGST SGST + CGST IGST – Zero Rated b. Location of the supplier or location of recipient is outside India: Location of Supplier – Contractor or Builder Maharashtra Location of Recipient Location of of Services immovable property Dubai Maharashtra Dubai Gujarat Dubai Intra-State / Inter-State Intra-State Inter-State SGST + CGST / IGST SGST + CGST IGST – Zero Rated

20 Rate of Tax v GST Council had fixes following tax structure – Rate of Tax Exempt 5% 12% & 18% 28% + Cess Zero Rated Particulars 50% of goods in Consumer Price Index basket Mass consumption goods Standard Rate of Tax Consumer Goods, Luxury Goods, Tobacco, Pan Masala, Aerated Drinks etc. Exports and Supply to SEZ units v At present, it would be difficult to identify the rate of tax to be applicable to contractors and builders. Moreover, there is no clarity for deduction of value of Land at the time of determining the value of supply nor any rate of abatement has been prescribed as exist under existing law. v Contractors and builders are not eligible to opt to discharge tax liability under composition scheme (S. 9)

21 Time of Supply v Contractors or Builders are providing works contract services and such services are considers as “continuous supply of services” [S. 2(31)] their liability to pay tax crystalizes on the happening of following events, which ever is earlier – (i) the date of issue of invoice by the supplier; (ii) the last date on which he is required, under section 28, i. e. 30 days to issue the invoice with respect to the supply; or (iii) the date on which the supplier receives the payment with respect to the supply:

22 Time of Supply Due date is ascertained from Contract (i) Before or after the payment is liable to be made by the recipient; or (ii) Within 30 days of provision of service. Due date is not ascertained from Contract (i) Before or after each such time when the supplier of service receives the payment; or Within 30 days of provision of service. The Date of issue of invoice by the Supplier Payment is linked to completion of an event (i) Before or after the time of completion of that event; or (ii) Within 30 days of provision of service.

23 Value of Taxable Supply – S. 15 v The value of supply of goods and / or services shall be the transaction value. v Transaction value is the price actually paid or payable for the said supply of goods and / or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. v When the transaction is with related person or price is not the sole consideration for the supply, value have to be determined in such manner as may be prescribed. [15(4)]

Certain items to be included in Transaction Value – 15 (2) a. any taxes, duties, cesses, fees and charges levied under any statute, other than the {SGST Act/the CGST Act} and the Goods and Services Tax (Compensation to the States for Loss of Revenue) Act, 2016, if charged separately by the supplier to the recipient; b. any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods and/or services; c. incidental expenses, such as, commission and packing, charged by the supplier to the recipient of a supply, including any amount charged for anything done by the supplier in respect of the supply of goods and/or services at the time of, or before delivery of the goods or, as the case may be, supply of the services; d. interest or late fee or penalty for delayed payment of any consideration for any supply; and e. subsidies directly linked to the price excluding subsidies provided by the Central and State governments;

26 Input Tax Credits - ITC v Construction Industry is eligible to avail the ITC of taxes paid for procurement of goods and services. v Following conditions have to be fulfilled – (i) possession of a tax invoice, debit note, supplementary invoice or such other tax paying document; (ii) received the goods and / or services. It is deemed to be received if such goods are received on the direction of such taxable person. (iii) Tax charged in respect of such supply has been actually paid to the credit of the appropriate Government, ; (iv) Taxable person must have furnished return u/s. 34; (v) If the goods against an invoice are received in lots or installments, the taxable person shall be entitle to the credit upon receipt of the last lot or installment. (vi) Recipient of Services, fails to pay to the supplier, (a) amount mentioned in invoice; and (b) tax payable thereon, within a period of 3 months, from the date of issue of invoice, an amount equivalent

27 Apportionment of Credit & Blocked Tax Credit – S. 17 Input Tax Credits (Inputs + CG + IS) ITC is not eligible after the expiry of 1 year from the date of issue of tax invoice relating to such supply. Supply is used partly for business & other purpose i. e. non business purpose (amount spent for CSR) ITC would not be eligible to the extent attributable to the purpose of other purpose i. e. non business purpose. Supplies used partly for effecting taxable supplies (includes zero-rated) and partly for non-taxable supplies (includes exempt supply). ITC would not be eligible to the extent attributable to the nontaxable supplies (including exempt supply). Exempt Supply includes Tax payable under RCM Supplies used for personal consumptions. ITC fully blocked. Manner of credit attribution would be notified.

29 Apportionment of Credit & Blocked Tax Credit - S. 17 Banking & Financial Institution including NBFC engaged in supplying services by way of accepting deposits, extending loans or advances. ITC can be availed either – (i)To reverse proportionate credit; or (ii) Avail of 50% of the eligible ITC in that month. Option once exercised can not be withdrawn during financial year. Motor Vehicles and other Conveyances used for making following supplies – (a) further supply of such vehicles or conveyance; or (b) transportation of passengers; or (c) imparting training on driving, flying, navigating such vehicles or conveyance; (d) For transportation of goods. Shah & Savla LLP ITC is fully blocked.

30 Apportionment of Credit & Blocked Tax Credit - S. 17 Supply of Goods and Services (i) F & B, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a RTP for making an outward taxable supply of the same category of goods or services; (ii) membership of a club, health and fitness centre, (iii) rent-a-cab, life insurance, health insurance except where the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; and (iv) travel benefits extended to employees on vacation such as leave or home travel concession. Shah & Savla LLP

31 Apportionment of Credit & Blocked Tax Credit – S. 17 Works Contract Services (WCS) Plant & Machinery means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures. Immovable Property WCS supplied for construction of immovable property, other than Plant & Machinery. If such WCS is an input service for further supply of WCS, would be eligible for ITC. Construction includes re-construction, renovation, additions, or alternations or repairs to the extent of capitalization, to the said immovable property. Goods or Services received by a taxable person for construction of an immovable property, on his own account, other than Plant & Machinery, even when used in course or furtherance of business.

32 Apportionment of Credit & Blocked Tax Credit – S. 17 Input Tax Credits (Inputs + CG + IS) Taxable person discharging tax liability under composition levy [S. 9] Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. ITC fully blocked. Taxes paid due to (i) ITC wrongly availed or utilized by reason of fraud, suppression of facts or mis-statement – S. 67 (ii) Detention, seizure and release of goods and conveyance in transit – S. 89 (iii) Confiscation of goods and / or conveyances and levy of penalty – S. 90

33 Accounts and Records – S. 53 v

34 Accounts and Records – S. 53 v Every RTP shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of – ü Production or manufacture of goods; ü Inward or outward supply of goods and/or services; ü Stock of goods; Accounts can be kept in ü Input tax credit availed, electronic form in the manner as may be prescribed. ü Output tax payable and paid, ü Such other particulars as may be prescribed in this behalf: v In case of more than one place of business mention in COR, accounts relating to each place of business shall be kept at such places of business concerned.

35 Accounts and Records – S. 53 v Commissioner/ Chief Commissioner may notify a class of taxable persons to maintain additional accounts or documents for such purpose as may be specified. v Commissioner / Chief Commissioner considers that any class of taxable persons is not in a position to keep and maintain accounts in accordance with the provisions of this section, he may, for reasons to be recorded in writing, permit such class of taxable persons to maintain accounts in such manner as may be prescribed.

36 Accounts and Records – S. 53 v Every RTP whose turnover during a financial year exceeds Rs. 1. 00 Crores shall get his accounts audited by a chartered accountant or a cost accountant and shall submit to the Proper Officer ü a copy of the audited annual accounts; ü the reconciliation statement; and ü such other documents in the form and manner as may be prescribed in this behalf. v Every owner or operator of warehouse or godown or any other place used for storage of goods irrespective of whether he is a registered taxable person or not shall maintain records of consigner, consignee and other relevant details of the goods as may be prescribed.

37 Period of retention of accounts – S. 54 v Every RTP is required to keep and maintain books of account or other records and shall retain them until the expiry of sixty months (5 Years) from the due date of filing of Annual Return for the year pertaining to such accounts and records. v RTP who is a party to an appeal or revision any other proceeding before any Appellate Authority or Revisional Authority or Tribunal or Court, whether filed by him or by the department, shall retain the books of account and other records pertaining to the subject matter for a period of one year after final disposal of such appeal or revision or proceeding or investigation, or for the period specified above, whichever is later.

38 Shah & Savla