On October 29, Directorate General of Goods and Services Tax Intelligence (DGGI) declared that it had uncovered GST fraud to the tune of Rs 420 crore during the 2021-22 fiscal. Over 10 per cent of this, evasion of over Rs 50 crore, concerned the construction sector, especially the methods used by builders to hoodwink both the consumers and the government.
Top DGGI officials Onmanorama talked to said the detected irregularities are “just the tip of the iceberg”. It is the complexity of GST laws, and the rates that keep changing, that the builders or real estate agents have used to their benefit. The consumers, the flat/apartment/villa buyers, are blissfully unaware that they have been taken for a ride.
Advance and post-completion payments
There is no GST for every apartment sale. Whether GST should be collected for an apartment depends on the payment method adopted.
A housing sale is considered 'taxable supply' only if a builder collects money from the client as a token advance at the start or in the process of construction; in short, before a completion certificate is secured from the competent authority. If the money is collected in this manner, it is assumed that some form of service is given to the client by the builder. Therefore, Goods and Services Tax comes into play.
If a finished apartment is handed over, the sale is considered 'exempted supply'. There is no provision to collect GST as the sale is considered a mere hand over of immovable property. No service is deemed to be done in this case.
Illegal practices were detected in both these forms of sale. It was found that certain builders had collected GST from clients who had purchased completed flats (exempted supply). In many cases, it was also found that the GST collected was not submitted to the government either.
This amounts to double betrayal; of both the consumer and the government. Since the consumer was ignorant of the nuances of the GST law, the builder's pricing normally goes unquestioned. The builders stand to gain Rs 5 lakh to Rs 20 lakh per flat/apartment/villa.
'Before and After' fraud
In sales where GST is applicable, the DGGI sleuths found that the builders had charged a higher GST rate than what is mandated by the law.
This is done using the cover of a transition date: April 1, 2019. This was the date when the Union Finance Ministry tweaked the GST rates for the construction sector.
Before April 1, 2019, the GST was 18 per cent. However, this was only for the building and not for the land. One-third of the sale price of an apartment/flat is deemed as the value of land. So if a flat worth Rs 90 lakh is purchased, the GST will be applicable only for Rs 60 lakh, which is the 'abated value' after taking out the value of land.
To avoid accounting confusions, a flat rate of 12 per cent is imposed on the gross value, for the entire amount of Rs 90 lakh. The tax amount collected in both the cases – 18 per cent for just the abated value or 12 per cent of the gross value -- will be the same. However, there are unscrupulous builders who charge 18 per cent GST on the entire cost and then refuse to hand over the amount extorted from the consumer to the government.
Post April 1, 2019, the GST rates were revised to 7.5 per cent (abated value) and 5 per cent (gross value).
A builder imposes a higher rate of GST (12/18 per cent) saying that a project for which a client pays an advance has been ongoing or was launched before April 1, 2019. In certain cases, the additional amount a client had to shell out for a higher but illegal GST rate went up to even Rs 15 lakh.
Ongoing and new project
But there are guidelines to define an ongoing project, which consumers are generally unaware of.
A project will be considered 'ongoing', or launched before the transition date, only if at least one flat/apartment of the project has been purchased before April 1, 2019, and the sale amount accounted in the bank statement of the builder. Also, the foundation for the project should have been laid before the date. “But buyers are conveniently kept in the dark about such niceties in the application of the GST law,” a DGGI official said.
When the launch date is advanced to a period before April 1, 2019, the burden of a higher GST is heaped on the client. The builder will also get the benefit of input tax credit (ITC).
Abolition of input tax credit
One factor that inclines the builder to opt for an old date is the government decision to abolish ITC after April 1, 2019. If the project is claimed to be launched before the transition date, builders can claim input tax credit for materials like cement, tiles, steel, electric fittings and even the payment given to sub-contractors.
Input tax credit refers to the facility of reimbursement in the GST system where a trader/manufacturer/businessman gets back the tax he had already paid for inputs that make up his final product.
After April 1, 2019, builders were deprived of this facility. So even if the correct post-transition date is adhered to, a builder inflates the cost of the flat/apartment to compensate for the absence of the ITC.
Though the consumers get a raw deal, embedding the lost ITC in the total cost is not illegal. But what is the practice of treating flats/apartments earmarked for the landlord in a joint venture housing project as 'exempted supply' that does not involve GST.
In a landlord-builder joint venture, the landlord provides the land and in turn is granted rights over a certain number of flats. For instance, the landlord would be entitled to 25 houses in a housing project of 100 flats.
The apartments earmarked for the landlord inherently fall under 'taxable supply'. This is because, for the construction to begin, the landlord will first have to hand over the 'right of construction' to the builder. “Once this happens, a service contract is automatically generated between the builder and the landlord. The builder is offering the service of constructing some flats for the landlord. This makes these flats, the ones set apart for the landlord, under the 'taxable supply',” a top DGGI official said.
“Even if these landlord flats are sold after getting the completion certificate, these flats will have to pay GST. But our investigation revealed that many such flats are considered 'exempted supply' and the government is deprived of GST revenue,” the official said.
Nonetheless, such a practice drains only the government coffers, has no impact on consumers.