15 December 2019

Spotlight- Taxzone

Anti- Profiteering Law – A setback for the Construction Industry


Anti- profiteering measure, covered under Section 171 of the CGST Act, 2017 was introduced with two fold objectives- protecting consumers and to ensure that GST does further fuel the inflation. It provides that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. It thus intends to check price rise and also put a legal obligation on businesses to pass on the benefit.



Rate of Tax

Not Defined


Not Defined

Input Tax Credit

As per Section 2 (62) of CGST Act, 2017 Input Tax means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him but does not include the tax paid under the composition levy;


As per definition of recipient provided under section 2 (93), the recipient of supply of goods or services or both means –

(a) Where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) Where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) Where no consideration is payable for the supply of a service, the person to whom the service is rendered,

And any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied.

As per this definition, the recipient shall be the payer of consideration.


The article addresses various issues in relation to Anti-profiteering on Construction Sector:-


Section 171 of CGST Act, 2017 reads as follows: Any reduction in rate of tax on any supply of goods or services or the benefit of input tax be passed on to the recipient by way of commensurate reduction in prices.



Some of the keywords used in the definition are defined under GST law as follows:-


As we go through the above table and definitions of various key words, it is surprising to see that the base on which anti profiteering calculations are to be framed remain un answered. The interpretation of the key words is left for all to imagine, which has lead to numerous doubts in the minds of professionals and businesses seeking the correct interpretation of law.



The following key issues pertaining to construction industry are being raised because of this vague drafting and interpretation of Anti Profiteering Law:-


  • When Anti profiteering Law will be applicable on a business?
  • What is the meaning of reduction in rate of tax? Is it a comparison of Pre GST-Taxes vis-à-vis Post GST or is it meant to cover the continuous reductions being announced in the GST rates by the council?
  • What is the meaning of “benefit” as incorporated in section 171?
  • Whether these benefits would have to be computed at Customer Level, Project Level, State Level or at Company Level?
  • What is the meaning of Input tax Credit, is it ITC Availed or utilized? Whether it includes Transitional credit?
  • What happens if the ITC once availed or utilized is sought to be reversed? What if such a reversal takes place after the benefit has been passed to the recipient?



In addition to above, there is no methodology (clear or unclear) provided under the Law, about how to proceed for the calculations. The problem gets aggravated looking to the complexities in real-estate and construction contracts where the prices were fixed prior to implementation of GST and where a portion of work was pending to be executed as on that date.



However, before proceeding further, it is essential to test the applicability of anti profiteering provisions on works contract/real estate agreements :-


In Pre GST-regime, Works contracts were liable to VAT in respective states and most were also liable to payment of Service Tax except few cases which got covered under the Mega Exemption Notification. In addition to it, the materials used in the construction were liable to Excise duty in the Pre GST regime, the ITC of which was not allowed to the builders as well as contractors.


Further, when we go through the contracts, we find that majority of the contracts were entered on an all-inclusive basis, which necessitates the builder or contractor to re-calculate all the existing taxes which they were paying earlier.



The following major issues are being faced while calculations of Pre GST taxes in a works contract/ real estate agreement:-


  • Cost of construction pending as on 30-06-2017 can never be accurately assessed, as it is always based on estimates,
  • The actual consumption of different materials also cannot be quantified accurately till the work completion,
  • The budgeted cost of materials and actual cost of materials vary drastically, raising a doubt about the value to be considered for calculation of taxes
  • In most of the cases there is still a doubt, whether the post GST taxes have to be computed on the above estimate of pre-GST taxes.



Keeping all this in mind, we can say that working out the anti – profiteering benefit is a tough task which needs an extensive exercise and consideration of a number of factors.


Very recently the authors had the occasion to examine the recent order of The Anti-Profiteering Authority- In the case of Pyramid Infratech Pvt Ltd, where the Authority ordered the company to pass on the benefits to the tune of 6.1 per cent of the post GST taxable turnover in compliance with Section 171.


With due respect, the methodology adopted has been found to lack tax prudence on a lot of fronts. The order in principal also leaves a number of issues and concerns unresolved or unanswered which may be due to the lack of availability of the appropriate information from the builder.



The brief facts are as below:


  • The case was scrutinized by screening committee at the behest of complainants who were buyers in the project of said company in the name of “Urban Homes”.
  • The residential projects were of affordable housing, which were subjected to VAT @ 5.25 per cent and exempted under service tax in the Pre GST-era, and subsequently post GST were initially taxed at 12 per cent after abatement which got reduced to 8 per cent w.e.f. 25th January, 2018.


Following ratios direct or indirect are laid out by the authority in this case:


  • The Conditions of passing on the benefit of reduced tax rate and benefit of ITC have been viewed to be two independent conditions and Section 171 of CGST Act, 2017 would be attracted if both or either of these conditions exist. (Para 8)
  • The Authority also affirms that exact calculations of ITC for such projects is very difficult and can be calculated only at the completion of the project. Thus, leaving a scope for the builders or contractors to have provisional calculations and then final calculations at the end of the project. (Para 9)
  • The Authority has concluded that the ITC available to the respondent during PRE GST-period was 1.10 per cent whereas the ITC available to the respondent was 7.20 per cent of the taxable turnover and thus there was additional benefit of ITC to the tune of 6.10 per cent in the post GST era. (Para 13)
  • Assumed definition of Rate of Tax (Para 13). The word “Rate of Tax” has not been defined anywhere under GST. Now, as per Para 13 it is clear that the rate of tax means the sum total of all the taxes on Sales/Services/Manufactures/other in PRE GST-era as compared with rate of GST on Supply in post GST era. This also stands confirmed in the Vaseline order passed in the case of HUL.
  • The authority has also taken a view that increase or decrease in cost on account of factors other than tax rate and ITC are not to be considered for the purpose of profiteering. (para 22)





The points which are not at all considered by AUTHORITY in its order.


  • Construction Project Life cycle effect has been totally ignored and it is assumed that uniform expenses are incurred throughout the lifecycle based on the formula adopted by the Authority.


  • The ITC proportion post GST is taken for the period till the date of investigation which may not be commensurate to the duration of the project. A possibility that some of the high tax bearing materials would have been used in this period and labour execution is still pending can-not be ruled out. This would reduce the ITC for the future period. Therefore, it is not right to calculate the incremental benefits only for this period, it should be calculated on the basis of total project cost pending as on 30.06.2017 on the basis of the drawing and designs initially prepared by the respondent. However, no attempt has been made to ascertain the projected cost as at 1.7.2017 and the pre-GST taxes lying in the same.


  • The basis of calculation of the Anti-profiteering benefit as taken in the judgment has been the difference of the ratio of Input Tax Credit / Taxable Turnover in the post GST and the pre-GST regime which does not seem to be appropriate for following reasons: -


  • Taxable Turnover would vary as per the market conditions and it is difficult to maintain the ratio of the same in proportion to procurement in a real estate sector.


  • Input Tax Credit is an absolute number which would vary as per the Govt. rate policies. A lot of goods have been moved from 28 per cent to 18 per cent slab. This has not resulted into any benefit to the registered buyers as they were entitled to credit in both scenarios. However this will significantly vary the ratio as calculated by the authority to assess the anti-profiteering benefit.


  • No attempt has been made to assess the Input Tax Credit lost in the pre-GST regime which is no more the cost in the post-GST regime.


  • The appropriate formula would be to assess the difference between ratio of Input Tax Credit Lost / (Projected Taxable Purchases + Expenses) in the post GST and the pre-GST regime.



  • Overflow of Input Tax Credit at the end of the Project can-not be taken as a refund by the builders due to specific restriction under Notification 15/2017. No such overflow has been projected or worked out as the same can-not be termed as a benefit.


  • Reversal of Input Tax Credit in future due to receipt of Completion Certificate may also have a bearing on the Input Tax credit availed by the builder. Such a critical factor needs to be given appropriate weight while making the final computation.


  • It is assumed that all the expenses incurred in the post GST period are towards the taxable turnover as all the credit has been attributed towards the same. No regard has been given to the fact that Input Tax Credit would also get accumulated on account of construction of unsold units.


  • No comment has been given on the issue that if in future the ratio of credit vis-a-vis the taxable turnover is less than 7.2 per cent , there could be a possibility of recoveries from the customer.



The above are some of the basic observations that the authors have made on a preliminary study of the order. There are many issues which can be unearthed from this unique order passed by the Authority. But one thing is for sure that this will certainly have a lot of repercussions on the industry which continues to attract the negative eye of the regulators. This no more remains an easy to enter industry for the startups as even the matured ones find it difficult to adapt to the newly introduced customer protection initiatives of the government. Long live the customer, even if it as the cost of the seller.

CA Sandesh Mundra and CA Gaurav Goyal, Sandesh Mundra & Associates, Ahmedabad, based on their extensive research and computations done for several projects since the implementation of GST. During this journey they have been able to interact with a lot of government bodies engaged in infra projects, private sector giants and of course the law making agencies and feel a strong need to bring everyone to a common point of understanding on the subject of Anti-Profiteering.


As a Chairman of the GST Committee of Builders’ Association of India, CA Sandesh Mundra has organized several training programs with a view to educate the industry on the sensitive issues connected with Anti-Profiteering and the construction industry.