Anti-profiteering provisions enacted at the time of transition into Goods and Services Tax (‘GST’) regime have been a bone of contention between the businesses and the Governments across various jurisdictions, India being no exception. As per the relevant statutory provisions in India, the scope of anti-profiteering provisions mainly cover passing of benefit received on account of reduction of the tax rate or availability of Input tax credit.
While various industry sectors have come in the purview of anti-profiteering investigations, the real estate sector seems to be one of the most hard-hit sectors on this front. The increasing number of investigations on passing the benefit of tax credit by a developer to a customer and several differences of opinion between the developers and the National Anti-Profiteering Authority (‘NAA’) (in regards to the manner of computation of profiteering) is a testimony to this growing disconnect between the real estate industry and the NAA. The investigations on developers are mainly pertaining to benefits accrued pursuant to the introduction of GST as well as subsequent changes in rates of tax.
A standard method being adopted by the NAA is becoming unreasonable for developers
A perusal of various orders issued by the NAA on the passing of tax credit benefit by the developers seems to indicate that the NAA has adopted a standard method of identifying the benefit of the tax credit – which is based on the difference between the ratio of tax credit to turnover in the pre and post GST regime.
In most orders, such computations are made typically for the period under investigation and do not cover the entire tenure of a project or time of receipt of occupancy/completion certificate. For the pre-GST regime, the computations made in various orders have considered CENVAT credit of Service tax and Value Added Tax (‘VAT’, only in some cases and the corresponding turnover pertaining to area sold to arrive at a ratio of a tax credit.
Similarly, for the post-GST regime, the ratio of total GST credits (including transitional credits in some cases) to turnover pertaining to area sold (for which any consideration is received in the post-GST period) have been considered. The benefit of the tax credit, treated as profiteering, has been broadly computed by applying the ratio of such differential credit to the post-GST turnover. This methodology, however, seeks to compute benefit to be passed on to various customers on an average basis and without considering various factors such as the stage of construction at which a contract with a particular customer was entered, schedule for milestone payments, change in rate of tax on procurements in pre and post GST regime, etc.
Considering the peculiar business practices and long tenure of projects, the methodologies and principles adopted by the NAA for computation of profiteering for a real estate project are found unreasonable by various developers. Computation of profiteering and corresponding benefit to be passed on only for a specific period (viz., period under investigation) and at a given point in time seems to be inaccurate since eventual tax credits for a project are subject to considerable changes due to several factors such as unsold inventory at the end of the project, subsequent change in rate of tax and corresponding impact of tax credits, etc. However, the argument of computing the benefit for the entire project only at the time of receipt of occupancy/completion certificate has been specifically rejected by the NAA in various cases.
Transactions under investigation
As regards the transactions falling under the purview of investigation, various orders of NAA have pronounced a view that the investigations need not be confined only in respect of specific complaint of an applicant, but can be expanded to the entire project or even various projects being developed by a developer. In most orders, profiteering amounts have been computed for the entire project and not only for the applicant who lodged the complaint. Recently, in an order issued in case of an FMCG company, the NAA has in fact issued an order confirming profiteering based on suo motu investigation initiated by the authorities.
Various orders issued in respect of profiteering on account of the introduction of GST have also considered contracts entered post-July 01, 2017 (introduction of GST) for the passing of the benefit of the tax credit. This seems to be in contrast to the view adopted by most industry players to restrict the scope of the passing of benefits to only transitional contracts, on the rationale that prices for contracts entered post introduction of GST were already negotiated considering the GST benefits.
The pressing issues of cost increases, increase in tax credit due to increase in tax rate, lack of synchronization between time of accrual of credit and raising milestone-based demand on customers, variances in utilisation of credit in various tax periods, cost incurred for only specific units to be attributed to such specific units, have largely been ignored by the authorities. Further, the computation made in various orders also suffers from one or more errors such as non-inclusion of VAT credits for the pre-GST period and inclusion of VAT as well as Service tax turnover in the pre-GST period leading to double inclusion of turnover.
The fine line between discount and profiteering
The NAA has also sought to distinguish between ‘discount’ and ‘profiteering’ in various cases where developers have claimed to have already passed benefit by way of credit notes issued for discount. Such disallowance only on the basis of description included in a credit note without a detailed understanding of the nature of reduction seems to be high handed. Further, in some other cases, the difference in computation methodology adopted by developers and the NAA has led to situations where despite the passing of benefit in excess of the computation made by the NAA, profiteering has been identified qua specific segment of customers due to difference in the amount of benefit passed to individual customers.
The steady stream of NAA orders for developers is continuing and the issues, as well as concerns discussed above, is leading to a multiplicity of litigation. The only recourse against an order of NAA is to file a writ petition before the High Court and hence, a lot of matters in this regard are now before the High Courts. In retrospect, it would have been a lot better if a standard method or guidelines of computation of profiteering were prescribed in advance and in consultation with the industry. While the time to do so has already passed, one can now only hope for better consideration of practical concerns and inputs of developers while computing profiteering amounts.