Are builders using fake invoices to get higher input tax credit?

Payment of Goods and Services Tax (GST) in cash by top builders is as low as 0.4 per cent, according to an analysis carried out by tax authorities. It was also learnt that many builders may be using fake invoices to get higher input tax credit (ITC).

Tax payment by a GST assessee has two components, set-off against ITC and the balance that is to be paid in cash. Cash component is key for revenue trend which means if cash component is low, overall collection will be affected. Now the big question is what should be the cash component. To find this answer, tax authorities used data provided by NBCC (a Government-owned real estate developer) and CPWD (a Central Government department for construction management) to suggest that expected cash component should be 5 per cent or more.

Armed with this benchmark, the officials analysed tax payment details from GSTR-3B return of top 88 builders in India. These builders are based in seven CGST (Central Goods & Services Tax) Zones — Meerut (Noida), Bengaluru, Kolkata, Chennai, Hyderabad, Bhubaneswar and Mumbai. Meerut was lowest with 0.4 per cent tax paid in cash while Chennai was highest with 4.8 per cent paid in cash.

“ITC claimed by developers is much higher than what should be the ITC as per the NBCC and CPWD data,” showed the analysis which listed two reasons. First, the sector is highly evasion prone where ‘ITC is claimed on fake invoices.’ Second, slow moving inventory leads to higher ITC utilisation as ‘the construction is taking place without sale.’ Accordingly, it was suggested to bring down the GST rate to 5 per cent without ITC credit. This was accepted by a Group of Finance Ministers (GoFM).

The group also agreed to prescribe safeguards that 80 per cent or more of the purchases shall be made from the registered suppliers. Applicable tax rate on shortfall of purchases from registered supplier will be on merit rate on Reverse Charge Mechanism (RCM, where a registered assessee purchases from unregistered assessee and responsible for payment of tax) and will be decided by the Fitment Committee (a sub-panel of GST Council). It will also finalise some criteria on the basis of which the tax rate on shortfall purchases would be charged. This safeguard will help in maintaining the supply chain.

At present, there is a three-tier structure for housing projects — there is no GST on sale of complex/building and ready to move-in flats where sale takes place after issue of completion certificate by the competent authority. GST is applicable on sale of under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale. Card rate for such flats is 18 per cent, but effective rate is 12 per cent after abatement of 33 per cent (cost of land). And, in the affordable housing category the effective rate is 8 per cent. Both these rates are with full input tax credit (ITC).

Expert’s take

Harpreet Singh, Partner at KPMG, said if GST payment by cash is disproportionately low it could be primarily on account of excessive ITC claim by builders. There could be multiple reasons for such high credit such as opening balance of credits, high GST rate on cement, etc. “It would need to be seen if the mandatory condition of 80 per cent purchases from registered dealers would actually assist in formalising the sector. Meeting the threshold in the sector where there are lot of unorganised players could pose a challenge,” he said.

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