TRANSITIONAL CREDIT U/S 140(3) NOT DENIABLE TO CONSTRUCTION SECTOR – By KK Sharma, Member CBEC (Retd.)
AN issue that affects construction service industry today is the admissibility or otherwise of transitional credit,u/s 140(3) of the CGST Act, of eligible duties/taxes paid on the inputs contained in semi-finished or finished goods , that is,on the inputs which had already been used in the construction of immovable property when the GST was rolled out on 1 July 2017. A view reportedly taken by certain Central Tax (CT) formations is that since buildings already constructed or still under-construction, being immovable property, are not "goods", as defined in S. 2(52) of cGST Act, the transitional credit of eligible duties/taxes paid on inputs used is inadmissible u/s 140(3).
2. Logic dictates that if construction of such buildings is a taxable supply in terms of S. 7(1)(d) ibid read with paras 5(b) and 6(a) of the Schedule II thereto, then,unless specifically denied under S.17(5), the credit of eligible duties/taxes used for making such supply must be available to the suppliers.The obvious question that arises, therefore, from the view taken by the CT officers is whether the language of S.140(3) goes counter to this logic. Is such transitional credit indeed not available?
3. Let us examine this issue by splitting it up into the following three pointed questions:
A. What does S.140(3) provide for vis a vis construction industry?
B. Does the term "goods" used in S.140(3) exclude the goods having become a part of the immovable property?
C. Does S.140(3) touch only works contractors or suppliers of composite supply of construction of complex etc. as well?
Now let us try to find answers to these questions:
A. Scope of S.140(3)
4. Relevant text of S. 140(3) of cGST Actruns as follows:
A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:––
(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;
(ii) the said registered person is eligible for input tax credit on such inputs under this Act;
(iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;
(iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and
(v) the supplier of services is not eligible for any abatement under this Act:
5. A similar provision exists u/s 140(3) of the sGST Acts and corresponding provision of the utGST Acts of all States/UTs.
6. This section broadly affects two kinds of construction service suppliers who were operating under the erstwhile Service Tax law regime but were:
(i) not registered thereunder either because they fell under the exemption threshold of Rs.10 lakh, prescribed vide Notification N0. 33/2012-ST dated 20.6.2012, or were engaged in providing exempt service(s); or
(ii) providing works contract services and availing the benefit of notification No. 26/2012-ST dated 20.6.2012 which denied to them CENVAT credit on inputs (for the 75% abatement in the value allowed thereunder, including that of land, charged by the service provider, compensated for the loss of such credit).
7. The obvious purpose behind enacting this provision u/s 140(3) was that if an activity, exempt under the existing regime, had become taxable outward supply under the new dispensation, then subject to the 5 specified conditions, the person making such supply, out of the opening stock of his inventory as on 1 July, 2017, would be entitled to the credit of inputs used for building that stock. There may be hundreds of suppliers of composite supply of construction service who had unsold inventory of such immovable property units on that day, some under construction and others already constructed. They obviously expected to benefit from this reasonable statutory entitlement.
8. There is no doubt that S.140(3) confers the entitlement to transitional credit, in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock, without exception on all the six kinds of suppliers mentioned therein, including works contractors whose only output supply is immovable property. Will not, however, the view reportedly taken by the CT officers render this entitlement meaningless, to the extent of inputs contained in semi-finished and finished units of immovable property held in stock by such works contractors? Will it not substantially defeat the very purpose for which this provision was enacted in the first place and make S. 140(3) wholly redundant vis a vis works contractors?
B. Treatment of inputs having become a part of immovable property
9. That question necessitates a closer look at the terms "input" and "goods" used in S.140(3). The word "Inputs" has been defined in S.2(59) of cGST Act to mean any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business .The "goods" in turn has been defined in S.2(52) ibid to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. However and significantly enough, the ambit of the very same word "goods" has been slightly expanded,in the cGST Act itself while defining the "works contract" in S.2(119) – "works contract" means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. (emphasis supplied)
10. Thus, the goods would not lose their identity as goods even if they are converted into different sizes, shapes or forms in the course of execution of a works contract. The section 2(119),when read with paras 5(b) and 6(a) of Schedule II to cGST Act, unambiguously recognizes that an immovable property unit resulting from a construction of complex or works contract is a composite product of goods (inputs) purchased or fabricated by the contractor and the labour (input service) employed by him to build that property. When, therefore, a works contractor supplies a unit of this product to its recipient, he does not supply goods. He transfers to the recipient only the property in goods and that too in the form these exist in that unit. Isn't it, therefore, fair to assume that in works contracts, it is the property in goods in the form they exist in an under-construction or already constructed unit, as opposed to the goods as such, that constitutes the semi-finished or finished goods? If it was not so, why in the first place would S.140(3) accommodate a works contractor within its fold? Should the inclusion of works contractor therein be dismissed as a mere drafting error?
11. Here, it would be instructive to recollect how a "works contract" was defined in the now rescinded Finance Act, 1994 which authorized the Central Government to collect service tax on the service portion of the works contract. A "works contract", according to S. 65B(54) of that Act, as it stood on 30.6.2017, meant a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property. Further, even under the erstwhile CENVAT Credit Rules, 2004, a provider of works contract service was eligible for CENVAT credit of various kinds of duties paid on the inputs/goods used for providing works contract service, which resulted in the construction of immovable property. Can this duty credit be disallowed now that those Rules have been subsumed into the GST law and a works contract has been declared as contract for composite supply of service?
12. It is a common knowledge that the phrase "goods ( whether as goods or in some other form)" incorporated in the GST law has been borrowed from the State VAT laws which allowed credit of tax, paid on goods/building materials used in the execution of a works contract, and allowed its adjustment against the tax liability on such works contract, even when these goods had taken a different form by becoming a part of immovable property.The Delhi VAT Act, 2015, for instance, defined the term "goods", and "sale" respectively under S.2(m) and S.2(zc)(v) as follows:
S.2(m) "goods" means every kind of moveable property (other than newspapers, actionable claims, stocks, shares and securities) and includes –
(i) livestock, all materials, commodities, grass or things attached to or forming part of the earth which are agreed to be severed before sale or under a contract of sale; and
(ii) property in goods (whether as goods or in other form) involved in the execution of a works contract.
S.2(zc)(v) "sale" with its grammatical variations and cognate expression means ….and includes-
(v) transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
Further S.9 ibid, laying down rules for allowing/disallowing input tax credit made it clear, vide Explanation to S.9(2), that This sub-section does not prevent a tax credit arising for goods and building materials that are purchased either for the purpose of re-sale in an unmodified form, or for the performance of a works contract on a building owned or occupied by another.
13. A natural corollary of the expanded meaning of "goods", imported from the State VAT into the GST law,therefore, is that for the limited purpose of works contracts, the goods (inputs) like cement, bricks, TMT bars etc.,which have changed their form to become a part of the immovable property, would have to be treated as semi-finished or finished goods and, therefore, eligible for ITC under S.140(3) of the cGST Act. Considering them as an immovable property would in fact take them out of the GST net altogether in terms of para 5 of Schedule III to the cGST Act.
14. It is not open to question that the meaning of any word or phrase used in any statute can't be stretched or shrunk beyond what is expressly assigned to it in the statue itself, generally by way of a definition or interpretation clause, or an explanation. It is, however, equally undeniable that if the context in which a word, expressly defined in a statute has been used, conveys a different meaning and requires a flexible interpretation to serve that context, the law permits it. That precisely is the meaning of the opening line of S.2 of cGST Act "In this Act, unless the context otherwise requires --"
15. To sum up, so long as the outward supply remains taxable under GST law, then, unless the ITC is explicitly barred, credit of tax paid on inputs will invariably be available. It can't be denied by implication. Even under S.17(5) of cGST Act, where ITC in respect of certain inputs and input services has been specifically disallowed, including works contracts and construction service under sub-clauses (c) & (d) thereof, exceptions have been made in every case where the inputs and input services are used directly for making taxable supplies.
C. S.140(3) and suppliers of construction of complex service.
16. S.140(3) expressly refers only to works contract service and not to construction service in general. Does it, therefore, imply that the suppliers of other construction services, such as construction of complex, are not eligible for transitional credit contemplated therein? In this connection, it is essential to remember that the expression "construction" finds mention in the cGST Act at the following places:
(i) S. 2(119) which defines a works contract (reproduced in para 9 supra);
(ii) Sub-sections (c) and (d) of 17(5) which list up the goods and services in respect of which no ITC is admissible --
"(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property(other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.––For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property"
(iii) Para 5(b) and explanation (2) thereto of Schedule II which, as declared in S.7(1)(d), spells out as to which supplies are to be treated as supplies of goods or services.
5. Supply of services
The following shall be treated as supply of service, namely:-
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
Explanation. -For the purposes of this clause-
(2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;
17. Similarly, the term "works contract" appears in the said Act only at the following three places:
(i) S. 2(119), which is reproduced at para 9 supra;
(ii) S. 17(5)(c) which is reproduced at para 16(ii) supra; and
(iii) Para 6(a) of Schedule II, which is extracted below:
6. Composite supply.
The following composite supplies shall be treated as a supply of services, namely:-
(a) works contract as defined in clause (119) of section 2;
18. It would be seen that both the terms viz. "works contract" and "construction of complex" etc. involve construction of immovable property. Further,though both provide goods as well as service to the recipients, their supply has been declared under the GST law as supply of service. Also, both fall under Heading 9954 of Classification of Services, detailed in the Annexure to Notification No. 11/2017-CT(R) dated 28.6.2017. It is noteworthy that while the entire Section 5 of Chapter 99 of the Tariff, in which the Group 9954 falls, is captioned "Construction Services", the expression "works contract" finds mention in none of the 63 individual services classified thereunder. On the other hand, of the 12 entries against sl. No. 3, of the table appended to Notification No. 11/2017-CT(R) dated 28.6.2017 as amended (that notifies tax rates on services), relating to "Construction Services" of Heading 9954, as many as 10 entries specify tax rate on "Composite supply of works contract" and only one for construction of complex" etc.
19. Clearly, both the "construction services" and "works contract" have by and large been used inter-changeably. Essentially, what distinguishes a works contract from construction of complex is the ownership of land on which the said property is to be constructed. In case of a typical bipartite works contract for construction of immovable property, the land belongs to the potential owner of property and a works contractor supplies only goods and services required for its construction. In case of construction of complex, on the other hand,it is the supplier of construction services who owns or controls the land until it/its proportionate share is also assigned to the transferee(s) of individual unit(s) in the complex.
20. The land being immovable property is outside the GST purview, as provided in S.7(2) of cGST Act read with para 5 of Schedule III thereto. Its value is, therefore, excluded to arrive at the taxable value of construction service. The value of land or of the undivided share of land in construction of any immovable property has been pegged, vide para 2 of the Notification No. 11/2017-CT(R) dated 28.6.2017, at one-third of the total amount charged for the supply of the service as well as transfer of land or undivided share of land. Thus, the taxable value of supply of service, excluding the land value, is taken as two-thirds of the total price charged.
21. In this context, it is also relevant to remember that in case of construction of complex, the supply is deemed to be taxable, as laid down in para 5(b) of the Schedule II, only where whole or a part of the consideration is received by the person engaged in the construction of complex from the buyer either:
(i) before issuance of a completion certificate, where required, by the competent authority; or
(ii) before its first occupation (by the builder of the complex himself),
whichever is earlier.
22. It is also not without import that notification No. 26/2012-ST itself, referred to in S.140(3) of cGST Act,confers the said exemption on any person who was providing "works contract service" in relation to "Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority" (emphasis supplied).
23. Thus, subject to the two conditions mentioned in para 21 above and shorn of land value component, which in any case is excluded from the taxable value of construction service, all projects for construction of complex are, in essence, for composite supply of works contracts service. Accordingly, the entitlement to credit under S.140(3) applies as much to the supplier of construction of complex service as to a works contractor.
24. In my humble view, therefore, the stand reportedly taken by the Central Tax formations is not consistent with the relevant provisions of law and calls for reconsideration.