Reverse Charge Provisions for Builders

Reverse Charge Provisions for Builders

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Reverse Charge Provisions for Builders

Generally, under GST, the service provider is liable to pay the tax. However, the Reverse Charge is a system via which the service receiver is held liable to pay the tax.

Notably, section 9(3); section 9(4) and section 9(5) of the Central Goods and Services Tax Act, 2017 covers the reverse charge provisions.

In the present article, we will briefly deal with the reverse charge provisions as applicable to the builders.

Reverse charge provisions vis-à-vis applicable to builders-

As stated above, three sub-sections of section 9 of the CGST Act deals with the reverse charge provisions under GST.

All three sub-sections bestow specific powers to the Government. Such powers enable the Government to prescribe, via issuance of notification, category of person or goods/ services to whom reverse charge gets applicable.

Briefing of all the three sub-sections is tabulated hereunder-

Provisions Briefing of the provisions
Section 9(3) Empowers Government to prescribe the list of goods or services or both on which tax is payable on a reverse charge basis.
Section 9(4) Empowers Government to prescribe a class of registered persons, receiving goods/ services from an unregistered person, liable to pay tax under reverse charge.
Section 9(5) Empowers Government to prescribe the list of services on which electronic commerce operators will be liable to pay tax under reverse charge.

Accordingly, based on the powers bestow vide section 9(4), by issuing notification no. 07/2019- Central Tax (Rate) dated 29th March 2019, the reverse charge provisions are made effective to the builders (i.e., promoters/ developers).

Detail analysis of the applicability of reverse charge to builders-

In order to analyze the reverse charge provisions applicable to the builders, combine reading of notification no. 03/2019- Central Tax (Rate) along with notification no. 07/2019- Central Tax (Rate), both dated 29th March 2019, needs to be done.

First let us figure out when the reverse charge does not apply to the builders. The reverse charge mechanism will not apply to the builder if all the following criteria are satisfied-

  • The promoter/ developer procures all the capital goods from the registered supplier.
  • Further, the promoter/ developer procures at least 80% of the total purchase (i.e., inputs and input services) from the registered supplier. However, it is important to note here that the following listed items are outside the purview of 80% criteria-
    • Services by way of grant of development rights,
    • Long term lease of land (against upfront premium payment; salami; development charges, etc.),
    • FSI (including additional FSI),
    • Motor spirit,
    • Electricity,
    • High speed diesel,
    • Natural gas.
  • Additionally, the promoter/ developer procures all the cement from the registered supplier.

Failure in satisfying any of the above criteria makes the builder liable to pay tax on a reverse charge basis.

Post applicability of reverse charge, questions like the rate at which tax is payable and amount on which tax is payable arises. The same is answered in the below paras.

Rate at which tax is payable on reverse charge basis-

The following table helps to understand the situation when the reverse charge gets applicable and the corresponding rate at which tax is payable by the builder-

Particular The situation when the reverse charge gets applicable The rate at which GST is payable by the builder
Capital goods Any of the capital goods purchased from unregistered supplier 18% (9% CGST + 9% SGST)
Inputs Less than 80% of the inputs are procured from registered supplier 18% (9% CGST + 9% SGST)
Input services Less than 80% of the input services are procured from registered supplier 18% (9% CGST + 9% SGST)
Cement Any amount of cement purchased from unregistered supplier 28% (14% CGST + 14% SGST)

Amount on which tax is payable on reverse charge basis-

Firstly, let us clear up the easy part i.e. amount to be considered for payment of reverse tax on capital goods and cement. Under both of them, reverse tax is payable by the builder on any amount paid to an unregistered supplier.

Now, let us take up the amount to be considered for payment of reverse tax on short fall amount of input/ input services. The amount can be arrived at by applying the following formula-

Particulars Amount
80% of the total purchase of inputs/ input services XXX
(-) Amount of purchase from the registered supplier (XXX)
(-) Amount of cement purchased from an unregistered supplier on which tax is payable on reverse charge (XXX)
Short fall amount on which tax is payable on reverse charge basis XXX

The following points are to be kept in mind while calculating the short fall amount-

  • Inputs/ input services procured from composition dealer will be considered as procured from a registered supplier.
  • Inward supplies of exempted goods/ services will be included in the value of supplies from the unregistered suppliers.

Other important points-

  1. The builders need to maintain a project-wise account of inward supplies received from the registered suppliers and unregistered suppliers.
  2. Calculation of tax payments on the short fall amount is to be done at the end of the financial year.
  3. The above calculation is to be submitted, electronically, by the end of the quarter following the respective Financial Year.
  4. The tax payable on the shortfall amount will be added to the output tax liability in the month not later than the month of June subsequent to the end of the Financial Year.
  5. Input Tax Credit (ITC) not availed needs to be reported every month. It is to be reported as ineligible credit in Form GSTR-3B.
  6. Inputs/ input services on which GST is paid by the builder on reverse charge will be deemed to have been procured from the registered supplier.
  7. Form GST DRC-03 is to be used by the builder for making reverse charge payment.

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CA Poonam Gandhi is a Chartered Accountant and a Lawyer. With a wide practice experience and deep understanding of different laws and taxes, she has been an independent professional writer in the field of taxation, finance and laws.