Overview:

Treatment of retention under GST Act is going to be very crucial for construction industry. Work process of construction industry is always complex & continuous supply of service. The outcome of said contract is measurable only after completion of certain activities/project. Due to its long term nature, retention withheld is inevitable and part & parcel of construction industry. ITC on retention money is required to be reversed in the case of non-payment of consideration within 180 days as per sec 16(2) of CGST Act, 2017.

Relevant Statutory Provisions:

There are basically 3 section 13(1), 15(1) & 16(2) which are relevant for our analysis.

the second and third proviso of Sec 16(2) 0f CGST Act, 2017 states as under:
“Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon”.

Time of Supply of Services.— As per Sec 13(1) 0f CGST Act, 2017, the liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section.
(2) The time of supply of services shall be the earliest of the following dates, namely:—
(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under 37 section 31 or the date of receipt of payment, whichever is earlier; or
(b) the date of provision of service, if the invoice is not issued within the period prescribed under 38 section 31 or the date of receipt of payment, whichever is earlier; or
(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply:
Value of Taxable Supply.— As per Sec 15(1) 0f CGST Act, 2017, the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Standard Operating Procedure of Construction Industry:

Project execution by contractor at its own capacity:

In construction industry, there is no fixed place of supply of services. It depends on the contracting states/country where provision of service to be executed. As per Sec 12(3)(a) of IGST Act, 2017, in case of Immovable property, place of supply of service be the location at which the immovable property is located or intended to be located. Further, as per Sec 22(1) 0f CGST Act, 2017, registration is required to be obtained in the states where it makes a taxable supply of service. So based on the above, it is clear that the contractor has to take registration as per the contracting states/project specific.

Demerit:- Excess input credit of lying in one state can not be utilised towards output services of another state.

Project execution by contractor with other party (JV):

Sometimes, due to pre-qualification issues/ nature of contract, two or more person come together & formed a JV for that particular contract and after successful award of contract, the JV either:-

• Execute whole work through JV itself
• sub- contract the work to lead partner/ JV partners on back to back basis (100%) without any profit/(loss) in JV books of accounts. This is standard practice in construction industry.

How it is going to impact contractor:

Let us understand this with an example:- Radhe Ltd entered into a Joint Venture agreement with Shyam Ltd for participating in  Water Supply Project under Government of Madhya Pradesh for Design, supply, construction, installation, testing, commissioning of intake system for (24×7) water supply project on EPC mode for the contract value of Rs. 100 cr plus 12% GST.  Accordingly, JV was formed in the name & style of  Radhe-Shyam JV .  This is to avoid construction industry partnership issues register at latter stage. After awarding the contract, Radhe-Shyam JV will offload entire work on back to back basis (100%)  to Radhe Ltd(50%) & Shyam Ltd (50%) without any profit/(loss) in JV books of accounts. As per the contract, retention money percentage was 5%. This retention money in contract will be kept till defect liability period. Now, question will arise what will be the retention money accounting treatment in the books of accounts of JV from GST perspective. For sake of simplicity, let us assume, there will be only one billing of Rs 100 cr by JV to Client and one bill each of Rs 50 cr by Radhe Ltd &  Shyam Ltd respectively on Radhe-Shyam JV as per table below in ideal situation.

In the ideal situation, there will be no GST liability in the books of JV since, entire work is offloaded on back to back basis (100%)  to JV partners. However, as per sec 16(2) of CGST Act, 2017, ITC on retention money is required to be reversed in the case of non-payment of consideration within 180 days to the extent of amount not paid.

Out of Rs 102 cr received from JV after deducting retention, GSTTDS and Income Tax tds on retention money, JV will pay Rs 2 cr towards TDS deducted & balance Rs 100 cr will be disbursed to JV partners. So total amount withheld by JV to JV partners will be Rs 9 cr will be kept on hold and accordingly GST on Rs 9 cr is required to be reversed as per sec 16(2) of CGST Act, 2017.

Now question may arise, whether JV will get this GST credit reversed? What will JV do with this GST credit when GST liability is already discharged. Will they get GST refund?

The answer to first question is yes. This GST credit will be available to JV once payment is made by JV to JV partners and this is feasible only when client released retention money withheld. As per Rule 37(4) of CGST rule, 2017, the time limit specified in sub-section (4) of section 16 shall not apply to a claim for re availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.

The answer to second question is No since accumulated ITC is available only when 1) there is inverted duty structure 2) zero rated supplies made without payment of tax. Since it is not falling on either categories, ITC credit will not be available & it will be the cost of the contractor.

Analysis of second provision of section 16(2) of CGST Act, 2017 in respect of the construction industry:

1. Section 16(2) of CGST Act, 2017 read with Rule 37 (1) & (2) of the GST rules, 2017 is applicable only if a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier.
2. In the aforesaid context, it is important to note that the provision obligating the reversal of credit becomes applicable only when the recipient fails to pay. The phrase “fails to pay” is a specific incident and is only applicable in situations when there is an obligation to pay. Since JV have given a back to back contract to its JV partners with the same terms and conditions as entered with Client therefore the obligation to pay arises only when said amount is received from Client. Further, JV are not obligated to pay the retention money withheld within a period of 180 days as per the contract, it cannot be said that JV have failed to pay the money and accordingly, the proviso is not applicable in this context. Hence, question of GST input reversal should not arise in this case.
3. Further GST amount is paid by JV in full to its JV partners and only contractual/statutory amount is retained. This type of retention is a normal practice of the construction industry. Thus when GST was paid in full, input reversal cannot be required. Similar view is also reiterated in Commissioner of Central Excise, Pune-I Vs. Thermax Engineering Construction Co. Ltd. 2017 (12) TMI 1191-CESTAT Mumbai, the operative part of judgement is re-produced as under:-

“8. As regard appeal filed by the department against dropping of demand on retention money and on Export of Service we find that though the amount against supply of services by the sub-contractors was retained by the assessee but the amount of service tax was paid in full to the supplier/vendor. The amount was retained by the assessee in terms of understanding between the assessee and their vendors and not due to non payment. The same was agreed to by both the parties.”

Anantnath Developers Vs. Commissioner of Central Tax 2018 ACR 83 CESTAT Mumbai, the operative part of judgement is re-produced as under:-

“4.1 He also submitted that the retention of amount out of bill amount was for specific performance of contract. They are placing purchase order on their sub-contractors and take corresponding guarantee from the sub-contractors. The purchase order provides for 5% of retention of bill amount. That service tax amount is paid by them in full to the sub-contractors and only retention amount is retained. Further entire service tax was paid by the contractors to the government. Thus when service tax was paid in full, credit cannot be denied.”

This view was also reiterated in Service tax Circular No. F.122/3/2010-ST dated 30.04.2010.

Further, the meaning of the concept “failure to pay” has not been defined under the GST Act or Rules. “Failure to pay” means non- payment. The meaning of non-payment, as given in the Black’s Law Dictionary, is:

“Failure to deliver money or other valuables, esp. when due in discharge of an obligation.

In this regard, we relied upon some judgment wherein meaning of Failure to pay is clarified:-

Supporting Case Laws

1. In Malaysian Airlines Vs. Union of India (WP 17 of 2004), failure to pay means non-payment, which means failure to pay when due. In the said case, there is a penalty imposed if amount of foreign travel tax collected is not paid to the government, within fifteen days from the date of collection. It was held that failure to pay within this prescribed time frame would mean non-payment or failure to pay. If any persons fails to pay within the statutory period, then such person is well within the sweep of the words “failure to pay’’ Once the statutory period is over and breach in payment of tax is committed, then it is immaterial when the defaulter in future is making the payment. Applying the said judgement, second proviso of section 16(2) of the CGST Act should only trigger when payment is due.
2. Royal Calcutta Turf Club Vs. Wealth Tax Officer “B” Ward Viii on 30 May, 1983, the word Failure means “Non-fulfilment of an obligation imposed on the assessee by law or by statute. In the case of absence of obligation of the assessee, such non-filing would be an act of omission.
3. Ram Kishore Vs. Bimla Devi and Ors. AIR 1957 All 658, 1957, the word fails cannot connote the meaning of voluntary refusal. These words do not give a discretion or right to the person.
4. Further, the second proviso to Section 16(2) of the CGST Act is merely an anti-evasion measure introduced in the law and the legislative intention behind introducing the same, is to ensure that suppliers especially from MSME sector are paid promptly. In case of transactions where there is no revenue loss to the Government as long as the necessary compliances as per Section 16(2) of CGST Act (other than making payment within 180 days), are made, it would be incorrect to deny the admissibility of ITC  when all necessary conditions of Section 16(2) of CGST Act have been satisfied. . If such an extreme view is taken, major construction companies would be highly burdened with denial of ITC and unwarranted compliances.

A reading of the proviso to Section 16(2) of the CGST Act, also indicates that the requirement is to pay to the supplier of goods or services, the amount towards the value of supply along with tax payable thereon within 180 days. Thus the proviso does not specify that entire value of supply has to be paid. The words ‘amount towards the value of supply’, implies only the amount as agreed between the supplier and the recipient which need not be the entire value of supply.

Conclusion:

The main intention behind rolling out GST is to make “One Nation One Tax” and to avoid cascading effect of tax by providing seamless credit of ITC. If we closely look at the provision of section 13(1), 15(1) & 16(2) of CGST Act, 2017, it appears that there is no co-relation of all these section. Section 13(1), 15(1) talks about when GST is required to be payable and at what value. GST is payable at transaction value, which is the price actually paid or payable for the said supply of goods or services at the time of provision of services, whereas sec 16(2) asked to reversed GST credit if payment is not made within 180 days. Basis this, GST department has started unnecessary harassments by issuing notice regarding GST ITC reversal without considering the actual facts & figure.  The drafting of GST provision should be more specific and clear to avoid litigation. This type of provision is against the principles of natural justice by denying ITC credit. The Government should come out with circular/ clarifications in this regard to stop unnecessary harassments by GST officials. The contractor may also go for retention money advance ruling but in majority case this gone against applicant and once Advance ruling is taken the applicant is bound to follow it. As per my personal opinion, the applicant may go for writ petition challenging 2nd proviso to sec 16(2).