Investigation done by DGSG Nw Delhi regarding M/S Pyramid Infratech Pvt ltd Gurugram (Builder)

Directorate General of Safeguards(DGSG) Customs and Central Excise New Delhi now new name Directorate General of Anti Profiteering submitted its report on anti profiteering done by M/S Pyramid Infratech Pvt. Ltd. Gurugram ,Haryana (Building residential flats under Haryana Affordable Housing policy 2013). 109 home buyers made complaint against builder during the year 2017-18 for not passing the benefit of Input Tax Credit (ITC) to home buyers
DGSG after detailed investigation submitted its report on 24/05/2018 to National Anti Profiteering Authority (NAA). The findings of report submitted are –
(1) Pre GST era VAT was applicable @5.25% and Service Tax was exempted on Affordable Housing.
(2) Pre GST era ITC ratio available to taxable turnover (%) was 1.10%.
(3) During GST (w.e.f.1/7/2017) GST rate was 12% and 8% (w.e.f.25/1/2018).
(4) During GST ITC ratio available to taxable turnover (%) is 7.20%. In this way builder is benefited by increased ITC ratio 6.10% (7.20%-1.1%) due to GST implementation.
(5) DGSG recommended that during the first period (i.e. 1/7/2017 to 24/1/2018) additional ITC available is 6.10% of the total taxable turnover(TTO), the tax rate has increased by 6.75%(12%-5.25%) leaving no benefit of ITC to be passed on to applicants.( Increased tax burden > Increased ITC ratio)
(6) On the other hand during the second period i.e. 25/1/2018 to February 2018 the additional ITC of 6.10% of the taxable turnover is more than the increase in the tax rate by 2.75%(8%-5.25%) requiring the notice to pass on the benefit of additional ITC of 3.35(6.10%-2.75%) of the taxable turnover to the consumers by way of Commensurate reduction in price.

Comments on the report

(1) The findings of report favours builder and indirectly allowed him to do profiteering. The methodology adopted to decide the amount of ITC benefit to be passed to consumers is completely defective and favouring builder.
(2) According to the above methodology how builder is doing profiteering can be understood easily by the example given below
(a) Pre GST total tax ;VAT(5.25% +ST 0%) =5.25%
(b) Pre GST ITC available ratio to TTO =1.1%
(c) During GST total tax 12% (1/7/2017 to 24/1/2018)
(d) During GST ITC available ratio to TTO =7.2% ( increased ratio 6.1%)
(e) According to DGSG no input benefit passed to consumers

Now Builder will fulfil GST liability in the following manner

When GST is 12% , excess ITC available is 6.1%. The increased tax liability 6.75% (12%-5.25%)
Is fulfilled by increased ITC (6.1%) and rest 0.65%(6.75%-6.1%) by depositing cash/cheque by builder.
The net burden increased on builder during GST @12% is only 0.65% compared to VAT regime ,because rest increased liability is offset by increased ITC which was not available during VAT. Therefore increased liability on buyers should be only 0.65% .

What happen if ITC 6.1% is not passed to consumers



If the increased ITC available6.1% is not passed to home buyers ,it will result in increase of builder profiteering by 6.1% due to GST. This can be easily understood by the following method;
GST @12% consist of two parts
(a) VAT @5.25% (5.25% is collected from home buyers)
This is fulfilled by 1.1% ITC available during VAT + 4.15% by depositing

(b) Increased GST burden @ 6.75% (6.75% is collected from home buyers)

Builder now has 6.1% (increased ITC) + 6.75% (collected from home buyers)= 12.85%

And from this available 12.85% fund builder will disburse increased ITC available @6.1% + 0.65% by depositing to fulfil increased GST 6.75% tax liability. Thus 6.1%(12.85%-6.75%) amount collected from home buyers is left with builder increasing his profiteering due to GST.
When GST is @8%
In the same way when GST is 8% builder will adjust ITC 7.2% (1.1%+6.1%) and will deposit only 0.8% tax , because increased liability is offset by increased ITC available.
Therefore full increased ITC 6.1% should be passed under GST during both periods.
The methodology adopted by DGSG is fit in the cases where goods are having MRP. MRP incudes VAT/GST . In the present case the methodology adopted by DGSG is fits appropriate because in present case VAT/GST is over and above according to BBA . more