Retention & Withheld Amount in GST

Real Estate/ Construction Industry is one of most created businesses in India. Real Estate industry is also the most unorganised area in India. It is developing day to day and given crores of people employment. Real Estate industry has its say in the Gross Domestic Product of India.

Retention Amount & Withhold Amount are general words in the development industry, we find these words in every development contract, on every level. Retention Clause generally found in every development contract/agreement. This is the amount, which client /buyer holds, while making payment to contractor as security for completion of work assigned. Retention Amount will be percentage of consideration and any be deducted in dynamic payment also. It can be held at different levels of contract, such as client /buyer and contractor, contractor and subcontractor, etc. 

Retention Amount gives security and safeguard to the client /buyer from contractor to finish work allotted. 

Retention Amount and Withhold Amount are two unique words. Both are used in various senses. The retention percentage is referenced in the contract itself, whereas the withheld amount is an amount of retention over and above the retention percentage mentioned in the contract. 

LET'S CONSIDER BOTH SITUATION AND APPLICABILITY OF GST; 

1. RETENTION AMOUNT; 

Retention of money as held by customers is a safeguard against defects which may subsequently develop and which the contractor may fail to correct. It is to guarantee that the contractor completes the contract within stipulated time and according to the prescribed way. The retention money shall be deducted on agreed percentage (as referenced in contact/agreement) from the amount payable to contractor or on each instalment of dynamic billings. A contractor may also deduct from payment to subcontractors on the same basis. Generally, Retention Amount will be paid on completion of project or receivable of Completion Certificate from concerned specialist. 

The Retention Amount is liable to GST as it would be treated as supply, even if money is not released to the contractor, because such retention money represents the value for the construction services. The measure of progress billing, including maintenance cash, has to be accounted for GST based on the date of invoice as stated in the develop contract.

2. WITH-HELD AMOUNT; 

In some cases, the buyer may withhold some portion of the amount which is being part of the terms of agreement with the builder & developer. Such a withheld amount is possibly over and above the terms of the agreement. Hence under those cases, GST shall be payable on Running Account bill increased on the client. It may be noted that even though such amount may have been received from the client or the buyer, GST shall still be bound on such withheld amount.

Representing WITHHELD AMOUNT/IF WITHHELD AMOUNT NOT RECEIVED FROM CLIENT:

As we have talked about above, GST has been paid on withheld at the time of issue of receipt. The same shall not be subjected to again GST, on receipt basis. Now let's consider, when customer has not paid withheld amount, then there shall be two ways to account the same as follows; 

• Bad debts - now right now of risk of GST or the credit won't accessible;  

• Raising a Credit Note- if a builder/contractor issued Credit Note then, the benefit of reversal of GST liability is only available when the recipient reverses the proportional credit claimed for such supply if he is a registered consumer. Such a case does not apply in case of an unregistered consumer. The Credit Note will not be given after the due date of filing of Annual Return and month of September of subsequent financial year, whichever is prior.
   

DE WE HAVE TO REVERSE CREDIT OF TAXES PAID ON RETENTION AMOUNT;

SECTION 16(2) of CGST Act, 2017 is relevant in this case a provision has been added and same provides that; 

'Given 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 estimation of supply along with tax payable thereon within a period of 180 days from the date of issue of receipt by the supplier , an amount equal to the ITC availed by the recipient shall be added to his output tax liability, along with interest thereon, in such way as may be prescribed.” 

The above provision clearly mentioned that if the recipient neglects to pay the supplier, the amount of consideration along with tax afterwards, within a time of 180 days from issue of receipt, the recipient will not be able to take credit of tax paid on such invoice. 

The Retention Amount does not fall under above provision, if contract provides or allows clients to hold certain %(percentage) of consideration as retention. 

We can check Retention Amount on the basis of above provision, suppose client/buyer has not paid the retention amount to the customer, within a period of 180 days from the date of issue of receipt. In this case if terms and conditions of agreement provide so, that a portion of consideration shall be kept by client/buyer till completion of agreement, then the client shall take full credit of taxes paid on the payment made to the contractor. 

A contractor should get a certificate by mentioning that a 5% (assuming to retention) sum should be certified and invoiced only upon completion of the defect liability period.

Mohit Bisht

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