Can Unsecured Loan consider as advance received for a service?

[Suresh Yadav]

A builder received unsecured loan from many individuals before Commencement Certificate(CC). After obtaining CC Certificate, Builder returned the unsecured loan to individuals bank account & subsequently after 2-3 days took same amount as flat consideration through same bank account of individual and booked flat for same individuals & paid applicable GST. Can initial unsecured loan be considered as advance received for construction service (flat) from individual? Can GST department demand interest on the same?

In some cases builder returned unsecured loan after Completion Certificate & booked flat after 2-3 days of returning unsecured loan. No GST paid because after Completion Certificate it became exempt. Can GST be demanded by department considering unsecured loan as advance?

There is no written agreement available for unsecured loan between builder and individual. It is generally orally or mutual unserdtaing.

[Suresh Yadav]

Additional information:- Loan is returned by builder without interest.

[Sadanand Bulbule]

Plz peruse the following Section 2[31] of the CGST Act:

(31) "consideration" in relation to the supply of goods or services or both includes--

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

Analysis:

The unsecured loans were independent financial transactions, duly recorded in the books of account and fully repaid prior to execution of any agreement for sale or allotment of any unit. At the time of receipt, there was neither an identifiable supply nor any obligation to provide construction service. In terms of Section 7 read with Section 2(31), consideration must be in respect of or for inducement of a specific supply. As the impugned amounts were not received against any such supply, they do not qualify as consideration or advance for construction services. GST has been duly discharged on actual consideration received wherever applicable.

[Mr. Heet Shah]

To substantiate that funds recd are as unsecured loan there should be loan agreement, to prove the intent of loan. Further funds should have been credited in books a unsecured liability, interest should have been provided to prove the nature of funds as loan rather than advances for flats.

Also intent or benifit arising from such loan should be substantiated esp. where it is interest free. Developer may manage to prove the price difference in sale of property as compensation for funds as loan.

Allotment or booking letter should be issued on repayment of funds not prior to it.

 

 

[Raam Srinivasan Swaminathan Kalpathi]

I am of the opinion that the entire transaction is a sham and will be definitely disputed by the GST department. The charade of an unsecured loan is only to disguise the advance amount received from a customer, on which GST is leviable, for a works contract. I for one would strongly advise RPs to refrain from such slight of hand methods and chinaneries. Without of an iota of documentation the trail of funds could easily be established by the department. Best wishes

[Sadanand Bulbule]

Yes Sir. Prima facie, it appears to be "well engineered" affairs to ascape GST liability. Intent is more crucial than the event.

[Raam Srinivasan Swaminathan Kalpathi]

Profuse thank you respected Sri.Sadanandji for your endorsement of my views. Dont want to pour any further vitriol on the query.

[Sadanand Bulbule]

The querist is informed to come with clean facts on this forum.

[KASTURI SETHI]

The query needs redrafting. It must be clear and based on facts and not on future plans.

From the query, it appears that the purpose of the query is to explore the possibility of availing exemption via this forum otherwise every Tom, Dick & Harry knows the difference between advance and loan.

[KASTURI SETHI]

Such plan, if executed, would boomerang. in the form of SCN demanding tax along with interest and imposing penalty.

[KASTURI SETHI]

HUMBLE SUGGESTION

We should be able to identify any hypothetical query so that our precious time is not wasted and also our peace of mind is not disturbed.

[Shilpi Jain]

Substance over form - this concept very well applies to these facts!

AI Summary

Consideration characterization: unsecured loans may be recharacterised as advances and attract GST if linked to supply. Whether purported unsecured loan receipts can be treated as consideration for construction services depends on economic substance: genuine loans recorded as liabilities with supporting documentation and interest retained loan character, whereas undocumented, sequenced receipts that operate as pre payments may be recharacterised under the substance over form principle and treated as taxable advances for GST.