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TMI BlogReversal of credit as per rule 42 for ongoing real estate projectsX X X X Extracts X X X X X X X X Extracts X X X X ..... Reversal of credit as per rule 42 for ongoing real estate projects - By: - Shilpi Jain - Goods and Services Tax - GST - Dated:- 15-11-2019 - - Reversal of credit as per rule 42 for ongoing real estate projects Nov 19 The real estate sector has seen a mass change in the provisions under GST from 1 st Apr 19, be it relating to the taxability or the input tax credit. In this article we would be discussing the provisions relating to input tax credit. From 1 st Jul 17 to 31 st Mar 18, the provisions relating to credit for this sector (including for any other sector) were something similar to the provisions contained under the CENVAT Credit Rules, 2004 wherein the common credit was required to be proportioned to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the taxable revenue, which only would be an eligible credit. Provisions prior to 1 st Apr 19 All the units in respect of which amounts are received from customers before the project completion (i.e. receipt of completion certificate or first occupation, whichever is earlier) would be considered as taxable units i.e. amounts received towards their sale would be liable to GST. Amounts received in respect of the other units are considered as those that are not liable to tax and thereby requiring reversal of credit in terms of section 17(3) of the CGST Act, 2017 (referred to as Act). The flaw with this credit reversal mechanism was that During the initial phases of the project before completion, huge amount of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses are incurred commonly for the entire structure which consists of the taxable and the exempt units. At this time, there is no exempt revenue whereby entire credit becomes eligible. After the project is completed also there are taxable receipts, which only diminish as the expenses in the project diminish thereby leading to a sizable amount of credit being availed at such point of time also. The units that were never sold, never get considered towards the credit reversal as there is no revenue recognised in the books in this regard to take part in the credit reversal calculation. All the above cumulatively led to availing more credit than what would be eligible. Credit reversal provisions from 1 st Apr 18 Due to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, the Government was losing a lot of revenue in terms of the huge credits being availed by this sector which was not in proportion to the exempt revenue or area in the project, when considered as a whole. Thereby, while attempting to rationalise the rate of tax for this sector, amendments were also made to the credit provisions contained in rule 42 and 43 of the CGST Rules, 2017 (referred to as Rules). As per the amended provisions of rule 42 , which are effective from 1 st Apr 19, all credits relating to the project are to be considered as common credit and the monthly reversal is to be computed which would be in proportion to the carpet area (and not revenue) of the units that are exempt or identified to be sold after com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pletion (say for example the mortgaged units). Then, finally on project completion the said reversal is to be re-calculated which would be in proportion to the carpet area of the units that actually remain unsold. This provision would ensure that the credit availed by this sector is more representative of the credit attributable to the units sold in respect of which tax is being paid by the assessee. Issues in the above provision Past credits of projects that have not attained completion The said provision states that the credit reversal in respect of a project is to be done before the month of September following the end of the financial year in which the project completion is attained. Further, the project credit from 1 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jul 17 till the project completion has to be taken to compute this reversal. The first question arising from the above is, whether a provision which is effective from 1 st Apr 19 can require re-computation of any credit that has already been availed by the assessee? That is, whether the credit availed during say FY 2017-18 and 2018-19 (assuming the project completion is attained during FY 19-20), is actually required to be considered for reversal as per the new provisions effective from 1 st Apr 19? No, in light of the decision of the Supreme Court in the case of Collector Of Central Excise, Pune Versus Dai Ichi Karkaria Ltd. 1999 (8) TMI 920 - SUPREME COURT where it held that the credit once availed is indefeasible more so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when there is no provision in the law for reversal unless credit has been taken illegally or irregularly. Thereby, in the present scenario as well, before 1 st Apr 19, the credit which was availed by the promoter in respect of a project that has not attained completion, the intention being to use the goods/services for taxable supplies, is an eligible credit in terms of section 16(1) (assuming all the other conditions u/s 16(2) are fulfilled) and does not fall under the ambit of section 17(2) and rule 42. Similar was held by the Gujarat High Court in the case of Principal Commissioner v. Alembic Limited , 2019 (7) TMI 908 - GUJARAT HIGH COURT though in the context of the earlier laws. A subsequent change in the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot defeat such credit that has been validly availed earlier. Further, the provision under rule 42(3) requires re-calculation of the final amount that is to be reversed in the project which has attained completion, by considering the credit ascertained under rule 42(1) . In this regard, as discussed in the above paragraph, the credit availed for the project in the FY 2017-18 and 2018-19 were not in terms of rule 42 , whereby the newly inserted provision rule 42(3) will not be applicable for such credits availed earlier. Hence it can be said that only the credit that is being availed from 1 st Apr 19 is required to be considered for the reversal as per rule 42(3) ibid for the projects that have not attained completion befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1 st Apr 19. Say for example The credit availed during FY 2017-18 and FY 2018-19 is ₹ 1.5 crores in total. Completion certification (CC) received during Jul 19. Proportion of carpet area of units unsold as on the date of CC = 30% Credit availed from Apr 19 to Jul 19 = ₹ 10 lakhs No reversal of credit required w.r.t. ₹ 1.5 crores availed prior to 1 st Apr 19. Credit availed from Apr 19 to Jul 19 of ₹ 10 lakhs to the extent of 30% i.e. ₹ 3 lakhs, is to be reversed. Credit reversal to be as per revenue or carpet area, for period prior to 1 st Apr 19 Say, in respect of a project which has attained completion in the FY 2018-19, the assessee does the final credit reversal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of rule 42(2) , which is to be done before the due date of Sep 19 return, whether such reversal is to be done on the basis of the revenue during the FY 2018-19 or on the basis of the carpet area of the exempt units in the project? Since this reversal is to be done as per the provisions contained in the law before 1 st Apr 19 (the date on which the provisions of rule 42(2) were amended and rule 42(3) was inserted requiring final reversal to be done on carpet area basis) such reversal is to be done on the basis of the exempt revenue booked during FY 2018-19 and not on the basis of the carpet area of the exempt units. Thereby, if an assessee, being conservative opts to reverse credit availed right from 1 st Jul 17, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project which has attained completion during FY 2018-19, such reversal will have to be done on the basis of the exempt revenue in the project and not on the basis of the carpet area of the exempt units. Say for example The credit availed during FY 2018-19 is ₹ 1 crores in total. Completion certification (CC) received during Dec 18. Proportion of exempt revenue as per returns during 18-19 is 20%, whereas carpet area of unsold units as on completion is 40%. Credit to be reversed for FY 2018-19 = ₹ 20 lakhs (on the basis of revenue and not on carpet area). Thereby, even though the provisions have changed from 1 st Apr 19, the credit reversal for the transitioning projects would still be majorly as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions contained prior to such date. This could be disputed by the department and thereby a suitable intimation can be made to the department regarding the credit reversal methodology. - Reply By Rakesh Garg as = Hello Shilpi First of all, my compliments to you for your good analysis. At point no. (c), you have stated that prior to 1.4.2019, the units that were never sold, never get considered towards the credit reversal as there is no revenue recognised in the books in this regard to take part in the credit reversal calculation. My discussion is in respect of eligibility of ITC in respect of such unbooked flats on the date of OC/CC, even without considering the amendments effective from 1.4.2019. As per Sch-III /entry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, sale of land and, subject to clause (b) of paragraph 5 of Schedule II , sale of building has been considered as neither supply of goods nor of services. Thus, sale of unbooked flat as on the date of OC/CC comes in this category. The question is whether ITC could be claim is respect of such non-supply. As per Explanation below sec 17(3) , inserted w.e.f. 01.02.2019, the expression value of exempt supply shall not include the value of activities or transactions specified in Schedule III , except those specified in paragraph 5 of the said Schedule. As per the Scheme of the GST Act, ITC is available in respect of taxable supplies including zero rated supplies; and not the exempt or non-taxable supplies. As per sec 16 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct , availability of ITC is based upon intention. If the inward supplies are made or intended to be made in the course or furtherance of business, then ITC shall be allowed. However, sec 17 restricts the eligibility of ITC; and is based upon act (and not the intention): ITC shall not allowed in respect of exempt and non-taxable supplies even if intention at the time of receipt was to make taxable supplies. If the taxable supply subsequently becomes exempt, then ITC already claimed in respect of such exempt supply is reversed under sec 18(4) . In the present case, certainly, the intention of the Promoter is to make the taxable supply; which, however, could not take place till the date of OC/CC. Meaning thereby, apparently, sec 17 , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which talks about supply, could not be invoked, because there is no supply whatsoever; and thus, reversal under sec 17(1) and (2) is not required. If this interpretation is adopted, then we could claim ITC even if the unit is used for our own purpose; but, to claim ITC without paying any output tax, appears to be irrational. In the case of Safari Retreat, ITC was allowed by the Orissa HC in respect of goods and services because immovable property was used for making outward taxable supply in the form of rent. If have moved one step ahead. In this regard, as per sec 17(5)(d) , input tax credit shall not be available in respect of goods or services or both received by a taxable person for construction of an immovable property (other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. In the present case, since the flats have not been booked till the date of OC/CC, it might be said that construction takes place on the own account of the Promoter. Hence, in such cases, in may be stated that proportionate ITC in respect of unbooked flats would be reversed on some reasonable basis: whether it be on the basis of Revenue or Carpet Area. It is an interesting matter for my understanding; pl discuss further. Thanks and regards Dated: 16-11-2019 Reply By Shilpi Jain as = Thanks for the read and the revert. An important aspect to note here is that the eligibility of any credit shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be seen at the time of its availment. This comes from the CENVAT scheme where there are judgments of the Courts stating the same. Once availed, reversal requires express provision in the law. THereby, the lacuna in case of real estate projects which was addressed by way of amendment to ITC rules specifically for this sector Section 18(4) woudl not be applicable as the supply is not being exempt i.e. the rate of tax has not changes. It is because of project completion that the supply being made is exempt. It is the object of supply which changes. Dated: 18-11-2019 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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