ACCOUNTING & TAXATION
Real Estate Services – ITC Reversal
GST structure on Real Estate Services relating to residential and commercial apartments has drastically changed w.e.f. 01.04.2019.
The nature of Real Estate services is different from normal supply of services. For example, A builder intend to construct a complex or building and sale it to a buyer. It is a supply as per Para 5(b) of Schedule II of CGST Act. Such supply is taxable till the builder receives completion certificate. After obtaining completion certificate, it is considered as exempt services. This is because, after completion of work or first occupant of the project it become building and GST is not applicable on building.
The Government vide Notifications No. 3 to 8/2019-Central Tax (Rate) all dated 29th March, 2019 has introduced revised scheme which applies to residential and commercial apartments which are covered under RERA [Real Estate (Regulation and Development) Act, 2016].
The new scheme is compulsory for projects commenced on or after 1-4-2019. In respect of ongoing projects as on 31-3-2019, the promoter has option to shift to new scheme w.e.f. 1-4-2019 (without ITC) or continue under earlier scheme (with ITC).
In case of ongoing projects, if the promoter intends to shift to new scheme (of 1%/5%) w.e.f. 1-4-2019, he is required to refund excess ITC availed as on 31-3-2019 or get credit of ITC less claimed as on 31-3-2019.
Where promoter opts to continue with old scheme and pay tax at full rate (8%/12%) after availing ITC, proportionate reversal of Input Tax Credit is required in respect of apartments remaining unsold as on date of completion or first occupation, whichever is earlier.
The reversal is required to be made on date of completion of project. Reversal should be as per rule 42 of CGST Rules in respect of inputs and input services and rule 43 of CGST Rules in respect of capital goods.
Such reversal will be on basis of carpet area and not on basis of value (first proviso to Rule 42(i) of CGST Rules, 2017 inserted w.e.f. 1-4-2019].
Para 5(b) of Schedule II of CGST Act 2017 covers real estate projects of residential and commercial apartments.
As per section 17(3) of CGST Act, value of exempt supply shall include sale of building where supply is made after obtaining completion certificate. For purpose of section 17(3) of CGST Act (proportionate reversal of ITC when taxable person is making both taxable and exempt supply), the expression “value of exempt supply” shall include sale of land or sale of building after completion certificate is obtained.
Section 17(3) of CGST Act envisages that apportionment of ITC between exempt supply and taxable supplies shall be on basis of value. However, on service of real estate of residential and commercial apartments such apportionment shall be on basis of area of construction of complex (Removal of Difficulties Order No. 04/2019-CT dated 29-3-2019 provides that such apportionment shall be on basis of area of construction of complex w.e.f. 01.04.2019).
Illustration: –
Let us try to understand calculation of reversal amount with the help of an Illustration: –
| Sl | Description | Symbol | Value |
| (a) | Total Input tax involved on input & input services in a tax period | T | 100 Lakhs |
| (b) | Amount out of “T” attributable to Input & input services intended to be used exclusively for purposes other than business | T1 | 10 Lakhs |
| (c ) | Amount out of “T” attributable to Input & input services intended to be used exclusively for exempt supplies | T2 | 15 Lakhs |
| (d) | Amount out of “T” in respect of inputs on which credit is not available under section 17(5) [ineligible ITC] | T3 | 05 lakhs |
| (e) | Since (a) +(b)+(c) above is exclusive for non-business, exempted and eligible purposes, it will not be credited to the electronic credit ledger. Amount of ITC credited to the Electronic Credit ledger shall be T-(T1+T2+T3) = 100-(10+15+5) | C1 | 70 Lakhs |
| (f) | Amount out of “T” attributable to Input & input services intended to be used exclusively for taxable supplies. (Refer Note 1) | T4 | 0 |
| (g) | Input tax credit left after attribution of input tax credit towards exclusives (exempted, non-business, ineligible, taxable) supplies is a Common Credit. It means common credit has a component of credit used for taxable & exempted supplies both-.
T-( T1+T2+T3+T4) or (C1-T4) |
C2 | 70 Lakhs |
| (h) | Aggregate Carpet Area construction of which is exempt from tax | E | 500 SqM |
| (ha) | Aggregate Carpet Area identified by the builder as unbooked | E1 | 2500 Sq M |
| (i) | Aggregate Carpet Area of the apartment in the project | F | 10000 Sq M |
| (j) | The amount of input tax credit attributable towards exempt supplies = C2*(E1+E2) /F = 70*(500+2500)/10000 | D1 | 21 Lakhs |
| (k) | The amount of credit attributable to non-business purposes included in common credit shall be equal to five per cent of C2.
= 5% of C2 |
D2 | 3.5 Lakhs |
| (l) | The remainder of the common credit shall be the eligible input tax credit attributed to the purposes of business and for effecting taxable supplies =C2-(D1+D2) = 70-(21+3.5) | C3 | 45.5 lakhs |
Input Tax Credit (ITC) to be reversed = amount of input tax credit attributable towards exempt supplies + The amount of credit attributable to non-business purposes included in common credit. = D1+D2 = Rs 21 Lakhs + Rs 3.5 Lakhs = 24.5 Lakhs.
Note 1 – Refer Point (f) above:– In case of real estate projects of residential and commercial apartments, When builder receive input and input services, it is impossible to identify its use for exclusive taxable purpose as it will be commonly used during construction of apartments and after receipt of completion certificate . Hence, the value has to be taken as Nil at that stage.
Final calculations of eligible ITC in case of real estate projects where no transition of ITC: Rules 42(3) to 42(6) of CGST Rules inserted w.e.f. 1-4-2019 make provisions for final calculations of eligible ITC in case of real estate projects or residential and commercial apartments. In case of supply of real estate services, the input tax determined under rule 42(1) shall be calculated finally, for each ongoing project or projects which commences on or after 1st April, 2019, which did not undergo or did not require transition of input tax credit consequent to change of rates of tax on 1st April, 2019.
The amount ‘C3’ ‘D1’and ‘D2’ shall be computed separately for input tax credit of central tax, State tax, Union territory tax and integrated tax and declared in form GSTR-3B or through form GST DRC-03.
The amount equal to ‘D1’ and ‘D2’ shall be reversed by the registered person in form GSTR-3B or through form GST DRC-03.
The value for a tax period shall be calculated for each project separately.