GST on Real Estate: Reversal of Input Tax Credit

With the series of changes that have been made effective from 1^st April, 2019 the effective tax rates has come down from 12% and 8% to 5% and 1% in the case of construction of  residential apartments and Affordable housing apartments respectively. Consequent to these changes the ITC has become ineligible and there is a need for reversal of ITC in cases where the promoter opts to pay GST at the new effective rate of 5% or 1%, as applicable, to the extent of the ITC attributable to the supplies whose time of supply (ToS) occurs after 01.04.2019. This article is aimed to explain the formula for reversal of ITC in coherent way possible.

Legal background

The notification 3/2019-central tax (rate) dated 29^th March 2019 provides that the credit of input tax charged on goods and services used in supplying the service has not been taken except to the extent as prescribed in Annexure I of the said notification in the case of REP other than RREP and in Annexure II of the said notification in the case of RREP.

It also provides for reversal of ITC on goods and services by debiting the electronic credit ledger or electronic cash ledger, an amount attributable to construction in a project, time of supply of which is on or after 1st April, 2019, which shall be calculated in the manner as prescribed in the Annexure I of the said notification in the case of REP other than RREP and in Annexure II of the said notification in the case of RREP. As per the notification, the reversal is to be done within the due date for furnishing of the return for the month of September 2019. It also provides two illustrations in the annexures which has been explain in this article.

Section 17(2) of the CGST Act 2017 provides that the ITC shall be restricted to so much of input tax as is attributable to the taxable supplies and Section 17(3) of the act provides that the value for the purpose of sub-section (2) of section 17 of the said Act shall be such as prescribed by rules. Rule 42 and Rule 43 of the CGST Rules, 2017 deals with the manner in which ITC in respect of inputs and input services; and capital goods have to be reversed. These rules have been amended vide Notification No 16/2019 central tax dated 29-03-2019.

A removal of difficulty Order No. 04/2019-Central Tax dated 29.03.2019 has been issued which provides that w.r.t. the construction of complex services as defined in para 5(b) of Schedule II to the Act, the area of construction can be considered as the basis for determining the area attributable to the taxable and exempt supplies. Prior to the issuance of this order the only basis for attributing ITC to the taxable and exempt supplies was the value of such supply.

Cost Benefit Analysis

 The computation of the above reversal is critical to ascertain its impact on the tax cost for the real estate promoter to decide whether to continue in the old rate or opt to the new scheme.

Reversal of ITC for person opting for the new scheme

1. Tx = ITC on inputs and input services attributable to construction of residential and commercial portion, where ToS is on or after 01.04.2019
2. T = Total ITC availed from 01.07.2017 to 31.03.2019 including transition credit (whether or not utilised)
3. Te = ITC attributable to construction of commercial and residential portion where ToS is before 01/04/2019 and Te shall be calculated as Tc + Tr.
4. Tc = ITC attributable to construction of commercial portion in the REP.
5. Tr = ITC attributable to construction of residential portion in the REP where ToS is before 01/04/2019.
6. F1 = carpet area of residential apartment / Total carpet area of residential and commercial apartment.
7. F2 = Total carpet area of residential apartment booked before 01.04.2019 / Total carpet area of residential apartment.
8. F3 = Value of supply for residential apartment booked before 01/04/2019 where ToS is before 01/04/2019 / Total value of supply for such booked apartments.
9. F4 = 1 / % completion of construction as on 31.03.2019.

In case of a RREP or a project other than RREP having only residential apartments:

1.Where % of completion is not zero or where there is inventory in stock

ITC to be reversed Tx shall be calculated as:

Tx= T-Te

Where,

Te=T*F1*F2*F3*F4

2. Where % of completion is zero as on 31/03/2019 but invoicing has been done having ToS before 31/03/2019 and no inputs or input services has been received as on 31/03/2019

 The registered person shall be eligible to take ITC on goods and services received on or after 1 st April, 2019 for construction of residential or commercial portion in the RREP, for which he shall not otherwise be eligible, to the extent of the amount of Te. Te shall be calculated as below:

Te=Tn*F1*F2*F3

Where,

Tn= Tax paid on such inputs and input services on which ITC is available under the CGST Act, received in 2019-20 for construction of residential and commercial apartments in the RREP.

3. Some special circumstances

 Notwithstanding anything contained in A. or B. above, Te shall be determined in the following situations as under:

• Where percentage invoicing is more than the percentage completion and the difference between percentage invoicing and the percentage completion of construction is more than 25%; the value of percentage invoicing shall be deemed to be percentage completion plus 25%;
• Where the value of invoices issued on or prior to 31st March, 2019 exceeds the consideration actually received on or prior to 31st March, 2019 by more than 25% of consideration actually received; the value of such invoices for the purpose of determination of percentage invoicing shall be deemed to be actual consideration received plus 25% of the actual consideration received;
• Where the value of procurement of inputs and input services prior to 1st April, 2019 exceeds the value of actual consumption of the inputs and input services used in the percentage of construction completed as on 31st March, 2019 by more than 25% of value of actual consumption of inputs and input services, the jurisdictional commissioner or any other officer authorized in this regard may fix the Te based on actual per unit consumption of inputs and input services based on the documents duly certified by a Chartered Accountant or Cost Accountant submitted by the promoter in this regard, applying the accepted principles of accounting.

ILLUSTRATION I:

Points to be noted:

1. The amount of Te and Tx shall be calculated separately for CGST, SGST,UTGST and IGST.
2. Where, Tx is positive, i.e. Te < T, the registered person shall pay, by debit in the electronic credit ledger or electronic cash ledger, an amount equal to the difference between T and Te. Such amount shall form part of the output tax liability of the registered person and the amount shall be furnished in FORM GST ITC- 03. The registered person may file an application in FORM GST DRC- 20, seeking extension of time for the payment of taxes or any amount due or for allowing payment of such taxes or amount in installments in accordance with the provisions of section 80. The commissioner may issue an order in FORM GST DRC- 21 allowing the taxable person further time to make payment and/or to pay the amount in such monthly installments, not exceeding 24, as he may deem fit.
3. Where Tx is negative, i.e. Te>T, the registered person shall be eligible to take ITC on goods and services received on or after 1 st April, 2019 for construction of residential portion in the REP, for which he shall not otherwise be eligible, to the extent of difference between Te and T.
4. Where percentage completion is zero but ITC has been availed on goods and services received for the project on or prior to 31st March, 2019, ITC attributable to construction of residential portion which has time of supply on or after 1st April, 2019, shall be calculated and the amount equal to Tx shall be paid or taken credit of, as the case may be, as prescribed above, with the modification that percentage completion for calculation of F4 shall be taken as the percentage completion which, as certified by an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972) or a chartered engineer registered with the Institution of Engineers (India), can be achieved with the input services received and inputs in stock as on 31st March, 2019.

 In case a project other than RREP having both residential apartments as well as commercial apartments:

1. Where % of completion is not zero or where there is inventory in stock

Tx = T – Te

Where,

Te = Tc + Tr

Tc = T * (carpet area of commercial apartments in project / total carpet area of commercial and residential apartments); and

Tr = T*F1*F2*F3*F4

In case the ITC attributable exclusively to construction of commercial portion (T1) and ITC attributable exclusively to construction of residential portion (T2) are available, a registered person can calculate ‘Te’ as below:

Te = Tc + T1 + Tr

Where,

Tc is the ITC attributable to construction of commercial portion in the REP, calculated as Tc =T3 * (carpet area of commercial apartments in the REP/ total carpet area of commercial and residential apartments in the REP);

T3 = T- (T1 + T2)

T1 = ITC attributable exclusively to construction of commercial portion in the REP

T2 = ITC attributable exclusively to construction of residential portion in the REP

Tr is the ITC attributable to construction of residential portion in the REP which has time of supply on or before 31.03.2019 and which shall be calculated as under,

Tr = (T3 + T2)* F1 * F2 * F3* F4              or

Tr = (T- T1)* F1 * F2 * F3* F4

Where % completion as on 31st March, 2019 is zero but invoicing has been done having time of supply before 31st March, 2019, and no input services or inputs have been received as on 31st March, 2019, “Te” shall be calculated as follows

The registered person shall be eligible to take ITC on goods and services received on or after 1st April, 2019 for construction of residential portion in the REP, for which he shall not otherwise be eligible, to the extent of the amount of Te calculated as below:

Te = Tc + Tr

Where,

Tr = Tn* F1 * F2 * F3

Tn= Tax paid on such inputs and input services on which ITC is available received in 2019-20 for construction of REP.

Tc =Tn* (carpet area of commercial apartments in the REP/ total carpet area of commercial and residential apartments in the REP)

Points to be noted:

1. The amount of Te and Tx shall be calculated separately for CGST, SGST,UTGST and IGST.
2. Where, Tx is positive, i.e. Te < T, the registered person shall pay, by debit in the electronic credit ledger or electronic cash ledger, an amount equal to the difference between T and Te. Such amount shall form part of the output tax liability of the registered person and the amount shall be furnished in FORM GST ITC- 03. The registered person may file an application in FORM GST DRC- 20, seeking extension of time for the payment of taxes or any amount due or for allowing payment of such taxes or amount in installments in accordance with the provisions of section 80. The commissioner may issue an order in FORM GST DRC- 21 allowing the taxable person further time to make payment and/or to pay the amount in such monthly installments, not exceeding 24, as he may deem fit.
3. Where Tx is negative, i.e. Te>T, the registered person shall be eligible to take ITC on goods and services received on or after 1 st April, 2019 for construction of residential portion in the REP, for which he shall not otherwise be eligible, to the extent of difference between Te and T.
4. In case of a REP, The registered person may calculate Tc and utilize credit to the extent of Tc for payment of tax on commercial apartments, till the complete accounting of Tx is carried out and submitted.
5. Where percentage completion is zero but ITC has been availed on goods and services received for the project on or prior to 31st March, 2019, ITC attributable to construction of residential portion which has time of supply on or after 1st April, 2019, shall be calculated and the amount equal to Tx shall be paid or taken credit of, as the case may be, as prescribed above, with the modification that percentage completion for calculation of F4 shall be taken as the percentage completion which, as certified by an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972) or a chartered engineer registered with the Institution of Engineers (India), can be achieved with the input services received and inputs in stock as on 31st March, 2019.

Reversal of credit in case of a person opting to pay tax at the rates applicable prior to 1/04/2019 in accordance with rule 42 and rule 43 of CGST Rules, 2017.

 Notification 16/2019 – Central Tax dated 29-03-2019 has amended the Rule 42 and Rule 43 of CGST Rules, 2017. The said rules are effective from 1/04/2019 and it has to be applied for the credits availed even earlier where the cut-off dates of the project has not occurred before 1/04/2019. However for projects where the cut-off date has occurred after 1/04/2019, provisions of rule 42 as existed before 1/04/2019 would continue to apply.

Earlier the final entitlement of ITC was to be calculated at the end of a financial year. Now as per the amended provisions of the rule, it has to be calculated at the time of completion of the project. Similarly, the ITC eligibility would be on the basis of the carpet area of the apartment and not on the basis of the value of supply

The excess ITC availed as ascertained after final computation would attract interest whether or not it is utilized. The interest would be calculated from 1^st April following the Financial Year in which the cut-off date occurs.

Reversal of ITC in terms of rule 42 w.r.t Inputs and input services.

• ITC on inputs and input services used for real estate projects should be considered as common credit in the tax period in which the credit is eligible.
• The amount of eligible credit shall be calculated on the basis of carpet area and not on the basis of sale value.
• This calculation has to be done for each project separately and where any input or input service is used for more than one project, reasonable basis to be adopted to segregate the credit for each project.
• Such computation shall be done on a monthly basis and then recomputed finally at the end of the completion of project i.e. by due date of furnishing return for the month of September following the financial year in which Completion certificate is issued or first occupancy, whichever is earlier.
• Final computation shall be done for ITC availed from 1^st July 2017 or date of beginning of project whichever is later till the cut-off date.
• However such final computation is not required to be done for RREP which underwent transition of ITC consequent to change of rate of tax on 1/04/2019 i.e. for ongoing project who opted for the new rate and new projects which did not require any reversal of ITC. 

Monthly Computation of the eligible ITC

Eligible common credit C3 calculated as

C3= C2-(D1 + D2)

 Where,

D2 is the amount of credit attributable to non-business purposes if common inputs and input services are used partly for business and partly for non-business purposes calculated as D2 = C2 x 5%

D1 is the amount of input tax credit attributable towards exempt supplies calculated as D1= (E÷F) × C2

C2 = Common credit (input and input services)

E = Aggregate carpet area of the apartments, construction of which is exempt plus aggregate carpet area of the apartment, construction of which is not exempt but identified to be sold after cut-off date. ‘E’ would include the carpet area of all apartments has not been booked in the tax period during the cut-off date and carpet area of apartments on which tax is paid or payable at the new rates.

F = Aggregate carpet area of the apartment in the project

Final computation of eligible ITC at the completion of the project:

On the final computation which has to be done by the due date for furnishing return for the month of September following the FY in which cut-off date occurs.  The final computation has to be done in the same manner as prescribed above, with the modification that the value of E/F shall be calculated as under:

E= Aggregate carpet area of the apartments, construction of which is exempt from tax plus aggregate carpet area of the apartments, construction of which is not exempt from tax, but has not been booked till the cut-off date.

F= Aggregate carpet area of the apartments in the project;

The excess/short ITC availed needs to be adjusted in Form GSTR-3B or through Form GST DRC-03 as follows:

1. Excess ITC availed – Such excess need to be reversed along with interest @18% from 1st of April of such financial year till the date of reversal.
2. Short ITC availed – Same can be claimed as credit in the return filed not later than September following the FY in which the cut-off date occurs.

Final computations of eligible ITC in respect of commercial portion for projects other than RREP:

In case of an ongoing real estate project where the carpet area of commercial apartments is more than 15% of the total carpet area, the residential apartments are eligible for the new rates while the commercial apartments would be liable to tax at rates applicable prior to 01/04/2019 with ITC being eligible.

The final eligible credit would be-

C3 (Agg)*E/F

Where,

C3 (Agg) is the aggregate common credit on commercial portion in the project calculated as C3(Agg) = (Aggregate of monthly C3 determined for the period 01/07/2017 to 31/03/2019) x AC/AT (+) (Aggregate of monthly C3 determined for the period 01.04.2019 to the cut-off date)

AC = Aggregate carpet area of commercial apartments in the project

AT= Aggregate carpet area of all apartments in the project

E= Aggregate carpet area of commercial apartments which have not been booked till the cut-off date.

F=AC=Aggregate carpet area of commercial projects in the apartment.

On the final computation done as above, the final adjustment excess / short) needs to be carried out in Form GSTR-3B or through Form GST DRC-03 in the month not later than the month of September following the end of financial year in which the cut-off date occurs, as follows:

1. Excess ITC availed: Such excess need to be reversed along with interest @18% from 1st of April of such financial year till the date of reversal.
2. Short ITC availed: Same can be claimed as credit in the return filed not later than September following the FY in which the cut-off date occurs.

Reversal of ITC in terms of rule 43 w.r.t Capital goods

• ITC on capital goods used for real estate projects should be considered as common credit in the tax period in which the credit is eligible.
• The amount of eligible credit shall be calculated on the basis of carpet area and not on the basis of the sale value.
• This calculation has to be done for each project separately and where any capital goods are used for more than one project, reasonable basis to be adopted to segregate the credit for each project.
• Such computation shall be done on a monthly basis and then recomputed finally at the end of the completion of project i.e. by due date of furnishing return for the month of September following the financial year in which cut-off date occurs.
• In case of existing capital goods used in the new project, ITC attributable to the remaining useful life can be availed in new project.

The amount of common credit in respect of capital goods attributable towards exempted supplies denoted as ‘Te’, and calculated as-

Te= (E÷ F) x Tr

Where,

Tr is the amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period and shall be the aggregate of ‘Tm’ for all such capital goods;

Tm = Tc / 60, where Tc is the aggregate common credit in respect of capital goods for a tax period.

E= Aggregate carpet area of commercial apartments, construction of which is exempt and aggregate carpet area of commercial apartments, construction of which is not exempt but has not been booked till the cut-off date.

F= Aggregate carpet area of commercial projects in the apartment.

Final computation of eligible ITC

Te(final)= [(E1 + E2 + E3)/F ]*Tc (final)

Where,

Te (final) = common credit attributable to exempt supplies

E1 = Total carpet area of apartments which is exempt from tax

E2 = Total carpet area of apartments where sold before 31/03/2019 and opted for new rates. i.e. E2 = Carpet area of such apartments x V1/ (V1+V2)

V1= Installments where ToS is on or after 01.04.2019

V2= Installments where ToS is before 01.04.2019

E3 = Aggregate carpet area of apartments which is not booked before cut-off date.

F = Aggregate carpet area of apartments in the project.

Tc (final) is the aggregate of credit of all capital goods attributable to the project and calculated as Tc (final) = aggregate of A (final) in respect of all CG used in the project

A(final) = A* (no. of months CG used in project/60)

On the final computation done as above, the final adjustment excess / short) needs to be carried out in Form GSTR-3B or through Form GST DRC-03 in the month not later than the month of September following the end of financial year in which the cut-off date occurs, as follows:

1. Excess ITC availed: Such excess need to be reversed along with interest @18% from 1st of April of such financial year till the date of reversal.
2. Short ITC availed: Same can be claimed as credit in the return filed not later than September following the FY in which the cut-off date occurs.

Disclaimer: While every effort has been taken to provide correct information, the authors/ publishers will not be liable for any loss, expense, liability, detriment or deprivation suffered arising out of any action based on the information provided above. The readers are expected to cross-check the facts and information with government circulars and notification.