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GST Update on credit reversal of flats sold

GST UPDATE ON CREDIT REVERSAL OF FLATS SOLD AFTER COMPLETION CERTIFICATE-PART-III:- 

In continuation to our earlier update regarding the requirement of credit reversal on flats sold after obtaining completion certificate, we now discuss the provisions of Rule 42 of the CGST Rules, 2017 in case of multiple projects undertaken by various builders. In order to explain the provisions of credit reversal, we frame one example as follows:-

We hereby explain the computation of credit reversal with respect to construction undertaken by various builders as follows:-

Builder no. 1:-

Starting Date:- 01.04.2015
No. of Flats:- 100
No. of Flats sold prior to completion certificate:- 70
Cenvat Credit availed from 01.04.2015 to 01.10.2017 on 100 flats:- Rs. 10,00,000
Date of obtaining completion certificate:- 01.10.2017
Cenvat Credit for the month of October, 2017:- 80,000
No. of Flats Sold in October, 2017:- 5
Value of 5 Flats sold in October, 2017:- Total value of flat is Rs. 30,00,000/-

All demand letters have been issued till completion certificate and so there will be no taxable turnover for builder 1 for the month of October, 2017 and the entire credit of Rs. 80,000/- will have to be reversed. However, the credit already availed upto 01.10.2017 amounting to Rs. 10,00,000/- is not liable to be reversed as per Rule 42 of the CGST Rules, 2017.

Building 2:-

Starting Date:- 01.04.2015
No. of Flats:- 100
No. of Flats sold prior to completion certificate:- 70
Date of obtaining completion certificate:- Not Yet
Date of grant of occupancy certificate:- Not yet
Cenvat Credit availed from 01.04.2015 to 01.10.2017 on 100 flats:- Rs. 10,00,000
Cenvat Credit for the month of October, 2017:- 65,000
Demand raised of Rs. 5,00,000/- on 70 flats sold.

No amount of credit to be reversed as entire credit pertains to taxable supply of service. Hence, the builder can avail the entire input tax credit of Rs. 65,000/-.

Building 3:-

Starting date:- 01.04.2015
No. of Flats:- 100
No. of Flats sold prior to first occupancy:- 40
Cenvat Credit availed from 01.04.2015 to 30.09.2017 on 100 flats:- Rs. 6,50,000/-
Date on which first occupancy granted:- 1.10.2017.
Cenvat Credit for the month of October, 2017:- Rs. 60,000/-
No. of flats sold in the month of October, 2017:- 6
Value of 15 Flats sold in October, 2017:- Demand letter raised for amount of Rs. 5,00,000/- per flat but total value of flat is Rs. 30,00,000/-
Demand raised for 40 Flats sold in October 2017- Demand letter raised for amount of Rs. 5,00,000/- per flat but total value of flat is Rs. 25,00,000/-

Amount of credit reversal = 60,000 * 75,00,000/(2,00,00,000+ 75,00,000)
= Rs. 16,364/-

We submit that the builder is liable to reverse credit of Rs. 16,364/-. However, there is no need to reverse the credit availed upto 30.09.2017 of Rs. 6,50,000/- by the builder.
Now, if we modify our example wherein there is a builder no. 4 who is undertaking the construction of above buildings of builder no. 1, 2 and 3 simultaneously. In such a situation, if there is common input tax credit of Rs. 1,00,000/- pertaining to all the buildings for the month of October, 2017, the total amount of credit reversal will be as follows:-
Amount of credit reversal pertaining to common credit will be
1,00,000* (15,00,000+75,00,000)/(3,50,00,000+2,00,00,000+15,00,000+75,00,000)
= 1,00,000 *90,00,000/6,40,00,000
Rs. 14,063/-

Now, apart from the common input credit reversal of Rs. 14,063/-, the builder will also be required to reverse the credit pertaining to building of builder 1 amounting to Rs. 80,000/- pertaining to exclusively exempted building will also have to be reversed. Furthermore, the credit of Rs. 16,364/- will be required to be reversed as computed under builder no. 3. Hence, the total credit reversal by builder no. 4 undertaking construction of all buildings simultaneously will be Rs. 1,10,427/- as against the total credit of Rs.3,05,000/-. However, the credit of Rs. 65,000/- exclusively pertaining to taxable building will not be counted for the purpose of reversal and will be admissible as full credit.

We submit that if the computations made above are observed, it is found that, for building of builder 1, in the month when the flats have been sold after obtaining completion certificate, entire credit will be liable for reversal. Furthermore, for building of builder no. 2 wherein neither occupancy has been granted nor completion certificate has been obtained, no credit reversal is required. However, in case of building of builder no. 3, the requirement of credit reversal will come into picture and as noticed, the amount of credit reversal will be insignificant and only with respect to credit availed in the respective month. Moreover, in case of simultaneous construction undertaken by builder 4, there will be additional reversal of common input credit. Hence, although the provisions have been framed requiring the credit reversal for sale of constructed flats after completion certificate or first occupancy, the amount of credit reversal is not substantial for the builders.

The content of this GST update is for educational purpose only and not intended for solicitation.

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  • CA Aditya Bansal

    In the above example why cenvat/ITC availed upto CC/First Occupancy has not been reversed. As per 42/43 only common credit reversal provision is there. But all the credit availed during construction & flats sold after CC as exempt, proportionate credit should also be reversed.