Abdulla Pettiwala
The GST law carries forward the levies of the earlier laws when it subsumed the VAT law, Central Excise and the Service Tax laws.
The dispute is with respect to the fine line where the movable property becomes immovable property and thus beyond the scope of levy under Article 246A of the Constitution of India. An attempt to define this line has been made by the date on which the assessee obtains the completion certificate (“CC”) or occupation certificate(“OC”).
Activity of construction of a complex, building, civil structure intended for sale to a buyer wholly or partly for a consideration received before the issuance of CC / OC or first occupancy is treated as service [ Sch II para 5(b) of CGST Act]
The sale of land and sale of building other than that covered under Sch II 5(b) are excluded from the scope of GST Law [ Sch III para 5 of CGST Act]
The rate(s) of GST applicable for residential and commercial apartments, under the GST Laws have been encoded in Sec 9, 11, 15 & 16 of the CGST Act read with Noti 11/2017 CGST(Rate) as amended from time to time, and the exemptions have been provided for in Sec 11 of the CGST Act read with Noti 12/2017 CGST(Rate) as amended from time to time.
The credit mechanism under the GST Laws has been encoded for the ITC on input and input services and on capital goods under Chapter 5 (Sec 16 to Sec 22) of the CGST Act as also Chapter 5 (Rule 36 to Rule 45) of the CGST Rules.
The credit eligibility under Sec 16 read with Rule 36 and 37 lays the basic guidelines on the documentary requirements and the principles for claim of ITC.
The apportionment of credit in Sec 17 read with Rule 42 for inputs and inputs services (“INIS”) and with Rule 43 for capital goods encodes the criteria and the quantum of available ITC for a given business activity with Rule 44 providing for the manner of reversal of credit under certain circumstances.
1 . Position upto 31-Mar-19
1.1 Tax on supply
The construction activity upto the date of completion certificate or first occupancy, has been deemed to be a service under Sch II 5(b) of the CGST Act.
GST @12% was leviable under Clause 3(i) of the Table and Para 2 in Noti 11/2017 CGST (Rate) before its amendment vide Noti 3/2019 CGST (Rate) on 29-Mar-19, except where the entire consideration was received after the date of either completion certificate or first occupation, whichever is earlier.
1.2 ITC on INIS [Rule 42(1)]
The input tax on INIS is available on construction activities and the total input tax (“T”) on INIS is to be segregated into:
- T1 – attributable exclusively for purpose other than business /personal purpose
- T2 – attributable exclusively for exempt supplies (includes RCM supplies, transaction in securities, sale of land and building)
- T3 – attributable exclusively for supplies specified under Sec 17(5) of CGST Act
The amount credited to the electronic credit ledger (“C1”), is the balance remaining after removal of T1, T2 & T3 from T.
{C1 = T – (T1+T2+T3)}
The electronic credit ledger is in effect is the Input Tax Credit Ledger (the erstwhile CENVAT ledger) in electronic form which gets updated basis the reporting in GST returns.
From C1 reduce the amount attributable exclusively for taxable and zero-rated supplies (“T4”); what remains pertains to common ITC (“C2”)
{C2 = C1 – T4} on which the ratio of turnover of exempt supply (“E”) to total turnover (“F”) is to be applied to determine the ratio of ITC attributable to exempt supply (“D1”).
{D1 = E/F*C2}
An adhoc attribution @5% of C2 is to be considered towards inputs used for purposes other than business/personal purpose (“D2”)
{D2 = 5%*C2}
The balance remaining post removal of D1 and D2 is the common credit attributable to taxable supply and eligible for ITC (“C3”).
{C3 = C2 – (D1+D2)}
D1 and D2 are to be debited to the electronic credit ledge and reported in GSTR 3B.
The balance remaining in the electronic credit ledger is the inputs on INIS which is allowable credit.
The above mechanism for determination of ITC shall be applicable for all projects prior to 31-Mar-19 and ongoing projects as on 31-Mar-19 for which the developer opts to continue charging GST as per the rates applicable prior to change bought about by Noti 3/2019 CGST(Rate).
1.3 ITC on Capital Goods [Rule 43(1)]
Capital goods used in a project are eligible for ITC to the extent used for supply of taxable output supply.
Thus, the input tax on capital goods used exclusively for non-business purpose or exclusively for exempt supplies is to be ignored. The balance being for the purpose of business (“Tc”) is to be credited to the electronic credit ledger.
The amount of ITC allocable to exempt supplies (“Te”) along with interest u/s 50(1) of CGST Act, for each of the tax periods of the useful life of the asset, is to be paid as output tax liability.
The useful life of an asset for the purpose of ITC is taken as 5 years or 60 months from date of invoice. The ITC for each quarter (“Tm”) is arrived at by diving Tc by 60.
{Tm = Tc / 60}
The cumulation of all the Tm is the common ITC at the beginning of the tax period (“Tr”).
{Tr = Tm1+Tm2+Tm3+……+Tmr}
The value of Te is arrived at by applying the ratio of exempt supplies (“E”) to total turnover (“F”) on Tr.
Te = {E/F*Tr}
2. Position effective 01-Apr-19
2.1 Tax on Supply
With the reduction in the GST rates for supply of construction of residential apartments and affordable residential apartments all ongoing projects as at 31-Mar-19 and new projects commencing from 01-Apr-19 are to be classified as Real Estate Projects (REP) or Residential Real Estate Projects (RREP).
A construction project where the carpet area of the commercial apartments is not more than 15% of the total carpet area of all the apartments in the REP would be termed as RREP.
(A) All apartments (residential and commercial) under RREP and the residential apartments under REP would be chargeable to a lower rate of GST for supplies made upto the earlier of the date of completion certificate or first occupancy @ 1% for affordable housing and @ 5% for residential apartments and commercial apartments. The rate of 1% and 5% is post reduction of 1/3rd for cost of land. [ Clause 3 (i), (ia), (ib), (ic), (id) of the Table read with Para 2 to Noti 11/2017 CGST(Rate) as amended by Noti 03/2019 dated 29-Mar-19]
(B) For the ongoing projects where the developer opts to continue under the taxation mechanism prior to the amendment and for the commercial apartments under REP would be chargeable to full rate of GST for supplies made upto the earlier of the date of completion certificate or first occupancy @12%, i.e. 18% as reduced by 6% being the 1/3rd for cost of land. [Clause 3 (if) of the Table read with Para 2 to Noti 11/2017 CGST(Rate) as amended by Noti 02-2019 dated 29-Mar-19]
2.2 Conditions for Lower Rate
The lower rates of GST in 2.1 A. above are subject to certain conditions, viz.;
a. 80% of the INIS and 100% of the cement purchased are from registered suppliers or the developer will have to pay the shortfall of GST under reverse charge @18% in case supplies from unregistered dealers, and for cement @28%.
b. GST under reverse charge, on supply of construction service to landowner, is to be paid by the developer where the consideration for FSI is in terms of apartments.
c. The ITC on ongoing projects shall be restricted to as prescribed in Annex 1 and Annex 2 to Noti 3/2019 CGST(Rate). (See 5.2.1 and 5.2.2 below)
d. No ITC would be available for new projects beginning from 01-Apr-19.
3. GST on FSI
The developer is liable to pay GST under reverse charge for the FSI obtained from landowner on the entire consideration other than that attributable to the residential apartments booked prior to date of completion certificate.
GST is payable on the entire FSI attributable commercial apartments on the date of payment of the consideration and with regard to that attributable to residential apartments, GST is payable on the un-booked residential apartments not exceeding 1% of the value of the un-booked affordable housing apartments and not exceeding 5% of the value of the other un-booked residential apartments on the date of obtaining completion certificate.
4. ITC on INIS and Capital Goods for New projects
For all new projects from 01-Apr-19 onward ITC would not be available for supply of residential and commercial apartments in RREP and supply of residential apartments in REP. These are the projects covered by the Clause 3(i), (ia), (ib), (ic) and (id) of the Table to Noti 11/2017; i.e. 2.1 A. above.
4.1 The ITC on INIS
For projects under 2.1.B. above (for the commercial apartments in REP of new projects and for the ongoing projects were the developer opts to continue under the mechanism prior to the amendment w.e.f. 31-Mar-19), will have to be calculated project wise as per the mechanism provided in Rule 42 of the CGST Law (supra). The entire process for calculation remains the same as given in 1.2. above except the calculation of “D1” where the ratio to be applied on “C2” being the carpet area of apartments which are exempt from tax plus the carpet area of apartments to be sold post the date of OC (“E”) to the total carpet area of the apartments in the project(“F”). The projects under Para (i) to (id) would be considered under exempt supply for the determination of “E”. [Rule 42(1) of CGST Rules]
4.2 The ITC on Capital goods
For projects under 2.1.B above will have to be calculated project wise as per Rule 43 of CGST Law (supra). The entire process of calculation remains the same as provided in 1.3. above except for the value of Te wherein the ratio to be applied on Tr would be the carpet area of apartments which are exempt from tax plus the carpet area of apartments to be sold post the date of OC (“E”) to the total carpet area of the apartments in the project(“F”) and the projects under Para (i) to (id) would be considered under exempt supply for the determination of “E”. [Rule 43(1) of CGST Rules]
In the year when the completion certificate is received for a project the final ITC on capital goods attributable to exempt supply (Tefinal) is to be determined before the due date of annual return or September.
Tefinal = [(E1+E2+E3) / F] * Tcfinal where
Tcfinal = Aggregate of A * (No of months asset used for the project / 60)
F = aggregate carpet area of all the apartments in the project
E3 = carpet area of un-booked apartments in the project
E1 = carpet area of exempt apartments in the project
E2 = carpet area of transitional apartments which are partly exempt and partly taxable due to change in rates as on 01-Apr-19. This is determined as
E2 = [carpet area of transitional apartments] * [ V1 / (V1 + V2)] where
V1 = the total value of supply of transitional apartments exempt from tax
V2 = the total value of supply of transitional apartments which was taxable
This would apply for ITC on Capital goods for ongoing projects too (6 below).
5. ITC on INIS for Ongoing projects
For all ongoing projects which have not received a completion certificate or have a commencement certificate prior to 01-Apr-19 and do not opt for continuing under the old rates of tax prior to Noti 3/2019 CGST (Rate) would be required to re-calculate the ITC from 01-Jul-17 or the date of commencement of project (where the project commenced post 01-Jul-17) till 31-Mar-19 basis the method prescribed under Annex I for RREP and Annex II for REP of Noti 3/2019 CGST (Rate).
The recalculation of the ITC is to enable the developer to avail ITC on that proportion of INIS which are attributable when the output supply was taxable at full rate of tax on the residential apartments in REP and RREP and commercial apartments in RREP.
To achieve the appropriate allocation the specific identified ITC on INIS corresponding to the output supply on which full rate of tax is paid is allowed and on the common ITC on INIS the ratio is applied with respect to the ratio of bookings done to total project as also the GST paid on amounts received to the total bookings and the percentage completion of the project is applied. Further the identification of residential and commercial apartments for REP is necessitated to restrict the proportion to be applied on ITC on INIS for residential portion only.
5.1 ITC in year of completion of project
In the year of receipt of completion certificate the final ITC on the commercial portion in a REP for ongoing projects must be arrived at by
C3 final_comm = C3 agg_comm * (E/F) where “E” is un-booked commercial apartments on date of completion certificate and “F” is the total carpet area of commercial apartments in REP.
C3 agg_comm = [ Total of all C3 as per Rule 42(1) from 01-Apr-19 till date of completion certificate] +
[ Total of all C3 as per Rule 42(1) from 01-Jul-17 till 31-Mar-19] * (Ac / Ar)
Where “Ac” is total carpet area of commercial apartments and “Ar” is total carpet area of all apartments in REP.
The re-calculation of the ITC is required to be done to determine the portion of ITC available on the INIS in relation to the supply of construction on residential apartments in REP and supply of residential and commercial apartments in RREP for supply of construction services prior to 31-Mar-19 on which the earlier non-concessional rate of GST was applicable.
5.2 ITC on date of transition (31-Mar-19)
5.2.1 As per Annex 1 (REP)
The determination of total ineligible ITC attributable to the construction of residential portion in REP(“Tx”) is by reducing the eligible ITC attributable to construction of Commercial portion(“Tc”) and that attributable to construction of residential portion having time of supply prior to 31-Mar-19 (“Tr”) from the total ITC on INIS from 01-Jul-17 to 31-Mar-19(“T”).
{Tx = T – Tc – Tr}
“Tc” is determined by applying the ratio of carpet area of commercial apartments (CACA) to the carpet area of residential and commercial apartments (CARCA) in the project on the Total ITC on INIS.
{Tc = T * (CACA/CARA)}
“Tr” is determined by a product of four ratios on T where the project completion is more than zero and where the project completion is equal to zero then the it would be on “Tn”, which is the tax paid on inputs received in FY 2019-20 for INIS on which ITC is available under CGST law .
For, project completion greater than zero
{Tr = T *(F1*F2*F3*F4)}
For, project completion equal to zero
{Tr = Tn*(F1*F2*F3*F4)}
“F1” is the ratio of carpet area of residential apartments (CARA) to total CARCA in the project;
“F2” is the ratio of CARA booked prior to 31-Mar-19 to total CARA in the project;
“F3” is the ratio of that value of supply of construction of residential apartments booked prior to 31-Mar-19 with time of supply prior to 01-Apr-19 to the total value of supply of residential apartments booked prior to 31-Mar-19;
“F4” is the ratio of percentage completion of the project prior to 01-Apr-19, where the % completion is greater than zero.
Thus, the amount of eligible credit (“Te”) available of the INIS for the residential apartments in an ongoing REP as at 31-Mar-19 would be T – Tx.
The Tx would be arrived project wise;
(a) For project where completion is more than zero;
Tx = T – Tc – Tr (supra);
i.e.
Tx = T – (T * CACA / CARCA) – (T * F1*F2 *F3 *F4)
Alternatively
For projects where one can identify the ITC attributable exclusively to the construction of commercial portion of the REP (“T1”) and the ITC attributable exclusively for residential portion (“T2”) “T3” would be arrived at by reducing T1 and T2 from total ITC on INIS.
{T3 = T – T1 – T2}
Thus,
Tx = T – T1 – Tc – Tr (supra);
i.e.
Tx = T – T1 – (T3 * CACA / CARCA) – [(T – T1) *F1*F2 *F3 *F4]
Or
Tx = T – T1 – (T3 * CACA / CARCA) – [(T3 + T2) *F1*F2 *F3 *F4]
(b) For projects where the project completion is equal to zero;
Tx = T – (Tn *F1 *F2 *F3)
5.2.2 As per Annex 2 (RREP)
The only change from that of REP would be that Tc is not required to be determined and the value of F1 would be 1 as the ratio of F1 is to be taken as CARCA to CARCA.
Thus, the amount of eligible credit (“Te”) available of the INIS for an ongoing RREP as at 31-Mar-19 would be; T – Tx.
The Tx would be arrived project wise;
(a) For project where completion is more than zero;
Tx = T – Te (supra);
i.e.
Tx = T – (T * F2 *F3 *F4) since F1 = 1
(b) For projects where the project completion is equal to zero;
Tx = T – Te (supra);
i.e.
Tx = T – (Tn *F2 *F3) since F1 = 1 and F4 = 0
6. ITC on Capital Goods for Ongoing Projects
Same as explained under ITC for new projects in 4.2 above.
7. In Summary
All real estate projects are to be classified as RREP or REP.
The Lower GST rate would be applicable on the entire consideration for all residential apartments in RREP. [Clause 3 (i), (ia)] and REP [Clause 3 (ic)] and on the commercial apartments in RREP [Clause 3 (id)], where booked prior to date of completion certificate
Full rate of GST would be applicable for all commercial apartments in REP and ongoing projects where the developer chooses to continue in the earlier regime and has filed Annex IV within the specified date. [Clause 3(if)]
ITC is only available for commercial apartments in a REP for new projects [Rule 42(1)] and ongoing projects [ Rule 42(4)] as also for the projects disclosed under Annex IV filed within the specified date [Rule 42(1)].
For ongoing projects as on 01-Apr-19, other than opted for in Annex IV, ITC on INIS would be available to the extent of Tr, Tc and T1 for RREP (Annex 1) and to the extent of Tr for residential portion in REP (Annex 2) as also a proportion of Tn.
