QUESTION

Whether a builder in a commercial real estate project required to reverse proportionate credit of un-booked units as on the date of receipt of BU permission, once BU permission received for the building of following purchase used in construction of building , 1. Elevator, escalator & centralized air condition system and other common facilities such as washroom , sitting area, water drinking area, parking area & etc., if remaining un- booked units will be leased out and rent collected there from include one proportion of the above mentioned facilities? 2. If in question one above, if remaining units will not be leased out instead sold out to third parties ?

ANSWER
 

Facts of the case: Whether a builder in a commercial real estate project required to reverse proportionate credit of un-booked units as on the date of receipt of BU permission, if remaining un- booked units will be leased out and rent collected therefrom include one proportion of the above mentioned facilities? 2. If in question one above, if remaining units will not be leased out instead sold out to third parties?

Law Applicable: SCHEDULE III OF CGST ACT

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

SCHEDULE II OF CGST ACT

5. Supply of services

 The following shall be treated as supply of service, namely:'

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Interpretation: There may be 3 situations:

1. Units sold before receipt of completion certificate: This case is covered and clause 5(b) of Schedule II and is treated as supply of services. Therefore you are eligible to claim ITC on units sold before completion certificate.

2. Units sold after receipt of completion certificate: This case is covered under clause 5 of Schedule III and is treated as neither supply of goods nor supply of services. Since the transaction is out of GST therefore ITC is not eligible and you are required to reverse the ITC claimed  (u/s 17 r/w Rule 42 &43) on units sold after the completion certificate.

3. Units leased out:  Orissa High Court in a writ petition filed by Safari Retreats Private Limited v Chief Commissioner of Central Goods & Service Tax [W.P. (C) 20463 of 2018] allowed availment of input tax credit (ITC) on goods and services used for construction of immovable property which is later given on Lease/Rent.

However if the leased out units are sold after sometime, then credit availed is required to be reversed  (u/s 17 r/w Rule 42 &43) along with interest @ 24% pa (u/s 50 of CGST Act). The interest will be calculated from the date, credit is availed. Therefore in this case you are required to do cost and benefit analysis so that the interest on reversal will not unnecessary add to your cost.

Conclusion: ITC is eligible on units sold before completion certificate or on units given on lease, however ITC claimed on units sold after completion certificate or sold after lease period is required to be reversed on pro rata basis as per section 17 read with  Rule 42 &43 along with interest @ 24% pa. (Reply dt. 10/03/2021)