QUESTION

Taxpayer is registered in construction business as a builder. They have received BUP (completion certificate) for entire project on Dec, 2018. At the time of availing credit, it is not known that how many flats will be sold after obtaining completion certificate. Consequently, the builder avails the entire credit. I have following question relates to reversal of ITC for the FY 2018-2019 : (a) Section 17(2 ) stipulates that where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies. This section restricts the credit which has been used in the supply of fully exempt supplies or partial credit where it has been used both in taxable as well as exempt supplies. Thus the intention of the law is to restrict such credit which is used in provision of exempt supplies. Going by the notion it can be said that credit used in the supply of flats after completion certificate should be reversed in full because no GST will be payable on that. But the mechanism provided under rule 42 does not support this notion. Furthermore, if the provisions contained in Rule 42 are minutely observed, it is found that the phrase “intended to be used” is of immense importance. According to the provision of Rule 42 , the common credit is calculated in a given formula which mainly speaks about `during the tax period`. Therefore, As per the mechanism provided above, the input to be considered for the purpose of reversal is that of the month in which completion certificate obtained and credit availed post Dec, 2018 would only require compliance of Rule 42 of the CGST Rules, 2017 ? Under the erstwhile service tax regime also Hon’ble Gujarat High Court in the case of Principal Commissioner Vs. M/s Alembic Ltd 2019-TIOL-1495-Ahm-ST has held that `once the assessee is not required to reverse any credit availed by him on valid input services availed during the period 2010 till obtaining of completion certificate, the said amounts reversed by the assessee under protest cannot be retained by the Revenue authorities and those have been refunded to him. ` (b) Whether reversal of ITC has to be done for the entire credit availed during the financial year 2018-2019 in full ? (c) Suppose builder has not reversed ITC till date, whether reversal has to done as per Rules 42 and 43 of CGST Rules, 2017 read with Notification No. 16/2019-CT dated 29-3-2019 along with interest @ 18 % ?

ANSWER

Facts of the case: Registered builder have received BUP (completion certificate) for entire project on Dec, 2018. At the time of availing credit, it is not known that how many flats will be sold after obtaining the completion certificate. Consequently, the builder avails the entire credit. Whether reversal of ITC has to be done as per section 17 for the entire credit availed during the financial year 2018-2019 in full or as per Rules 42 and 43 of CGST Rules, 2017?

Law Applicable:
SECTION 17 OF CGST ACT
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Interpretation: Section 17 restricts availment of credit.  It simply says that ITC will be allowed if the output supply is taxable including zero-rate tax.

Rule 42 gives a guideline for reversal of credit but does not provide exclusion to the situation where it (rule 42) does not apply.

The rule is framed under the provision of Act therefore rules can't overrule the Act. Although CGST  rules have not provided any specific  guideline for reversal of ITC  for construction yet.

Conclusion: Thus by virtue of section 17 ITC it is not allowed if flats are sold without GST.  A GST officer can issue a notice for disallowing ITC under section 17  instead of issuing notice for reversal of credit under rule 42 .(Reply dt.05.10.2020)