GST Update on Reversal of ITC in Real Estate

Section 17 of the CGST act, 2017 deals with Apportionment of credit and blocked credits. The sub section (2) of the said section states that where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the credit pertaining to taxable supplies (including zero-rated supplies) shall only be taken.
Exempt supply as defined under section 2(47) includes non taxable supply. Further non taxable supply means a supply of goods or services or both which is not leviable to tax under CGST Act or IGST Act. Therefore, the credit shall be allowed only if the said ITC is used for making the taxable supplies.
Further, according to clause 5(b) of schedule II to CGST Act, 2017; following shall be treated as supply of service:-
"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 or after its first occupation, whichever is earlier."
This implies that where the entire consideration is received after issuance of completion certificate or after its first occupation, it will come out of purview of definition of supply and accordingly, ITC pertaining to the goods or services utilized in its supply shall not be allowed in view of section 17(2) of CGST Act, 2017.
This provision will prove harsh to the builders in view of following facts:-
• At the time construction is started, builder is not in position to ascertain as to which flats will be sold before completion certificate or first occupation as the case may be. Accordingly, it is not possible for him to ascertain the eligible credit.
• As the entire ITC is availed by the builder and subsequently the completed flats come out of purview of GST, a huge amount of ITC becomes reversible which ultimately effects the liquidity of the builder.
• Interest liability also arises on the said ITC which becomes reversible subsequently.
Therefore, since ITC is not allowed on such flats, the same becomes the part of cost. Further, there is no procedure for ascertaining such ITC in the beginning, the interest liability will arise which will be significant in amount. As builder will add these costs in the total cost of such flats, this will tantamount to price hike of flats.

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GST Update on Reversal of ITC in Real Estate

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