Eligible ITC Calculation For Real Estate Projects – Detailed Analysis

INTRODUCTION

1. Indirect taxation and the Real Estate Sector have an unusual bond right from the earlier days when the tax on the said sector was imposed for the first time. The bond is unusual due to the fact that it involves the supply of goods, services as well as immovable property. Carving out the taxable event and carrying out the valuation thereof has always been debatable. Miserly is further increased when one considers the extent of the input tax credit (“ITC”) which can or cannot be availed/utilized by the said sector.

2. Come 1^st July, 2017 with the implementation of GST, it was thought that the misery of the sector would be reduced to a greater extent given the fact that now goods as well as services shall be taxed under a single legislation. Hence the expectation was that the earlier disputes related to the identification of the taxable event as well as valuation thereof would be done away with. Grant of ITC to the sector was also expected to keep the prices of the property unchanged even if the rate of tax was much higher than the cumulative rate in the earlier regime.

3. However the reality turned out to be different. The uncertainty towards the ITC which would be allowable coupled with the outward tax on the total value less 1/3^rd land deduction (which was highly inadequate especially in metro cities) did not lead to the situation which the Government expected. Hence the desire to bring back transparency in the pricing along with the desire to remove the uncertainty regarding the eventual amount of ITC which can be availed resulted in the decision of bringing back the composition scheme for the said sector. Slew of notifications came to be issued on 29.03.2019 ushering in the new era for taxing the said sector. With regard to the ongoing projects, a one-time option has been granted to either continue to pay the tax under the old scheme or to shift to the new scheme w.e.f. 01.04.2019 and pay the tax at the lower rates (i.e. 1%/5%). If option to continue to pay the tax under the old scheme for the ongoing projects is not exercised by 10^th May, 2019 it would be deemed that the new scheme has been opted. For the new projects it is mandatory to pay the tax as per the new scheme. Number of conditions have been imposed for the tax payer desiring (for ongoing project) or mandated (for new project) to pay the tax as per the new scheme. In the present article we shall be dealing with the conditions related to the ITC.

CONDITIONS RELATED TO ITC

4. Notification No. 03/2019 – Central Tax (Rate) dt. 29.03.2019 has substituted certain entries in the parent rate notification No. 11/2017 – Central Tax (Rate) dt. 28.06.2017 dealing with the applicable rates on supply of various services. Against Sr. No. 3 of the said parent notification, entry no. (i), (ia), (ib), (ic) & (id) has been inserted which provides for the reduced effective rate of 1%/5% in case of residential apartments in any Real Estate Project (“REP”) as well as commercial apartments in case of Residential Real Estate Project (“RREP”). Said lower rates shall be mandatory for any new project on or after 01.04.2019. For ongoing projects, an option has been granted to either continue to pay the tax under the old scheme or to shift to the new scheme w.e.f. 01.04.2019 and pay the tax at the lower rates (i.e. 1%/5%). Thus if the promoter exercises the option to pay the tax as per the new scheme, then the conditions stipulated against the referred entries providing for the lower rates have to be abided. Two such conditions, to be analysed in the present article, dealing with ITC reads as under:

“Provided also that credit of input tax charged on goods and services used in supplying the service has not been taken except to the extent as prescribed in Annexure I in the case of REP other than RREP and in Annexure II in the case of RREP;

Provided also that the registered person shall pay, by debit in the electronic credit ledger or electronic cash ledger, an amount equivalent to the input tax credit attributable to construction in a project, time of supply of which is on or after 1^st April, 2019, which shall be calculated in the manner as prescribed in the Annexure I in the case of REP other than RREP and in Annexure II in the case of RREP;”

5. The first proviso referred above thus provides that the ITC in respect of goods and services used in supplying the services (taxed at the effective rates of 1%/5%) has not been taken except to the extent permissible. Hence the promoter shall be required to calculate the ITC which shall be permissible. Said permissible amount shall be calculated as per Annexure I (in case of REP other than RREP) and Annexure II (in case of RREP).

6. Second proviso referred above further provides that the amount of ITC attributable to construction in a project time of supply of which is on or after 1^st April, 2019 (referred as ineligible ITC) shall also be calculated as per the referred Annexure’s and the said amount needs to be debited in the electronic credit ledger (if credit is available to the said extent) or to electronic cash ledger (i.e. the balance amount to be paid by cash). It must also be noted that the calculations shall be done separately for each tax type (i.e. separate calculations for CGST, SGST & IGST). Further the working shall be done project-wise.

7. With the above background let us now understand the calculations provided in both the Annexures. It must also be noted that the below referred calculations shall also aid in deciding whether to continue under the old scheme or shift to the new scheme for the ongoing projects. We shall first deal with Annexure I and then shall go to Annexure II.

ANNEXURE I

8. Said annexure applies to a Real Estate Project which is not a Residential Real Estate Project. As per clause (xix) of the NN 03/2019 – CT (R) a REP wherein the carpet area of the commercial apartments is not more than 15% of the total carpet area of all the apartments shall be construed as a RREP. Annexure I applies to only such projects which are not RREP. In other words, it applies to projects wherein the carpet area of commercial apartments exceeds 15% of the total carpet area of all the apartments. Further the said annexure applies only in the context of the construction of residential portion in the said non-RREP project. Hence a fully commercial project shall not be covered by the said annexure. This is because such project shall be continue to be taxed as per the normal rates (i.e. 12%) with ITC (subject to reversal as per Rule 42 & 43).

9. Said Annexure is further sub-divided into two parts. Hence we shall deal with each part separately.

ANNEXURE I – PART 1

10. Methodology prescribed in the Part 1 applies only when the % completion as on 31^st March 2019 is not zero or where there is inventory in stock. In other words said part applies to such non-RREP projects wherein some % of work has already been done as on 31^st March 2019 or there is inventory in stock (i.e. procurements have happened on or before 31^st March).

11. Essentially the objective of the working is to arrive at the ITC in respect of the construction of residential portion which has time of supply on or before 31^st March, 2019. This is because only the said amount of ITC attributable to residential apartments shall be eligible as the corresponding supply has been taxed at the earlier higher rates (8%/12%). Further since the project is a non-RREP, the under-constructed commercial apartments supplied even on or after 01^st April, 2019 shall continue to be taxed at the higher effective rate of 12%. Hence even ITC in respect of commercial area shall be eligible. Thus eligible ITC (Te) shall be as under:

Te = Tc (ITC attributable to the construction of the commercial portion) + Tr (ITC attributable to the construction of residential portion which has time of supply on or before 31^st March, 2019)

12. Hence the ineligible ITC denoted by Tx shall the be derived as under:

Tx = T – Te

WHAT SHALL “T” INCLUDE

13. In the above equation T is the total ITC availed (utilized or not) on inputs and input services used in construction of the non-RREP from 1^st July, 2017 to 31^st March 2019 including transitional credit taken on 1^st July, 2017. Following observations can be made while computing the amount of T:

a. ITC to be considered shall be the ITC availed irrespective of the fact as to whether the same has been utilized or not.

b. Said ITC has to be calculated project-wise and not entity-wise.

c. Only ITC in respect of inputs and input services is to be considered. Hence ITC in respect of capital goods are not to be considered.

d. Even transitional credit availed for the project in question needs to be considered.

14. Above observations will surely lead to the difficulty of the identification of the availed ITC (including transitional credit) attributable to the particular project. This is because Sec. 35(1) of the CGST Act, 2017 read with Rule 56 of the CGST Rules, 2017 do not provide for maintaining records project-wise of the ITC availed. Further in cases where the transactional credit has been claimed of the balance available in the last return, such balance is of the amount remaining after the utilization thereof and not of the credit availed. Hence bifurcating the said balance project-wise would be very difficult especially considering the fact that the FIFO rule (Rule 14(2)) for CENVAT utilization was abolished. Hence unless such rule is applied, the attribution of such transitional credit to a particular project shall be a challenge.

15. Now Te, which is eligible ITC, is the sum total of the (a) ITC attributable to the construction of the commercial portion (Tc) and (b) ITC attributable to the construction of residential portion which has time of supply on or before 31^st March, 2019 (Tr).

CALCULATION OF “Tc”

16. Tc as stated above is the ITC attributable to the construction of the commercial portion. Said ITC is calculated by applying the proportion of the carpet area of commercial apartment to total carpet area of the commercial and residential apartment. Same can be illustrated as under:

No. of apartments in the project	100	units
No. of residential apartments in the project	75	units
Carpet area of the residential apartment	70	sqm
Total carpet area of the residential apartments	5250	sqm
No. of commercial apartments in the project	25	units
Carpet area of the commercial apartment	30	sqm
Total carpet area of the commercial apartments	750	sqm
Total carpet area of the project (Resi + Com)	6000	sqm
ITC Availed (T)	1	crore
Tc = T x (carpet area of commercial apartments in the REP/ total carpet area of commercial and residential apartments in the REP)	0.125	crore

17. Hence as seen above, ITC attributable to the commercial apartment shall be INR 0.125 crore. Said ITC shall be eligible because in the case of a non-RREP, the applicable effective rate on commercial apartments shall continue to be 12% and hence ITC attributable to such units shall be admissible. It remains to be seen as to how Rule 42 can come into play on completion of the said project to the extent of the un-booked commercial apartments.

CALCULATION OF “Tr”

18. Tr stands for the ITC attributable to the construction of the residential portion which has time of supply on or before 31^st March, 2019. Similar to Tc, even Tr shall be eligible since the same relates to construction of residential portion which has time of supply on or before 31^st March, 2019 and hence tax has been paid at the earlier higher rates (12%/8%). Tr shall be calculated as under for the above referred example:

Value of each residential apartment	0.60	crore	–
Percentage completion as on 31.03.2019	20%		As declared to RERA or determined by registered architect or a chartered engineer
No of residential apartments booked before transition	40	units	–
Total carpet area of the residential apartments booked before transition	2800	sqm	40 (apartments) * 70 sqm
Value of booked residential apartments	24	crore	40 (apartments) * 0.6 (value of each apartment) – It may be noted that value of each apartment may not be same and hence total of the value of all booked apartment shall be considered.
Percentage invoicing of booked residential apartments on or before 31.03.2019	20%		Figure to be derived by dividing the value of invoicing done on or before 31st March from the total booked value.
Total value of supply of residential apartments having t.o.s. prior to transition	4.8	crore	As the percentage invoicing is 20%, TOS shall be 20% of the total booked value i.e. 24*0.2.
ITC Availed (T)	1	crore	It shall include transitional credit.
Tr = T x F1 x F2 x F3 x F4
F1	0.875		Carpet area of residential apartments/total carpet area of commercial + residential apartments.
F2	0.533		Total carpet area of residential apartments booked on or before 31st March, 2019/Total carpet area of residential apartments.
F3	0.200		Such value of supply of construction of residential apartments booked on or before 31st March, 2019 which has time of supply on or before 31st March, 2019/Total value of supply of construction apartments booked on or before 31st March, 2019
F4	5		1/% completion of construction as on 31st March, 2019.
Tr= T x F1 x F2 x F3 x F4	0.467	crore	Amount of eligible ITC.

19. Above working can be easily understood as under:

1^st Step: Gross up the ITC for determining the eligible amount for the entire project. In the above case, ITC availed is INR 1 crore and the work completed is 20%. Hence if the entire project is completed, pro-rata ITC would have been INR 5 crores (i.e. 1*5 (1/20%)). This is F4.

2^nd Step: From the grossed up ITC, the amount attributable to the residential apartment needs to be worked out. This is because the ITC attributable to the commercial apartment shall continue to remain available. In the above case, 87.5% of the area in the project is for residential apartment. This is F1. Hence the ITC of INR 4.375 crore out of the total grossed up ITC of INR 5 crores shall be now considered for further steps as the said amount relates to the residential apartments.

3^rd Step: From the grossed up ITC attributable to the residential apartments, ITC attributable only to the booked apartments shall be available. This is because the un-booked apartments shall now suffer tax at the lower rates of 1%/5% or no tax when booked on or after 01.04.2019. In the above case the area of the booked residential apartments to the total area of residential apartments is 53.3%. This is F2. Hence of the grossed up ITC of residential apartments, only 53.3% shall be admissible. Hence only INR 2.33 crore (4.375 * 53.3%) shall be admissible.

4^th Step: Even in respect of booked residential apartments, ITC shall be available only in respect of that construction which has time of supply on or before 31^st Marc, 2019. This is because the time of supply arising on or after 01^st April, 2019 shall be subjected to lower rates of 1%/5%. In our case the time of supply in respect of booked apartments has arisen only to the extent of 20% of the value of apartments booked as invoicing to the extent of only 20% has been done. This is F3. Hence 80% of the value of booked apartment shall suffer tax at the reduced rates on or after 01.04.2019. Hence only INR 0.467 crore (2.33 * 20%) shall be admissible. It may be noted that if percentage of invoicing done is more than the work completed (let us say 30% of invoicing is done when work completed is 20%), such 30% shall be considered in the present step (however please see 25% rule discussed later in this regard).

TOTAL ADMISSIBLE ITC

20. Now the total admissible ITC shall be ITC attributable to the commercial portion (Tc) which is INR 0.125 plus ITC attributable to residential portion which has time of supply on or before 31^st March, 2019 (Tr) which is INR 0.467 crore. Hence eligible ITC (Te) shall be INR 0.592 crore (0.125 + 0.467). Hence the ITC attributable to the construction of the residential portion which has time of supply on or after 1^st April, 2019 (Tx) shall be total ITC (T) which is INR 1 crore less Te which is INR 0.592 crore. Hence Tx shall be INR 0.408 crore.

21. Second proviso mentioned earlier provides that the said amount needs to be paid, by adding the same as part of the output tax liability, either by debiting the electronic credit ledger, if balance is available, or to be paid by cash by debiting the electronic cash ledger. Said amount needs to be paid by the due date for filing the return for the month of September, 2019. A registered person may also seek monthly instalment for payment of such dues which may be granted by the Commissioner. However such instalment period cannot exceed 24 months and the said instalment shall be paid with interest. Application has to be made in FORM GST DRC – 20 and the order to pay in instalment shall be granted in FORM GST DRC – 21.

22. Annexure – I further provides that if the amount of Tx is negative i.e. ITC eligible is more than the ITC availed till 31^st March, 2019, the registered person shall be eligible to take ITC to the extent of the difference, on the goods or services received for the said project on or after 1^st April, 2019.

23. Further registered person can calculate Tc (i.e. ITC attributable to commercial apartments) and utilize the same for paying the tax on the commercial apartments till the compete calculation for Tx is carried out and submitted.

24. In case where the percentage completion is zero and only goods or services have been procured on or before 31^st March, 2019 the ITC attributable to the residential portion which has time of supply on or after 1^st April, 2019 shall also be done as per the above formula only. The percentage completion (for calculating F4) in the said case shall be the percentage completion as certified by the registered Architect or Chartered Engineer which can be achieved with the inputs services received and the inputs in stock as on 31^st March, 2019.

ANNEXURE I – PART 2

25. Methodology prescribed in the Part 2 shall apply where % completion is zero as on 31^st March, 2019 but invoicing has been done having time of supply before 31^st March, 2019 and no input services or inputs have been received as on 31^st March, 2019.

26. Hence the methodology prescribed in the said Part 2 shall apply wherein no procurements of inputs or input services have happened and hence no construction has started but apartments have been booked in respect of which time of supply has arisen before 31^st In other words as per the agreement, in respect of booked apartments, the liability to pay the instalment has arisen before 31^st March, 2019.

27. In the above referred methodology only following changes may be noted. Rest shall remain the same.

28. Since no inputs or input services have been procured, the amount of ITC (Tn) which is to be taken as the base shall be the ITC on such inputs and input services received in FY 2019-20. F4 as stated above shall not be taken into account since no construction has begun as on 31^st March, 2019. It is surprizing to note that the law expects the promoter to calculate the eligible amount before the due date for furnishing the return for the month of September, 2019. The same cannot be calculated for Part 2 since the ITC (Tn) to be considered for the calculation can only be known after the end of FY 2019-20.

ANNEXURE II

29. Methodology given under Annexure II shall apply in case of a Residential Real Estate Project. In case of RREP it may be noted that even the commercial apartments shall be taxed at 5%. Hence even ITC in respect of commercial apartments which have time of supply on or after 01^st April, 2019 shall not be admissible. Hence as opposed to Annexure I wherein eligible ITC Te comprised of Tc (ITC attributable to commercial apartments irrespective of the time of supply) and Tr (ITC attributable to residential portion which has time of supply before 31^st March, 2019), eligible ITC for RREP (“Te”) as per Annexure II shall only comprise of the ITC attributable to commercial as well as residential portion which have time of supply on or before 31^st March 2019. This is because any supply of service in respect of commercial as well as residential portion on or after 01^st April, 2019 shall be taxable at the reduced effective rate of 1%/5%.

30. Similar to Annexure I, even Annexure II comprises of two parts. Part I applies to cases where % completion as on 31^st March, 2019 is not zero or where there is inventory in stock. Part II applies in cases where % completion as on 31^st March is zero but invoicing has been done having time of supply before 31^st March, 2019 and no input services or inputs have been received as on 31^st March, 2019.

31. Working for both the parts shall be similar to the working done under Annexure I. Only difference would be that working for Tc shall not be required and Tr of Annexure I (here referred only as Te) shall comprise of residential as well as commercial apartments.

25% RULE

32. The stated rule applies to both the annexure’s discussed above. Where percentage invoicing is more than the percentage completion and the difference between percentage invoicing (per cent points) and the percentage completion (per cent points) of construction is more than 25 per cent points; the value of percentage invoicing shall be deemed to be percentage completion plus 25 per cent points. Hence let us say percentage invoicing is 60% whereas percentage completion is only 20%. Since the difference is of more than 25 per cent points, the percentage invoicing shall be deemed to be only 45% (i.e. percentage completion (20%) + 25%). It may be noted that the difference is to be measured in per cent points (which is absolute) and not a relative difference by applying 25% to the percentage of completion.

33. Similarly where the value of invoices issued on or prior to 31st March, 2019 exceeds the consideration actually received on or prior to 31st March, 2019 by more than 25 per cent of consideration actually received; the value of such invoices for the purpose of determination of percentage invoicing shall be deemed to be actual consideration received plus 25 percent of the actual consideration received.

34. Also where, the value of procurement of inputs and input services prior to 1^st April, 2019 exceeds the value of actual consumption of the inputs and input services used in the percentage of construction completed as on 31st March, 2019 by more than 25 percent of value of actual consumption of inputs and input services, the jurisdictional commissioner or any other officer authorized in this regard may fix the Te based on actual per unit consumption of inputs and input services based on the documents duly certified by a chartered accountant or cost accountant submitted by the promoter in this regard, applying the accepted principles of accounting.

35. In a nutshell the logic behind the above provisions seems to be that the variance to the extent of 25% points between completion vis-à-vis invoicing, invoicing vis-à-vis actual receipts & value of procurements vis-à-vis value of actual consumption shall be considered as within the normal range and in this case the actual figures shall be considered for determination of the eligible ITC. However if the variance is more than the 25% points, then in case of difference between completion vis-à-vis invoicing and invoicing vis-à-vis actual receipts, only figures upto the 25% points variance shall be considered. Excess is to be ignored. In case of difference between the value of procurement vis-à-vis value of actual consumption exceeds 25% points, the jurisdictional commissioner to determine the Te based on the documents certified by a Chartered Accountant or Cost Accountant.

36. Perhaps the intention seems to be that the variation exceeding 25% points is unusual and hence can only be on account of some tax planning to claim higher ITC and hence is sought to be ignored. Author submits that applying the said rule without seeing the underlying reasons for variance exceeding the said 25% points is unjust and needs to be relooked by the Government.

WHAT HAPPENS TO ITC OF CAPITAL GOODS

37. It may be noted that ITC availed on capital goods do not form part of the above calculations. Hence a clarification is required as to whether the ITC attributable to capital goods to the extent of the unexpired period (out of 60 months) shall require any reversal or not. Plain reading of the notification do not suggest such reversal.

WHAT HAPPENS TO NEW PROJECTS

38. A new project can be either a REP which is a RREP or a non-RREP. If time of supply has arisen on or before 31^st March, 2019 but input services or inputs have not been received, calculation of eligible ITC shall be as per Part 2 of the Annexure I (in case of non-RREP) or Annexure II (in case of RREP). Hence ITC only to the extent of supply taxed at the higher rates shall be available. In all other new projects (i.e. where time of supply has not arisen on or before 31^st March, 2019) the above referred Annexure’s shall not apply.

CONCLUSION

39. Above discussions show that lot of work needs to be done by the concerned promoters of the real estate projects to arrive at the amount of ITC which shall be required to be paid back (as will happen in majority of cases). Accurate working can aid in deciding for the ongoing projects whether to opt for the new scheme or to continue under the old scheme. Accuracy of the working can also minimize the cost and shall enable to plan for the cash flow requirements to avoid higher interest cost, if instalments are sought.

(views are strictly personal)