Background
In the Goods and Services Tax (GST) regime, invoices and credit notes are vital for ensuring a transparent and compliant tax system. Invoices serve as essential records of taxable transactions, detailing the sale of goods or services, including the applicable GST. This ensures accurate tax calculation and remittance. Credit notes, issued to correct or adjust previously issued invoices due to returns, discounts, or errors, help maintain precise financial records. Together, these documents facilitate effective tax administration, reduce disputes, and enhance the overall efficiency of the GST system.
Understanding the significance of invoices and credit notes, especially in the real estate sector during the sale of under-construction flats or shops, is crucial. During the construction phase, activities such as flat bookings, agreements (Agreement to Sale – AFS), and milestone-based demands occur. Therefore, recognizing the importance of issuing relevant GST documents is equally important.
Key Aspects to Consider
1. Classification of Under-Construction Unit Sales under GST
GST provisions apply to “supply,” which must first qualify as goods or services. According to Schedule II, entry 5(b) of the GST Act, the sale of under-construction flats is classified as a “supply of service,” provided that part of the consideration is received before the issuance of the completion certificate or first occupancy.
2. Provisions Related to Invoices Under GST
The sale of under-construction units is considered a continuous supply of service (as per Section 2(33) of the CGST Act, 2017). The time of supply is linked to the time limit for issuing invoices, determined as follows:
- If the invoice is issued within the prescribed time limit (as per Section 31), the time of supply is the earlier of the receipt of payment or the date of the invoice.
- If the invoice is not issued within the prescribed time limit, the time of supply is the earlier of the event completion date or the receipt of payment.
- If neither of the above applies, the time of supply is as recorded in the recipient’s books of account.
As the time of supply is directly linked to the time limit for issuing invoices, Section 31(5) of the CGST Act, 2017, outlines the following provisions for issuing tax invoices:
- If the due date of payment is ascertainable from the contract, the invoice must be issued on or before that date.
- If the due date of payment is not ascertainable, the invoice must be issued before or at the time when the supplier receives payment.
- If the payment is linked to the completion of an event, the invoice must be issued on or before the event completion date.
Typically, at the time of executing the agreement for sale, a payment schedule is outlined in the agreement, indicating various milestones (often referred to as demand letters). Upon completion of these milestones, payments are triggered, requiring the issuance of an invoice.
This provision is commonly known as the “accrual method.” As per Section 13(2)(c) of the CGST Act, 2017, GST is payable on an accrual basis or upon receipt of consideration, whichever is earlier.
Example:
A customer books a residential unit for ₹75 lakh on March 15, 2024. The following table illustrates how invoices should be issued based on milestones:
| Period | Particulars | Cumulative Accrued (for invoice) | Cumulative Consideration received | Taxable Value of supply |
| (A) | (B) | (C) | (D) | (E`) (note) |
| Mar-24 | Amount paid Rs 10,00,000 | 3,375,000 | 1,000,000 | 3,375,000 |
| (7500000*45%) | ||||
| Jun-24 | Next milestone of 7% done | 3,900,000 | 1,000,000 | 525,000 |
| (7500000*(45+7)%) | ||||
| Jul-24 | Amount paid Rs 35,00,000 | 3,900,000 | 4,500,000 | 600,000 |
| (7500000*(45+7)%) | ||||
| Aug-24 | Amount paid Rs 5,00,000 | 3,900,000 | 5,000,000 | 500,000 |
| (7500000*(45+7)%) | ||||
| Oct-24 | Next milestone of 15% done | 5,025,000 | 5,000,000 | 25,000 |
| (7500000*(52+15)%) | ||||
| Feb-25 | Amount paid Rs 5,00,000 | 5,025,000 | 5,500,000 | 475,000 |
| (7500000*(52+15)%) | ||||
| Apr-25 | Amount paid Rs 5,00,000 | 5,025,000 | 6,000,000 | 500,000 |
| (7500000*(52+15)%) | ||||
| Jul-25 | Next milestone of 15% done | 6,150,000 | 6,000,000 | 150,000 |
| (7500000*(67+15)%) | ||||
| Aug-25 | Amount paid Rs 10,00,000 | 6,150,000 | 7,000,000 | 850,000 |
| (7500000*(67+15)%) | ||||
| Oct-25 | Next milestone of 15% done | 7,275,000 | 7,000,000 | 275,000 |
| (7500000*(82+15)%) | ||||
| Aug-25 | Amount paid Rs 5,00,000 | 7,275,000 | 7,500,000 | 225,000 |
| (7500000*(82+15)%) | ||||
| Dec-25 | Project occupation Certificate received | 7,500,000 | 7,500,000 | – |
| (7500000*(97+3)%) |
Note: The taxable value is the maximum of the cumulative accrued or consideration received, minus the taxable value of the previous period.
For each milestone, a tax invoice must be issued within 30 days. If issued within this period, the time of supply is the earlier of the invoice issuance date or receipt of consideration. If the invoice is not issued within 30 days, the time of supply is the earlier of the service completion date or receipt of consideration.
3. Applicability of E-Invoice
E-Invoices are electronic invoices exchanged and processed digitally for B2B transactions. The CBIC introduced e-Invoices from October 1, 2020, for taxpayers with an annual turnover exceeding ₹500 crore. This threshold has since been reduced to ₹5 crore.
E-Invoice Turnover Limits:
| Effective Date | Turnover Limit |
|---|---|
| 01/10/2020 | ₹500 Cr |
| 01/01/2021 | ₹100 Cr |
| 01/04/2021 | ₹50 Cr |
| 01/04/2022 | ₹20 Cr |
| 01/10/2022 | ₹10 Cr |
| 01/08/2022 | ₹5 Cr |
E-Invoice provisions apply to all B2B transactions, SEZs, exports, deemed exports, inter-branch taxable supplies, and related debit/credit notes. However, transactions involving under-construction property sales typically fall under the B2C category, exempting them from e-Invoice requirements.
Transaction related the sale of under construction category are not excluded from E-Invoices generation category per se, however most of the cases, since transaction is executed with individual and therefore he may not have a GST registration. Therefore, transaction is executed under B-2-C category, which does not required generation of E-Invoice.
However, there are certain category of supply, where it possible that, prospective buyer is registered under GST and hence Transaction get covered B-2-B category. Indicative list is as below,
- Sale of residential Unit to proprietor, and having GST registration.
- Sale of residential Unit to corporates for staff quarters / guest house.
- Sale of commercial unit.
Considering the possible scenarios, supplier / developer must need to understating the registration status of recipient and according decide, whether E-invoice is required to be issued or normal invoice will be sufficient.
4. Credit Notes on Cancellation of Flats/Shops
During construction, cancellations may occur due to various reasons, And once the cancellation occurred it necessitats GST reversals. Key provisions include:
1. Reversal of Tax: Adjustments towards tax liability are made through debit/credit notes. Credit notes should be issued for cancellations, reducing the booking advance and corresponding outward liability.
2. Grounds for Issuing Credit Notes: As per Section 34(1) of the CGST Act, credit notes can be issued when,
-
- The taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or
- Where goods or services or both supplied are found to be deficient.
- Where the goods supplied are returned by the recipient,
The registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed. Therefore, credit notes can be issued in case of cancellation of flats / shops.
Section 34(2) of the CGST Act 2017, prescribes the time limit the adjustment and reporting thereof in GST Returns, relevant extract is as follows,
“Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than due date for the month of September (till FY 2020-21) and from FY 2021-22 onwards “the thirtieth day of November” following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:”
In Simple Words Credit note for reduction in GST Liability cannot be issued beyond the due date for returns for the month of September of the next financial year. last date for the issuance of credit note can be summarized in below table,
| Financial Year | Last Date for Issuance of Credit Note |
|---|---|
| 2017-18 | 30 Sep 2018 |
| 2018-19 | 30 Sep 2019 |
| 2019-20 | 30 Sep 2020 |
| 2020-21 | 30 Sep 2021 |
| 2021-22 | 31 Oct 2022 |
| 2022-23 | 31 Oct 2023 |
| 2023-24 | 31 Oct 2024 |
Considering the above provision of the act, and provisions releveled for time of supply / Issuance of Invoice, In the event of cancellation, Credit notes can be issued to the extent portion of service provided within prescribed time limit as per column 3 above and corresponding tax liability can be reversed in respective tax returns.
Taxes paid for the period which is beyond limitation mentioned above cannot be reversed by issuing the credit notes. In case such cases agreement/Allotment letter will play an important role, with respect to tax element involved in the refundable amount for which credit note cannot be issued.
In the example as discussed above, suppose the flat booked in the month of March 2024, is due to unavoidable circumstance is need to cancel in the month of Dec 2024. Here there are two parts of the invoice.
- Invoice issued for the F Y 2023-24. As the time limit prescribed under GST for F Y 2023-24 was 31 Oct 2024 for issuance of Credit note and 30 Nov 2024 for reporting thereof in the GST return, is expired, credit note cannot be issued for the supply made and invoice issued till 31 March 2024.
- Invoice issued for the F Y 2024-25 (till Dec 2024). As the time limit prescribed under GST for F Y 2024-25 was 31 Oct 2025 for issuance of Credit note and 30 Nov 2025 for reporting thereof in the GST return, is not yet expired, credit note can be issued for the supply made and corresponding tax credit can be claimed.
However, as the supply is not fully made to the buyer, refund of the same is claimable directly from GST Department, and in this connection CBIC has issued the Circular No. 188/20/2022-GST, dated 27th December, 2022, enabling the recipient (unregister under GST) to claim the refund by filing application.
5. Time Limit for Refund Applications
As per section 54(1) of the CGST Act, time period of two years from the relevant date has been specified for filing an application of refund. Further, the relevant date in respect of cases of refund by a person other than supplier is the date of receipt of goods or services or both by such person in terms of provisions of clause (g) in Explanation (2) under section 54 of the CGST Act.
However, in respect of cases where the supplier and the unregistered person (recipient) have entered into supply of construction service of flats, if the contract is cancelled/ terminated before completion of service for any reason, there may be no date of receipt of service, to the extent supply has not been made/ rendered.
Therefore, in such type of cases, Sec 54 (time limit for refund application) date of issuance of letter of cancellation of the contract/ agreement for supply by the supplier will be considered as the date of receipt of the services by the unregister applicant. And two years’ time limit will start from the cancellation deed.
At the time of filing of refund application by the recipient, along with applicable, also need to submit the relevant documents, indicative list of the same is as below,
1. Tax Invoice
2. Receipt Voucher
3. Agreement/Allotment Letter
4. Cancellation Deed
5. Any other relevant documents to prove tax incidence
Conclusion
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