Availability of full cenvat credit on residential unit sold before completion certificate

by | Aug 6, 2019

The recent decision of the Gujarat High Court in the case of Principal Commissioner v. Alembic Limited 2019-VIL-335-GST-ST has given a big relief to the real estate sector. The Court was dealing with the issue of reversal of Cenvat credit on input services received in respect of residential units sold after the completion certificate.

On real estate projects, service tax is payable if a residential property is sold before issuance of completion certificate. If a property is sold post issuance of completion certificate, no service tax is payable and the activity is treated as akin to an exempt service.

In this case, the taxpayer availed full credit on input services used for construction of property for which completion certificate was not issued since it was providing only taxable service. It reversed proportionate credit on goods and services used for construction of property for which completion certificate was issued. The department contended that credit availed on goods and services even before issuance of completion certificate should be treated as common credit and subject to proportionate credit reversal.

The Court read Rule 3, 4 and 6 of the Cenvat Credit Rules, 2004 (‘Credit Rules’) harmoniously and the entitlement to credit needs to be seen at the time of receipt of input services. Once an input service was received at a time when output service was taxable and the said credit was availed legitimately, the same cannot be subsequently denied unless there are specific machinery provisions to this effect. The Court further observed that Rule 4(7) does not postpone availment of credit till the actual provision of output service.

The Court also rejected revenue’s argument on credit reversal requirement under Rule 11(4) of the Credit Rules. The Court held that this provision seeks reversal of credit on inputs lying. There is no provision which provides for credit reversal on input services.

NITYA Comments:

In our view, the High Court rightly held that once the credit is validly availed, it need not be reversed if the output service subsequently becomes an exempted service in the absence of a specific provision seeking such reversal. This view has been taken by the Supreme Court in various decisions.

The GST law has been specifically amended w.e.f. April 1, 2019 to provide that there shall be no inward supply exclusive to taxable activity in case of construction service, and all supplies shall be deemed to be common to taxable and exempted activities (where some flats are sold after issuance of completion certificate).

Basis this decision, the taxpayers can consider challenging the condition in transition scheme for real estate sector which require reversal of credit validly availed till March 31, 2019. We also highlighted this issue in our NITYA’s Insight | Issue 21 | Recent changes in Real Estate sector under GST dated April 12, 2019 at Page 3.

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