By S Sivakumar, LL.B., FCA, FCS, ACSI, Advocate
AS TIOL readers are aware, Rule 42 (and Rule 43 as well) have been drastically amended with effect from 1-4-2019, to provide for reversal, on the date of the completion certificate, of the ITC availed by the Developer/Builder from the date of inception of the residential project or 1-7-2017 whichever is later. Needless to say, this amendment is retroactive in its applicability, much to the disliking of the Realty Sector.
Be that as it may…
It is clear that Rule 42 has been amended with effect from 1-4-2019 to plug the obvious lacuna in the CGST Rules, 2017 regarding the lack of a procedure for reversal of ITC attributable to unsold flats as on the completion date (i.e. O.C). In terms of this amended Rule, the credit pertaining the construction of flats which have been booked/sold and those that are yet to be booked, to be worked out on the basis of the carpet area, cannot be considered for purposes of arriving at the figure under ‘T4′ for purposes of computing the reversal under the amended Rule 42.
Most Developers have been availing of ITC on their ongoing projects for the period 1-7-2017 to 31-3-2019, on the basis of the statutory provisions contained in the CGST Act, 2017 (Section 17) as well as, the CGST Rules (Rule 42), by including the credit attributable to the un-booked flats as well as the booked flats, under ‘T4′ of the then prevailing Rule 42. Now, in terms of the amendments carried out in Rule 42 with effect from 1-4-2017, this methodology is no longer possible. The question that would arise is, whether, the amended Rule 42 can be retroactively applied for the period prior to 1-4-2019? My view would be a clear NO.
Since, applying the new methodology for reversal of ITC in terms of Notification No. 16/2019-Central Tax dated 29-3-2019 in Rule 42 is not a clarificatory provision but a substantive provision resulting in an incremental tax liability for Developers and Builders, the amended Rule 42 cannot be retroactively applied. Attention of the TIOL readers is invited to the decision of the Hon’ble Supreme Court in Union of India & Ors vs M/s Martin Lottery Agencies 2009-TIOL-60-SC-ST, wherein, it was categorically held that a substantive explanation cannot be retrospectively applied.
Another import issue to remember is that, the amended Rule 42 is seeking to recover the input tax credit that has already been rightfully availed by the Developer/Builder and this is impermissible in law, in terms of the decision of the Supreme Court in the celebrated Dai Ichi Karkaria case (2002-TIOL-79-SC-CX-LB ).
In the equally celebrated case of Eicher Motors Ltd. And Anr vs Union Of India And Ors. Etc – 2002-TIOL-149-SC-CX-LB, the Apex Court had, in the context of deciding the constitutional validity of the modvat scheme which was modified by introduction to Rule 57-F [read as 57-F(4-A)] of the Central Excise Act, 1944, under which credit which was lying unutilised on 16-3-1995 with the manufacturers, stood lapsed in the manner set out therein, held as under, in Para 6:
- We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the Rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods.
Needless to say, the Eicher Motors decision is very much applicable to the ITC that has accrued to the Developers and Builders, in respect of the GST paid on inputs and input services, for the period of up to 31-3-2019 and the amended Rule 42 cannot touch this portion of the ITC.
We must not also forget the legal position that, f or the period prior to 1-4-2019, Developers and Builders were entitled to take the legal view that, prior to the date of the OC, un-booked flats cannot be treated as exempt supplies at all and consequently, there was no need to reverse ITC attributable to the un booked flats, in terms of the decision of the CESTAT M/s ALEMBIC LTD SHRENO LTD Vs COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, VADODARA-I, reported in – 2019-TIOL-358-CESTAT-AHM, which has been followed by the CESTAT, in several other decisions.
There is yet another angle to this discussion. Section 18(4) of the CGST Act,2017, which reads as under, clearly specifies that the reversal of credit already availed is attracted only in two cases, viz. when the registered taxable person shifts from the regular scheme to the composition scheme under Section 10 or when the goods or services or both supplied by him become wholly exempt. In the instant case, there is no question of the construction services becoming wholly exempt and if at all, there can be an issue of the service becoming partially exempt, which is not envisaged in Section 18(4). Hence, the amendments brought about in Rule 42 with effect from 1-4-2019 are clearly violative of Section 18(4) and in the case of a conflict, the section would prevail over the rule.
The section 18(4) reads –
4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:
Provided that after payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
TIOL readers are aware that, in terms of the Central Goods and Services Tax (Amendment) Act, 2018, Clause (d) of Section 7(1) which read as under, has been retrospectively omitted with effect from 1-7-2017:
“(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.”
It is, therefore, now possible to take a view that for any transaction to be treated as a ‘supply’, it should follow the conditions stipulated in Clauses (a), (b) and (c) of Section 7(1), notwithstanding its inclusion in Schedule II to the CGST Act, 2017. Consequently, can a transaction like sale of immovable property which is not a supply at all within the meaning of Section 7(1) as amended, be treated as an ‘exempt supply’ necessitating reversal of ITC, etc.
More about this, perhaps, in a separate article.
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