Recently I came across one important issue regarding Service tax on Developers

The question of for consideration is ….

Whether the CENVAT credit utilised in a construction project is required to be reversed when some of the flats remain unsold after obtaining completion certificate?

Contention for reversal of CENVAT credit remain unsold

The ready to sale flat (after obtaining CC) is not subject to service tax. The Cenvat Credit in

respect of services utilised for construction of such completed flats is not available since the

flats to be sold becomes immovable property and no longer is a service. Even thought the

CENVAT credit rules do not require one to one co-relation between input and output. But

here the CENVAT credit utilised has no nexus with the output service therefore, one has to

reverse proportionately cenvat credit.

The point of determination to decide flats are unsold is the date of grant of completion

certificate to the builder. Any flats for which no advance was received before obtaining CC,

would be considered as unsold flat. The moment CC is obtained and completed flats are sold

subsequently, there is no longer an 'output service' of construction. By virtue of definition of

service the so called 'construction service' transforms into immovable property thereby not

attracting the levy of service tax.

The Cenvat credit taken and utilised for payment of ST on 'output service'; which otherwise

now is immovable property, requires reversal from Cenvat credit rules perspective.

Generally all credit so availed is utilized by the builder/developers towards making payment

of ST during the construction stage when advance money is received from buyer of property.

Hence, it is understood that availment requires appropriate planning during construction stage

other-wise; if it is envisaged that some flats will be sold only after obtaining CC and all credit

is already utilized, the reversal of credit would be required to be made good in cash that too

with interest ranging from 18%-30%.

The transaction of sale of completed is no longer an output service hence we cannot take

input credit on services used for such completed flats.

Rule 3(4) of Cenvat Credit Rules, 2004 clearly specifies that

Cenvat credit may be utilised for payment of –

a)

…..

e) service tax on any output service:

We may make the reversal based upon any of the three different options specified in Rule 6

i.e.

Rule 6(2) -Maintain Separate Account of Input and Input services and take CENVAT credit

on input services used in taxable services only.

Rule 6(3)(i) –Pay 6% tax on the value of exempted goods or services and avail 100%

CENVAT Credit.

Rule 6(3A) -Reverse or pay proportional amount of CENVAT credit every month on

proportional basis

(Rules 6(3A) specifies the mechanism for such reversal to be done on or before 5th of the

every subsequent month and also for the whole financial year on or before 30th June

following the financial year. It also required the service provider to pay interest of 24% on

such reversal).

If the reversal is not made and there is no balance left in CENVAT account then the assessee

would be required to make it good in cash along with interest.

If such reversal is not made there is possibility that Dept may take a view that since 100%

input credit was utilised for payment of duty whereas 100% flats are not sold before

completion hence service provider has wrongly availed the CENVAT credit. Hence, requires

reversal and becomes eligible for the interest and penalty.