GST Refund by Unregistered Persons: When a Flat Booking Is Cancelled, Should the Buyer Lose the GST Paid?

In many real estate transactions, an individual buyer books an under-construction flat or building and pays the booking amount or instalments along with GST. Later, due to delay in construction, non-completion of the project, or any other reason, the buyer may cancel the booking or agreement. In such cases, the builder may refund the amount paid by the buyer but may deduct the GST portion, especially where the time limit for issuing a credit note under Section 34 of the CGST Act has already expired.

This created a genuine difficulty for unregistered buyers. They had paid GST to the builder, but after cancellation of the agreement, they were not able to receive the GST amount back from the builder. To address this issue, CBIC issued Circular No. 188/20/2022-GST dated 27th December, 2022, prescribing the manner of filing refund applications by unregistered persons.

Background of the Circular

The circular specifically refers to situations where unregistered buyers entered into an agreement or contract with a builder for supply of construction services of flats, buildings, etc. These buyers paid consideration, either fully or partly, along with applicable GST. Later, the agreement or contract was cancelled due to non-completion, delay in construction, or other reasons.

In many such cases, by the time the agreement was cancelled, the time limit for issuing a credit note under Section 34 of the CGST Act had already expired. Therefore, the supplier or builder could refund the amount to the buyer after deducting the GST collected earlier. This resulted in the unregistered buyer bearing the GST cost even though the underlying transaction was cancelled.

The circular also mentions a similar issue in the case of long-term insurance policies where the premium is paid upfront along with GST and the policy is terminated prematurely. However, for real estate buyers, the main relevance is cancellation of agreement or contract for construction of flat or building.

Legal Provision: Section 54 Allows Refund to “Any Person”

• The circular clarifies that Section 54(1) of the CGST Act already permits any person to claim refund of tax, interest, or any other amount paid by him. Such refund application has to be filed before expiry of two years from the relevant date.

• This is important because the phrase “any person” is wide enough to include an unregistered person also.

• Further, the circular refers to Section 54(8)(e), which provides that where an unregistered person has borne the incidence of tax and has not passed on the same to any other person, refund shall be paid to him instead of being credited to the Consumer Welfare Fund.

• Therefore, if the unregistered buyer has actually borne GST and has not passed on the burden to anyone else, the refund can be paid directly to such buyer.

Facility on GST Portal

To enable unregistered persons to file refund applications, a new functionality was made available on the common portal. This functionality allows unregistered persons to take a temporary registration and apply for refund under the category:

Refund for Unregistered Person

The circular further states that Rule 89(2) of the CGST Rules was amended, and Statement 8 was inserted in FORM GST RFD-01 to provide for documents and details required to be furnished along with the refund application by unregistered persons.

Who Can Apply for Refund?

An unregistered person can apply for refund in the following cases covered by the circular:

• Where the contract or agreement for supply of services of construction of flat/building has been cancelled; or

• Where a long-term insurance policy has been terminated.

For the flat cancellation case, the applicant should be an unregistered buyer who had paid GST to the builder and whose contract/agreement has been cancelled.

Temporary Registration by Unregistered Person

Before filing refund application, the unregistered person is required to obtain temporary registration on the common portal using his or her Permanent Account Number (PAN).

While obtaining temporary registration, the unregistered person must select the same State or Union Territory where the supplier is registered in respect of the invoice for which refund is being claimed.

For example, if the builder is registered in Gujarat for the invoice, the unregistered buyer should obtain temporary registration in Gujarat.

The circular also requires the unregistered person to undergo Aadhaar authentication in terms of Rule 10B of the CGST Rules.

Further, the applicant must enter bank account details in which refund is to be received. The bank account should be:

• in the name of the applicant; and

• obtained on the applicant’s PAN.

Filing Refund Application in FORM GST RFD-01

After obtaining temporary registration, the refund application has to be filed in: FORM GST RFD-01

The category to be selected is: Refund for Unregistered Person

The applicant has to upload:

• Statement 8 in PDF format;

• all requisite documents as per Rule 89(2) of the CGST Rules;

• certificate issued by the supplier under Rule 89(2)(kb);

• any other documents supporting that the applicant has paid and borne the incidence of tax and that such amount is refundable.

The circular also clearly states that the refund amount claimed shall not exceed the total amount of tax declared on the invoices in respect of which refund is claimed.

Separate Applications in Certain Cases

• The circular provides that separate refund applications have to be filed for invoices issued by different suppliers.

• Further, where suppliers are registered in different States or Union Territories, the applicant has to obtain temporary registration in each concerned State or Union Territory where such suppliers are registered.

• This means that refund is supplier-wise and State-wise. A single application may not be sufficient where invoices are from different suppliers or suppliers registered in different States.

When Refund Application Is Not Required

• The circular makes one important distinction.

• Where the time period for issuance of credit note under Section 34 of the CGST Act has not expired at the time of cancellation or termination of agreement/contract, the supplier can issue a credit note to the unregistered person.

• In such cases, the supplier can also pay back the amount of tax collected from the unregistered person. Therefore, there is no need for the unregistered person to file a separate refund claim.

• Accordingly, refund claim by an unregistered person can be filed only where, at the time of cancellation or termination of the agreement/contract, the time period for issuance of credit note under Section 34 has already expired.

Relevant Date for Filing Refund

• Section 54(1) provides a time limit of two years from the relevant date for filing refund application.

• For such cases, there may be a practical difficulty because in long-term contracts, such as construction of flats or long-term insurance policies, the contract may be cancelled before completion of service. Therefore, there may be no clear date of receipt of service to the extent supply has not been made or rendered.

• To address this, the circular clarifies that for determining the relevant date, the date of issuance of letter of cancellation of the contract/agreement by the supplier will be considered as the date of receipt of services by the applicant.

• So, for flat cancellation cases, the two-year period should be counted from the date of cancellation letter issued by the builder/supplier.

Minimum Refund Amount

The circular refers to Section 54(14) of the CGST Act, which provides that no refund shall be paid if the amount is less than Rs 1,000. Therefore, no refund should be claimed if the refund amount is less than Rs 1,000.

Processing by Proper Officer

The proper officer will process the refund claim filed by the unregistered person in a manner similar to other RFD-01 refund claims.

The officer will scrutinize the application with respect to:

• completeness of application; and

• eligibility of refund claim.

If satisfied, the officer will issue refund sanction order in:

Proportionate Refund Where Partial Amount Is Refunded

• The circular also deals with cases where the supplier refunds an amount lower than the amount originally paid by the unregistered person.

• In such cases, only the proportionate amount of tax involved in the amount paid back shall be refunded to the unregistered person.

• For example, if the buyer paid a certain amount along with GST, but on cancellation the builder refunds only part of the amount, the GST refund will also be restricted proportionately. The entire GST originally paid may not be refundable if the entire amount has not been refunded by the supplier.

Practical Checklist for Flat Cancellation Refund

For an unregistered buyer whose flat booking is cancelled, the following points should be checked:

• Whether buyer is unregistered under GST.

• Whether agreement/contract for construction of flat/building was entered into.

• Whether GST was paid to the builder.

• Whether agreement/contract has been cancelled.

• Whether the time limit for issuing credit note under Section 34 has expired.

• Whether temporary registration has been obtained using PAN.

• Whether temporary registration is taken in the same State/UT where supplier is registered.

• Whether Aadhaar authentication has been completed.

• Whether bank account is in applicant’s name and linked with PAN.

• Whether refund application is filed in FORM GST RFD-01.

• Whether category selected is Refund for Unregistered Person.

• Whether Statement 8 is uploaded in PDF format.

• Whether supplier certificate under Rule 89(2)(kb) is uploaded.

• Whether supporting documents prove that tax was paid and borne by the applicant.

• Whether refund amount is not less than Rs 1,000.

• Whether application is filed within two years from date of cancellation letter issued by supplier.

Conclusion

Circular No. 188/20/2022-GST provides a clear mechanism for refund of GST to unregistered persons in cases where flat booking or construction agreement is cancelled and the supplier is unable to refund GST through credit note due to expiry of the time limit under Section 34.

The applicant has to obtain temporary registration, file refund application in FORM GST RFD-01, upload Statement 8, supplier certificate, and relevant documents, and ensure that the application is filed within two years from the date of cancellation letter issued by the supplier.

Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.