How Denial of GST Input Tax Credit (ITC) On Plant, Land-Lease, Civil Structures And Buildings Adversely Impacts Manufacturing Decision
Right from pre-GST periods to GST regime, the Input Tax Credit (ITC) on capital expenditure viz. Land lease, Buildings, Civil Structures and Plants is never allowed.
Under Section 17(5)(c&d) of the CGST Act, 2017, input tax credit (ITC) is not eligible on goods or services received for the construction of immovable property (excluding plant and machinery) on a taxpayer’s own account, even if used for business. These are lease land, building, civil structure, cement, steel, civil works, etc.
The only solace being Supreme Court judgment in Chief Commissioner of Central Goods and Services Tax & Ors. Vs Safari Retreats Private Ltd. & Ors. (Supreme Court of India), Civil Appeal No. 2948 of 2023, dated 03/10/2024.
However, this judgment is beneficial restrictively to shopping malls or similar structures intended for leasing and the ruling cling on the Functionality Test treating the same as sort of Plant to extend the benefit. But the legislative quickly quarantined this beneficial judgment to aforesaid purpose only, which otherwise would have far reaching impact, by introducing the amendment in Section 17(5)(d) through addition of Explantion 2 therein.
This Explanation restricts the eligibility of ITC only to the extent of definition of Plant and Machinery which includes only Apparatus, Equipment and Machinery fixed to earth by foundation or structural support that are used FOR MAKING OUTWARD SUPPLY OF GOODS OR SERVICES OR BOTH and includes such foundation and structural supports.
But what about various buildings, sheds, other civil structures constructed in the factory premises. Why should the same be kept out of the ambit of ITC just because they are not directly related to outward supply. In fact, the entire premises is established only for the sole purpose of making outward supplies only and nothing else.
As we know, a substantial amount of input credit is involved in such huge expenses. Depending upon the nature of industry, the cost of total civil structures is around 40% to 60% with around 25 % of expenditure is incurred on buildings alone depending on the nature of business. The ITC contained therein gets added to such costs. So, right before the actual production of goods, there is a setback of this revenue loss that also quite substantially. It’s a big dampener for anyone desirous of entering in the field of manufacturing, which even otherwise plagued with high capital intensive.
While the Govt genuinely initiates various policies to flourish the economy by giving a variety of sops to increase manufacturing activities viz. Make In India, but collecting substantial taxes on such goods and services (via denial of ITC) is actually going against the impetus desired to the manufacturing development. It may not be intended, but such costs get cascaded in the supplies from the manufacturers to customers to their customers and so on. Though, to this extent, the GST collection goes up in the process but only at the cost of the original manufacturer i.e. unnecessary inflated cost of manufacturing.
Let’s analyze as to how it impacts the business:
1. Greatly influence investment decision: Due to denial of substantial ITC to the manufacturers (esp. small and medium set up companies), the decision to invest in Capex gets pushed towards economic alternatives, which are having deleterious impact on quality, durability, safety, etc. parameters. There is huge gap to be covered between the stuff manufactured at developed economies and India in terms of state-of-the-art goods. Same is the scenario in safety records also – there is difference between the two in terms of number of safety incidences (including near miss ones). Somewhere such huge loss of ITC has its share on these counts. Same is the case of Land Lease, where such costs usually compel the entrepreneurs to build factories at remote (economical alternative) areas, where skill labor and talented individual is not readily available leading to compromise on quality. Such skilled people are mostly reluctant to relocate to remote areas. All these have direct repercussions on productivity and operational efficiency. Same is the effect on input sourcing also which gets shifted from better-quality far-off suppliers to local suppliers in the vicinity of such remotely established plants.
2. Cascading Effect: Obviously, these cost gets inbuilt in the final product to make it proportionately uncompetitive.
3. Double Whammy: Denial of ITC on such expenses is a big put off for a person motivated to start a manufacturing business (as opposite a service provider) where he is already incurring substantial expenses in terms of acquisition of land, erection of plant & machinery, obtaining scores of cumbersome approvals, facing unforeseen troubles such business usually faces due to being tangible, etc.
4. Under-utilization makes pinch more acute: The loss becomes when there is no full utilization of this expenditure in case where the plant is underutilized or suffers partial or substantial shutdown or where for any other reason, it becomes difficult utilize it optimally. ITC is lost for the entire plant right before the inception irrespective of utilization of the assets i.e. while the business person is already under financial stress to the extent of underutilization, he has to bear the loss of attributable loss of ITC on top of it, as if he is being punished for underutilization of plant. It is understood that nobody erects plant for underutilization but put it for optimum utilization to secure more benefits out of it. Its market forces, competition, availability of raw materials, change in technology, change in demands depending on various aspects, global changes in demands/prices/unforeseen actions/etc..etc which has bearing on the utilization of plant. How can one predict 100 percent utilization of plant at the inception stage. It is worth consideration that ITC involved in unutilized or under-utilized plant / capacity should be allowed as a measure to encourage expansion.
5. Impacts ITC on Plant and Machinery: Due to blocked credit on aforesaid, the ITC in most of the cases are denied to even those goods which satisfy the category of Plant and Machinery leading to unwanted litigation and loss of ITC. There is general tendency to categorize such goods also as Civil Structures to bar the ITC.
6. Demotivation for Mediocrity: Unintended inducement to enter the territory of ‘Volume over Value’ goods making that attracts lesser levy. For the purpose of reducing the impact of high cost of manufacturing, the entities get compelled to start producing those goods which are subject to lesser GST rate instead of the intended purpose.
Conclusion:
In the current global economic scenario, there is an increase in having bilateral arrangements via Free Trade Agreements between countries wherein substantial reduction in tariffs are proposed. If such FTAs gets fully implemented and if ITC on Civil structures and plants are kept on blocked category, we can imagine what will happen to manufactories who will be forced to compete against the global players. Hence, it is high time, no ITC should be blocked for everything – inputs, capital goods, services – that goes into manufactories.
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