1. Introduction
The availability of Input Tax Credit (ITC) on works contract services relating to immovable property continues to be a contentious issue under the Goods and Services Tax regime. Tax authorities frequently invoke Section 17(5)(c) of the CGST Act, 2017 to deny credit on repair and renovation expenditures, often without examining the Explanation appended to the provision.
This article critically analyses the statutory framework, interpretational nuances, and practical application of the provision through a case-based discussion, highlighting that the restriction is conditional and hinges primarily upon the capitalisation of expenditure.
2. Legislative Intent and Statutory Context
The ITC mechanism under GST is designed to eliminate cascading taxes and ensure tax neutrality across supply chains. Section 17(5), however, carves out specific exceptions where credit is blocked.
Clause (c) of Section 17(5) restricts ITC on:
(c) Works contract service when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
The Explanation to Section 17(5) clarifies:
Explanation 1– For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitlization, to the said immovable property;
The Explanation therefore introduces a statutory qualifier that significantly influences the scope of restriction.
The principal question arising is:
Whether ITC on repair and renovation services relating to immovable property is disallowed irrespective of accounting treatment, or whether the restriction applies only where such expenditure is capitalised.
3. Interpretation
A purposive and harmonious construction of Section 17(5)(c) and its Explanation yields the following interpretational conclusions:
The restriction is confined to works contract services used for “construction”
The Explanation expands construction to include repairs and renovations
The phrase “to the extent of capitalisation” operates as a limiting condition
Capitalisation therefore becomes the statutory determinant for applicability of restriction
4. Departmental Approach — Common Pitfalls
In practice, tax authorities often apply Section 17(5)(c) mechanically. By ignoring the Explanation and failing to examine the taxpayer’s accounting treatment, they routinely—and incorrectly—treat all works contract services relating to immovable property as ineligible. Such approach results in legally unsustainable demands.
The reply to such Show Cause Notices should be structured around:
– Textual interpretation of statutory provision
– Producing ledger accounts, Profit & Loss statements, and statutory auditor certificates proving the expenditure was charged to revenue.
– Reliance on relevant Case Laws
5. Emerging Legal Principles
The analysis leads to the following principles:
ITC restriction under Section 17(5)(c) is not absolute
Capitalisation is the statutory trigger for disallowance
Revenue repair and renovation expenses remain eligible
Accounting treatment assumes substantive importance
Blanket denial of ITC on works contract services is legally untenable
6. Practical Compliance Guidance
Taxpayers should:
– Evaluate accounting treatment before availing ITC
– Maintain documentary evidence supporting non-capitalisation and obtain auditor certification where required
– Keep proper Documentary Records
7. Conclusion
The restriction on ITC relating to works contract services under Section 17(5)(c) must be interpreted in light of the Explanation appended thereto. The legislative framework clearly establishes that the restriction applies only where repair or renovation expenses are capitalised.
Accordingly, routine repair and renovation expenses treated as revenue expenditure remain eligible for ITC, subject to fulfilment of other statutory conditions. A contextual and fact-driven application of the provision is therefore essential to prevent unwarranted disallowances and ensure alignment with the foundational objective of GST — seamless credit flow.
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