GST on Commercial Building Rent Should Be 5% as ITC Is Blocked

Levy Should Be @ 5% On Renting of Building for Commercial – When Not Eligible for In-put Tax Credit Under Section 17(5) of GST Act

The article argues that GST on renting of commercial buildings should be levied at 5% where Input Tax Credit (ITC) is unavailable under Section 17(5) of the CGST Act, based on the principles of fairness, reasonableness, and equality under Article 14 of the Constitution. It states that the GST framework itself recognizes a legislative principle of providing concessional tax rates where ITC is denied, as reflected in various notifications covering construction services, real estate, composition schemes, and certain leasing services. The discussion refers to Supreme Court decisions recognising that ITC is a statutory right subject to legislative restrictions, while also acknowledging that GST is designed to avoid cascading of taxes. The article contends that denial of ITC on construction of commercial buildings, coupled with full GST on rental income, results in tax cascading and disproportionate burden. It concludes that, for consistency with existing GST rate structures and constitutional principles, renting or leasing of commercial buildings where ITC is unavailable should attract GST at a concessional rate of 5% without ITC.

The Principle of Fairness?

The principle of fairness must be followed by the government while proposing tax on goods and services. When the GST Legislature itself recognizes in numerous notifications and rate entries that denial of ITC warrants a concessional rate (for example, construction services, real estate schemes, composition levy, and certain exempt-credit structures), there must be a rational basis for imposing the full GST rate on other supplies where ITC is also denied. Otherwise similarly situated taxpayers are treated differently without intelligible differentia.”

“The GST statute and notifications themselves establish a legislative principle that where ITC is unavailable, the tax burden is often mitigated through a reduced rate. Departure from this principle without rational justification results in hostile discrimination and manifest arbitrariness under Article 14.”

The Hon’ble Supreme court judgment in Union of India v. VKC Footsteps India Pvt. Ltd. The Supreme Court observed that GST is a destination-based consumption tax and that input tax credit is an important feature of the GST framework. However, the Court also held that ITC is governed by the statute and can be restricted by Parliament.

The same principle has been reiterated by Justice MN Venkatachaliah (as the learned Chief Justice then was), speaking for the Constitution Bench held, It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation.

The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory.

Reasonableness under Article 14

The Supreme Court has consistently held that: Tax legislation can be challenged if it is manifestly arbitrary or lacks a rational basis under Article 14. However, courts generally give a wide latitude to the Legislature in fixing tax rates and prescribing conditions for ITC. For an argument that GST on output supply coupled with denial of ITC leads to impermissible double taxation or cascading. GST is designed as a value-added tax. Credit chain should ordinarily remain seamless. Blocking ITC while taxing the output creates tax-on-tax effects.

The Supreme Court held that ITC is a statutory concession and the Legislature may impose conditions or restrictions on it. At the same time, the Court recognized that VAT/GST systems are designed to avoid cascading of taxes.  Such a result may be argued to be contrary to the fundamental GST objective and arbitrary under Article 14.

Supreme Court judgment, in Chief Commissioner of Central Goods and Service Tax & Ors. vs. M/s Safari Retreats Private Ltd. & Ors, the Hon’ble apex court opinion that, the restriction on claiming ITC provided in the CGST Act is contrary to article 14 of the Constitution of India as it treats taxpayers engaged in the construction of immovable property for the purposes of rental or leasing activities in the same way as those engaged in the construction of immovable property for sale, by denying ITC for business expenditure (incurred during the property’s construction) in both situations. The ability to claim ITC is a statutory right under GST law, and blocking ITC related to purchases that result in income from rental activities collected by the taxpayer who constructed the building leads to unjust enrichment by the tax authorities, and a violation of the right to claim ITC under section 300A of the Constitution of India (which provides that no-one may be deprived of their property without legal authority).

Tax Rate @5% When No ITC.

It a settled principle in gst act that when the tax payer opted to pay concessional rate, he must forgo the input tax credit on supply of certain services. As per the notification 11/2017 most of rental and leasing services are at @5% without input tax credit.

So the intention of law makers is that the levy on rental and lease of any property must be rational. When the construction of building on own account is not eligible for input tax credit, the same should have concessional rate when giving on rent or lease to justify the levy under article 14 of Indian constitution.

And When Hotel accommodation (SAC 9963) Room tariff up to ₹7,500 per day 5% GST without ITC and Room tariff above ₹7,500 per day: 18% GST with ITC. why not the same principle in adopting rate of tax  of for renting building when given to business.

Opinion:-

GST is intended to be a value-added tax. Denial of ITC while taxing the output supply causes cascading. A high GST burden without credit may be challenged as arbitrary under Article 14 if there is no rational basis for the classification. The tax burden becomes disproportionate when compared with similarly situated taxpayers who receive credit. Therefore to satisfy fairness and reasonableness the tax rate on Leasing of commercial building my be at the rate 5% when No ITC IS ALLOWED.

Authors:

S.V.S. Raghavendra Rao, Advocate & Tax Consultant, Nellore, Andhra Pradesh, Phone: 9440275175, Email: raghuvatconsultancy@yahoo.com

S.V.S.N. Sasidhar Rao, Chartered Accountant, Nellore, Andhra Pradesh, Phone: 9490087873, Email: sasidharca1@gmail.com.