GST Law’s backbone is the free flow of input credit. This allows for tax-free transactions and eliminates cascading effects. Section 17(5) of 2017 CGST Act defines certain Goods and Services as Blocked Credit. This means that a taxable person cannot claim Input Tax Credit ( ITC ) for the goods or services listed under section 17(5) of the CGST Act 2017.
Section 17(5) of GST Act has been substantially modified by GST Amendment Act 2018, effective w.e.f. 01 February 2019. This article attempts to cover all provisions, amendments, and case laws relating to Blocked credit under the GST Act.
BLOCKED CREDITS UNDER GST‐ SECTION 17(5) OF CGST ACT, 2017
You cannot claim certain Goods & Services Taxes even if you paid it for when you purchased or spent money on them. These GST are called Blocked Input Credit. See the following details regarding Blocked credit:
As per the proviso, A registered person is not eligible to take input credits on GST paid on goods and services received by him under Section 17 (5) of CGST Act.
List of Block credit under GST
ITC ON CONSTRUCTION ACTIVITIES
Relevant Extracts of Section 17(5) (d) of CGST Act’2017 is as follows:
Apportionment of credit and blocked credits.
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.– For the purposes of clauses (c) and (d), the expression “Construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;”
Section 17 sub-section (5) Clause (d) restricts input tax credit of goods and services used by a person for construction of an immovable property (except plant and machinery) on his own account.
ON HIS OWN ACCOUNT
The phrase “On his own account” has not been defined anywhere. The GST Laws whether CGST or SGST or IGST nowhere defines the said phrase. Therefore, ordinary meaning of the expression should be derived. The plain and simple meaning of the said term according to my limited understanding should be “for his own purposes”.
This phrase was tested at the Authority for Advance Ruling – Andhra Pradesh (AAR-AP) in case of M/s Karthikeya Projects [AAR No. 09/AP/GST/2021] [2021-VIL-333-AAR] where it was held that if a person purchases construction material to provide the constructions services by using the said material, ITC shall not be available. In this case Applicant was sub-contractor providing works contract service to M/s. Anukar Projects Pvt. Ltd. (Main Contractor) for the construction of chemical Lab, Office Building and a ware house for the Contractee M/s. Luarus Labs Limited. The applicant was charging 18% GST in the Tax Invoices issued to the main contractor. The applicant approached AAR-AP to seek clarification whether he can avail Input Tax Credit on the goods purchased on his own account for furtherance of his business? AAR-AP held that clause (d) of Section 17(5) of the CGST Act restricts input tax credit of goods and services used by a person for construction of an immovable property (except plant and machinery) on his own account.
Thus, if a person purchases construction material to provide the constructions services by using the said material, ITC shall not be available. Input Tax Credit shall not be available to the applicant on the said purchases.
Same point of discussion was before Orrisa High Court in case of Safari Retreats (P.) Ltd. vs Chief Commissioner of Central Goods & Service Tax [W.P. (C) NO. 20463 OF 2018] [(2019) 105 taxmann.com 324 (Orissa)] Where petitioner had not sold shops in mall but had let out same, petitioner
was not liable to pay huge amount of GST on rent received and was entitled to utilise input credit tax charged on purchases made in construction. Safari Retreats Pvt. Ltd. (“Safari Retreat”) was in the business of constructing shopping malls and then letting out different units in the constructed mall on rent or under a lease to other businesses. Safari Retreat had purchased goods like cement, steel, sand, aluminium, etc, and services such as architectural, legal, consulting, etc, in order to construct a shopping mall in Bhubaneshwar. While purchasing such goods and services, Safari Retreat was liable to pay CGST and Orissa GST (OGST) as all these goods and services were taxable.
Further, while letting out units to other people on rent, the transactions would come under the definition of “supply” as per paragraph-2(b) of Schedule II of the aforementioned Acts. Therefore, in order to avail input tax credit on the inward supply of goods and services, Safari Retreat approached the revenue authorities for the same.
The revenue authorities decided against availability of ITC in this case in regard to the limitations under Section 17(5). Therefore, Safari Retreat would now have to pay taxes for both its inward supplies and its own supply of renting out units at its shopping mall. The above was thereafter challenged before the Orissa High Court to avail ITC on the said transactions along with challenging the constitutional validity of Section 17(5)(d) with respect to the activities carried by Safari Retreat.
The classification which the legislature has made in CGST Act by denying input tax credit to one class of taxable persons having a continuous business by placing them under Section 17 (5) (d) of both the aforesaid Act while other taxable persons coming under the aforesaid two Acts are allowed to avail the benefit of input tax credit under Section 16 of both the aforesaid two Acts, has no reasonable basis underlying such classification when both categories of taxable persons are carrying on a continuous business without any break in the tax chain.
It is very important to note that when a builder sells units in a building before issuance of a completion certificate, he is required to pay CGST and OGST on the amount of sale price received and at the same time he is also allowed credit and set off of the CGST and OGST paid on the inputs consumed to construct the building and thus the GST authorities themselves recognise and accept the position that where, in respect of a building under construction, the tax chain is not broken, Section 17(5)(d) is not applicable and input tax credit cannot be denied.
Consequently, not to adopt the same interpretation of Section 17(5)(d) in the present case where also there is no break in the tax chain, is highly arbitrary and discriminatory. In the case of the petitioner even the business is a continuous one without a break in the tax chain, yet it has been placed under Section 17(5) (d) of the CGST Act and the benefit of taking input tax credit has been denied and therefore on that ground alone and by itself Section 17(5) (d) of CGST Act and OGST Act requires to be struck down as violative of Article 14 of the Constitution if the said clause (d) of sub-section (5) of Section 17 is not read down.
The shopping mall which the petitioner Safari Retreat is constructing is neither ‘intended for sale’ nor ‘on his own account’ but it is “intended for letting out”. Therefore, by no stretch of imagination, it can be concluded that the shopping mall which is constructed by the petitioner Safari Retreat is ‘intended for sale’ or ‘on his own account’ and as such when the said shopping mall is constructed purely for the purpose of letting out, then such construction of the shopping mall will not come within the mischief of Section 17(5)(d) of CGST Act and OGST Act.
On the aforesaid clear position of law, if the GST authorities are trying to bring the petitioner case under section 17(5) (d) of both the aforesaid Acts then several words has to be read into the Section 17(5) (d) of the said two Acts which are not permissible in law and it is a well settled law that in constructing fiscal statute and in determining the liability of a subject to tax, one must have regard to the strict letter of law and no words can be added to a statute or read into it which are not there Legislature has also imposed another condition in Section 17(5) (d) of both the aforesaid Act which reads as when such goods or services or both are used in the course or furtherance of business’ this condition is applicable only when the immovable property is constructed ‘on his own account’ as appearing in that sections, which means that the taxable person on whose account the said immovable property is constructed.
The said condition cannot be applied to any other cases far less when the construction of the immovable property is intended for letting out.
Hon’ble Supreme Court in the case of Eicher Motors Ltd. vs Union of India [1999 taxmann.com 1769] also held that a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed.
INTERPRETATION OF STATUTES
It is a well settled law that the interpretation which defeat the very intention of the legislature should be avoided and that interpretation which advances the legislative intent will have to be accepted.
The rule of construction by reference to ‘Contemporanea Expositio‘ is a well-established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. “Doctrine of Contemporanea Expositio is based upon the precept that the words used in a statutory provision must be understood in the same way in which they are usually understood in ordinary common parlance by the people in the area and business.
Article 14 of the Indian Constitution guarantees to every citizen the Right to Equality. It applies the principle of Equality before the law and prohibits unreasonable discrimination between persons. The Constitution of India states Article 14 as follows:
“the State shall not deny to any person equality before the law or equal protection of the law within the territories of India.”
The Doctrine of Arbitrariness has been coined by the Constitution bench of the Supreme Court in the Royappa Case[E.P. Royappa v. State of Tamil Nadu (1974) 4 SCC 3]. It is a very prominent case where Article 14 was further interpreted and wider scope was given to it. Equality means to treat every person equally and without any discrimination made on the basis of sex, caste, religion, age, and politics. In this case, the Supreme Court laid a basic, new dimension to Article 14 and held it to be a guarantee against arbitrariness.
According to the Doctrine of Arbitrariness, “equal protection of the law” prohibits class legislation but permits reasonable classification of persons or things.
As per above mentioned discussions the phrase “on his own account” cannot be taken to refer a situation where any activity taxable under GST Laws is succeeding after Construction Supplies. Meaning, if any construction is input to provide taxable activity under GST Laws, then it cannot be considered as “on his own account”. Therefore, in my view ITC shall be allowed in all these cases. I don’t feel comfortable with the Order of AAR-AP and would like to follow Judgement of Honourable Orrisa High Court. The ITC shall be allowed in every cases where the activity of construction is taken for further taxable supplies without breaking chain of events.