GST Input Tax Credit on Construction of Immovable Property

BLOCK CREDIT: Section 17(5) of the CGST Act, 2017 provides for a list of goods and services on which input tax credit is not allowed. One of the item is mentioned in sub sec 5(c) & (d) of sec 17 of CGST ACT. The extract of the said provision is reproduced below for ease of reference:

(c) ITC is not available for Works contract services 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;

(d) ITC is not available for 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.

But would GST Credit be allowed if the building so constructed is given on Rent/Lease?

There can be two situations:

1. Construction by third party through works contract or

2. Construction by owner.

Situation 1

ITC Availability for Works Contract:

ITC is not available on works contract services when supplied for construction of an immovable property except plant and machinery. However, ITC for works contract can be availed only by person who is in the same line of business and is using such services for further supply of works contract service.

For instance, a building developer may engage services of a sub-contractor for certain portion of the whole work. The sub-contractor will charge GST in the tax invoice raised on the main contractor. The main contractor will be entitled to take ITC on the tax invoice raised by sub-contractor as his output is works contract service. However, if the main contractor provides works contract services to a company engaged in the IT business, the ITC of GST paid on the invoice raised by the contractor will not be available to the IT Company.

However the explanation gives the clarity that input tax credit on works contract service when supplied for construction of immovable property & goods and services or both received  by a taxable person for construction of immovable property is not allowed only to the extent of capitalization in the books of accounts. Thus, it would not be wrong to say that input credit is allowed if the expenses are of revenue in nature. That is the expenses are debited to profit & loss a/c.

Situation 2

ITC Availability for Own constructions:

ITC shall not be available in respect of the goods/services/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. However, can ITC be availed w.r.t GST paid on construction of immovable property which is to be let out for rent. We will throw light of this concept with the help of an interesting case of

Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax (Orissa High Court)

Key Highlights of Order

• The purpose of the CGST Act is to provide a uniform law for levy and collection of tax on intra state supply of goods and services, and to prevent multi taxation.
• Section 17(5)(d) of the CGST Act is to be read down and a narrow interpretation of Section 17(5)(d) of the CGST Act is frustrating the objective of the CGST Act.
• If the petitioner is required to pay GST on rental income arising out of the investment on which he has paid GST, he is entitled to avail the ITC for the inputs and input services consumed by them.

Ruling and Order of Hight Court (HC)

1. In that view of the matter, the HC held that the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted

2. The very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the ITC on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.

Thus it was held that ITC can be availed w.r.t GST paid on construction of immovable property which is to be let out for rent.

CONTRADICTORY TO THIS JUDGEMENT: The series of GST Advance Rulings on this issue, have given contradictory verdict. The Maharashtra Authority of Advance Ruling (‘AAR’) allowed ITC on overhead crane, sewage system, sanitary ware, air, water and oil supply systems and electrical works being plant and machinery. On the contrary, the Karnataka AAR disallowed ITC on electrical works, pumps, pumping systems and tanks, lighting system, physical security system and fire system being part and parcel of a building. Similarly, the Karnataka AAR observed that lifts, air handling units, chillers, sewage treatment plant and other facilities in a building cannot be separated from building and hence, disallowed ITC on the same.

1. In re Tarun Realtors Private Limited (GST AAR Karnataka)

AAR held “The provision of facilities like transformers, sewage treatment plant, Electrical Wiring and Fixtures, Surveillance systems, D.G. Sets, Lifts, Air Handling Units etc. are sine-qua-non for a commercial mall and hence cannot be considered separate from the building or civil structure. The provision of these are either statutory for a building or defines the nature of the building as a commercial mall. Hence the input tax credit on the inward supplies of goods or services involved in the construction of immovable property which is a civil structure or building is not available to the applicant and hence blocked”.

2. Ashish Arvind Hansoti (Maharashtra AAR)

Advance Ruling Authority had ruled that ,NO, ITC is available on any goods or services received by him for such construction and the same cannot be claimed by him. Thus, the provisions of Section (17)(5)(d) squarely applies in the subject case and thus the applicant cannot avail input tax credit.

3. Sree Varalakshmi Mahaal LLP (Tamil Nadu AAR)

Advance Ruling Authority in Tamil Nadu had ruled that, No Input Tax Credit is available against any goods or services received by the applicant for construction of Marriage Hall on his own account even if used in the course, or furtherance of his business of renting the place.

CONCLUSION:

Given various facets of ‘ITC on construction expenses’, we are of view that there is Orissa High Court case of M/s. Safari Retreats Pvt. Ltd  which held that ITC is allowed but the same case is pending with the Hon’ble Supreme Court, has not attained finality. We also find that the Hon’ble High Court has given the relief to the party invoking its writ jurisdiction while categorically holding that they are not inclined to hold Section 17(5)(d) to be ultra vires. Therefore, we are not relying upon the judgement of the Hon’ble High Court. And also there are various AAR that ruled that ITC is not available.

Futher  we conclude that that Section 17(5)(d) of the CGST Act restricts the seamless flow of credit and that denial of ITC in is unjust, arbitrary, oppressive and contradictory to the basic rationale of GST. And also the restriction under Section 17(5)(d) of the CGST Act should apply only in those cases where there is a break in the tax chain However, in the present case, there is no breakage in the tax chain therefore logically ITC should be available but the said provision should be given a literal interpretation and the restriction of Section 17(5)(d) of the CGST Act should apply accordingly to all circumstances. Hence we are of view that the entire section is confusing and contradictory and further explanations are required.