GST Input Tax Credit in respect of Work Contract Service Relates to Earth Work

1. In Industries the various type of activities is being carried for industry expansion, setting up of new unit etc like the site preparation, area development and other associated jobs which have to be necessarily undertaken in case of various upcoming projects. The job being considered as a works contract service which is in relation to an immovable property and the expenditure incurred shall be capitalised in the books.

2. Now a question come whether Input Tax Credit (ITC) available in respect of such earthing work like earth excavation, filing land, piling, flatting surface, piping, cutting tree, Concrete works, Reinforcement Steel, Shuttering, Aggregate from Crusher, Brick Work, Random Rubble Masonry, Dismantling of Brick, RCC 86 Anti Termite Treatment, Blasting studies, etc.

3. To know answer of above first we need to analysis section 17(5)(d) of CGST ACT-2017 i.e. Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of 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

Explanation.—For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means 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 excludes— (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises.

4. The close analysis of above section reveals that ITC is available for construction of an immovable property which is Plant or Machinery on his own account including when such goods or services or both are used in the course or furtherance of business.

5. Now question come in mind what is meaning of foundation or structural support to which Plant or Machinery fixed to earth.

6. To understood it take an example – A 100 hector land is taken on lease for setting up of new refinery and to make this land suitable to set up Plant or Machinery various earthing activities are done upon entire 100 hector land although actual Plant or Machinery is fixed to earth upon 60 hector land. It means that to earth the P&M over 60 % area of land we have to do work upon entire 100% area of land. If we go by very restrictive mind set then we will not take credit for entire work done on land saying that ITC is available only when machinery fixed to earth by foundation or structural support after doing all earthing work. But taking this restrictive decision will lose credit. Since think can we fix a P&M to earth without doing earth work for surrounding area? answer of this question is big no. So we should stretch out meaning of foundation or structural support at length to take ITC. Since this earthing work is part or parcel of foundation of Plant or Machinery in fixation to earth.

7. To understand more an AAR ruling is placed here AUTHORITY FOR ADVANCE RULINGS, WEST BENGAL in case of GGL Hotel & Resort Company Ltd where Authority held that in writing that credit of tax paid on goods and services used for construction of immovable property is allowed only if such immovable property is in the nature of plant and machinery. The expression plant and machinery has been defined vide Explanation to section 17 in Chapter V of the GST Act to mean apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services and includes such foundation and structural supports but excludes inter alia land, building, or any other civil structures. The input tax credit is, therefore, not admissible for the lease rent paid during the pre-operative period for the leasehold land on which a resort is being constructed.

8. Here Authority looked preoperative activities and tried to stretch meaning as much as possible, so restricted ITC in respect of pre-operative activities i.e lease rent.

9. Now in our above example where we took land over lease to set up plant or Machinery whether we should restrict our self and not to take credit on lease rent or stretch the meaning of foundation as AAR tried to do in above ruling and take credit. Also, Govt in his flayer over Work Contract has specified that “When a works contract is for the construction of plant and machinery, the ITC of the tax paid to the works contractor would be available to the recipient, whatever is the business of the recipient”.

10. Therefore, it may be viewed that ITC may be taken in respect of that that percentage of earthing work on which P86M is founded or placed to structural support.