As per rule 2(l) of CENVAT Credit Rules, 2004, CENVAT Credit of service tax paid on works contact service is available for specified services (i.e. developers services) by specific reference to the activity of construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer as specified service under clause (b) of section 66E. Further abatement notification 26/2012-ST dated 20.06.2012 also allowed CENVAT of input services and Capital Goods. But reference similar to rule 2(l) of CENVAT Credit Rules, 2004 is missing under section 17 of the CGST Act, 2017.
Existing Provisions related to CENVAT Credit
As per rule 2(l) of CENVAT Credit Rules, 2004, the activity of works contract is treated as input service for providing the service of developers who is selling under constructed property and therefore service tax paid on works contract service is allowed as CENVAT Credit. The relevant portion of the definition of input service is reproduced below:
Rule 2(l) ‘Input Service’
(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for thereof; or
(a) construction or execution of works contract of a building or a civil structure or a part
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of one or more of the specified services; or”
The specified services are provided under section 66E (b)of the Finance Act, 1994, which is reproduced below:
66E (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority.
Explanation.- For the purposes of this clause,-
(I) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non requirement of such certificate from such authority, from any of the following, namely:––
(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972; (20 of 1972.) or
(B) chartered engineer registered with the Institution of Engineers (India); or
(C) licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(II) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure;
Legal provision under GST Laws
As per Section 17(5) of CGST Act, 2017: Input tax credit shall not be available in respect of the following, namely:—
(c) 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;
Therefore ITC of works contract service is not available when it is supplied for construction of an immovable property. However it is input service for further providing work contract service ITC is available.
Now question arise whether the activity of developer selling under constructed property to the prospective buyer is covered under works contract?
As per Section 7(1) supply includes-
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
Further as per Schedule II
Clause 5 Supply of services
The following shall be treated as supply of services, namely:—
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
Clause 6 Composite supply
The following composite supplies shall be treated as a supply of services, namely:—
(a) works contract as defined in clause (119) of section 2; and
As per Section 2(119) of CGST Act 2017
“works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;
While treating the activities as supply of services or supply of goods, the Schedule II of the CGST Act 2017, clearly differentiate between the activity of works contract and activity of construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer (i.e. activity of developer) by separately mentioning under clause 5 & 6 respectively. Further definition of works contract under section 2(119) of CGST Act 2017 also does not provide any reference to the activity of developers.
However as per Serial No. 19 of the schedule of GST rates for the services as approved by the GST Council, GST Rate is @12% with full ITC but no refund of overflow of ITC to the activity of construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly.
Therefore there is no doubt that GST Council has every intention to give benefit of ITC to the developers but the law does not equip the officials exercising the power with full legal mechanism. This may lead to chaos/confusion that will further lead to unnecessary litigation.
(Author is a GST Consultant and can be reached at firstname.lastname@example.org)
Disclaimer: The views expressed herein above are solely author’s personal views/opinion. This is an informational article and should not be considered as legal opinion. The possibility of any errors and omissions in the article cannot be ruled out.