A Peculiar Case- On availing “Input Tax Credit -(ITC)” under GST Act, 2017 against the Supply of Renting Services to various Tenants – Pan-India

Mr NCZ , partner of “XYZ Inc”, India approached me to understand concept of “Input Tax Credit” and asked to give an opinion for his prime business of Renting the premises/building with or without facilities where many input materials/services he is taking on regular basis, can his firm avail the benefit of “ITC” and file the GST returns accordingly. The case FACTS & QUERY, as submitted by him are as under:

FACTS & TRANSACTIONS:

The XYZ Inc a partnership firm – have let out some commercial buildings on rent. These our entirely our own buildings in which various floors have been let out to various tenants). At some point some portions of the buildings could be vacant though they are let out for most of the time.

The rent agreements mention that buildings let out should be having good quality construction, POP, false ceiling, DG back up, lifts, computer connectivity with CAT-6 wires, work stations (in some cases) etc.

The buildings are more than 10 years old (as per the completion certificate).

Whenever any tenant changes or at times otherwise, we have to spend money on repairs of the building, eg.

1. Paint of exterior and interior of the building

2. Plastering/POP of the walls

3. AC repairs/replacement

4. Furniture repairs

5. Changing tiles/bathroom tiles/fittings

6. Changing of electricity fittings as per requirement of customer

Amounts involved in these could be huge for example a bathroom renovation could cost as much as Rs.20 lakhs. Plastering of exterior of the building could cost as much as 50 lakhs.

We charge all these expenses in P & L account under the head Repairs (even though we do not claim these expenses against rental income for income tax purposes).

We also have to pay commission to brokers for introducing tenants, audit fee and other administrative expenses.

Renting Property

QUERY:

1. Can we claim Input Tax Credit on the above items against Output Tax on Rental Income. Please elaborate in terms of ITC on:

  • Furniture and fixture eg. Chairs, tables, workstations, Doors, Windows, Glass
  • Buildings eg. Cement, Steel Paint, Civil Work, Sanitary Fittings, Wires, Electricity fittings, Facia of the building, Water Tanks
  • Plant & Machinery eg. Transformer, Lift, DG Set
  • Commission paid, Audit Fee, Administrative expenses

2. What is the position of ITC

1. when a new building is being constructed for purpose of letting it out

2. Repairs & renovations are done on an existing building

3. Is there any other suggestion you could give so that ITC on all the above items used in a building could be claimed against rental income

4. Examples of certain specific items purchased by us with HSN codes are attached along with. Please suggest ITC availability in terms of these specific items

BASIC UNDERSTANDING OF QUERY

XYZ Inc is owner of commercial housing buildings which are being given on rent to various tenants for their commercial/office/residential purposes. All buildings have completed their construction activity and already got the “Completion certificates” from the appropriate authorities.

There are some alterations/modifications/repairs in building as per the need of tenant specified requirement (which is wasted or needs again modification/alteration once it vacates by current tenant) and without that desired rent cannot be fetched out. Also Capital goods, plant machinery, furniture fixtures purchase and installed at premises as per the requirement of tenants or as minimal requirement to rent out the premise in proper shape and as competitive with market trend.

These all additions/modifications/repair and purchases goods/plant-machinery etc. have direct proportion to the “Value of Supply i.e. Renting Amount”. That means if these things are not provided to the Tenants then they will not pay desired rent and the exchequer will get less tax.

To exemplify the same, suppose a floor of building having 3000 square feet area can let out with the rent of Rs.1,05,000/- and if with the facility of Lift, Servo & few table chairs then it goes to Rs.1,50,000/- and if properly carpeted to make it dust proof then Rs.1,75,000/- then in all cases revenue will earn more GST @18% from Rs.18900/- to Rs.27000 to Rs. 31,500 per month respectively while ITC on purchase of additional plant/machinery or modifications/alterations will get only one time GST ITC benefits and no Depreciation will be available on GST part of assets to the supplier of services.

If analyze carefully then in renting activity everything counts – building location, its access, parking space, surrounding, ambience, entrance, moving paths, water supply, drainage/logging, paints, designs, interiors, falls ceilings, wood work, flooring, bathrooms & their fittings, kitchen, equipment, lift, transformer, stable voltage, fire proof, security equipment DVR Cameras etc. these all things are counted by the prospective tenant and after all his tailor made requirements are separate. So, if any prudent business man wants to take full advantage of business trend and wants to earn handsome rent then he has to think about all these things and activities as well has to spent on all these items and has to pay GST on all input supplies.

CLASSIFICATION OF INPUT SUPPLY NATURE WISE

1. Repair to Building

2. Modifications to Building

3. Alteration to Building

4. Additions to Building

5. Installation of Plant & Machineries

6. Purchase of Capital Goods

CLASSIFICATION OF INPUT SUPPLY ACTIVITY WISE

Repairs/alterations/modifications etc. subject to capitalization and claiming depreciation as well.

Repairs/alterations/modifications etc. temporary only contract to contract basis specified with the tenant himself routed through Profit & Loss Ac and no depreciation claimed.

Basic Plant & Machineries –treated as Capital Goods

Specific Plant & Machinery/Furniture & Fixtures etc. as per demand of tenant routed through Assets as classifications.

Note: Here it is assumed all used for business of Renting of premises purposes.

Capital Goods purchased for indirect use of business.

CLASSIFICATION OF INPUT SUPPLY SUPPLIER WISE

Services of outside suppliers taken –like works contract.

Self-purchase of material & services

In house purchases/repair etc.- employees on role

POSITION OF LAW

– AS PER GST ACT, 2017 ITS RULES & NOTIFICATIONS, CIRCULARS ETC.

RELEVANT DEFINITIONS under GST, Act 2017:

2(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business

2(19) “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;

2 (30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

2(33) “continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify;

2 (52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

2 (59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

2(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

2(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

the integrated goods and services tax charged on import of goods;

2(63) “input tax credit” means the credit of input tax;

2(67) “inward supply” in relation to a person, shall mean receipt of goods or services or both whether by purchase, acquisition or any other means with or without consideration;

2(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;

2(105) “supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied;

2(119) “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;

ACT – RELATED TO ITC

16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

RESTRICTIONS:

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note

(b) he has received the goods or services or both.

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.

PARTLY ITC ALLOWED

17. (1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

17. (2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies

17. (5) (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 (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.

SCHEDULE II TO GST ACT, 2017 WHICH SPECIFICALLY DEFINES WORKS CONTRACT & RENTING ACTIVITY

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. 

Explanation.—For the purposes of this clause—

(1) the expression “competent authority” means the Government or any authority authorised 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:—

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations,

replacements or remodelling of any existing civil structure;

RELEVANT RULES:

43. Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases.- 

43 (1) Subject to the provisions of sub-section (3) of section 16, the input tax credit in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the following manner, namely,-

(b) the amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero rated supplies shall be indicated in FORM GSTR-2[and FORM GSTR-3B]62and shall be credited to the electronic credit ledger;

[Explanation: For the purpose of this clause, it is hereby clarified that in case of supply of services covered by clause (b) of paragraph 5 of the Schedule II of the said Act, the amount of input tax in respect of capital goods used or intended to be used exclusively for effecting supplies other than exempted supplies but including zero rated supplies, shall be zero during the construction phase because capital goods will be commonly used for construction of apartments booked on or before the date of issuance of completion certificate or first occupation of the project, whichever is earlier, and those which are not booked by the said date.]63

[(c) the amount of input tax in respect of capital goods not covered under exempted supply used or pure business purposes, being the amount of tax as reflected on the invoice, shall credit directly to the electronic credit ledger and the validity of the useful life of such goods shall extend up to five years from the date of the invoice for such goods:

Note: The clause C is for those capital goods which are being used commonly by business man say in accounts, marketing etc. that ITC claim shall be taken in 20 qtrs.

RELEVANT CASE LAW & ADVANCE RULING

1. Advance Ruling No. RAJ/AAR/2019-20/05 dt.30/04/2019 in case of “Rambagh Palace Hotels Pvt Ltd

2. Safari Retreats Private Limited and Ors. v. Chief Commissioner of Central, Goods & Service Tax and Ors. [2019] 105 taxmann.com 324 (Orissa) W.P.(C) No.20463 OF 2018 April 17, 2019. Although, case is under Hon’ble Supreme Courts’ hearing and SLP accepted no Stay Granted, till adverse judgment come the HC Judgement will prevail.

CRITICAL ANALYSIS ACTIVITY WISE TO FORM THE SOUGHT OPINION

After keeping in view foregoing provisions of Act, Rules and Facts of the case and opinion sought on ITC, our analysis is as under:

CAPITAL CONSTRUCTION/REPAIR:

It is nature of additional units/part in building or which is covered a value addition in current asset with long life and cannot be classified as repair and is not routed through P & L A/c –.

[For example boundary wall made at ground floor for parking & garden area – Capital Repair and will be capitalised but it’s flowers/Mali/Purchases of material/Electricity/ Tube light /fire alarm/fire extinguishers refilling all are repair category and will be routed though P & L A/c.]

** AS per Schedule II of CGST Act, 2017 Para 5 Explanation 2 – Expression Construction includes – Additions, Alterations, replacements or remodelling of any existing civil structure.

&

Section 17(5)(d)- Disallows ITC on construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business.

&

Section 17(5)(d) Explanation says: Explanation.––For the purposes of clauses (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Here pertinent to note – Disallowance is “to the extent of capitalization” only.

Even – The Hon’ble High Court of Orissa, vide its order dated 17 April 2019 (Order), in Safari Retreats Private Limited v Chief Commissioner of Central Goods & Service Tax [W.P. (C) 20463 of 2018], has allowed availment of input tax credit (ITC) on goods and services used for construction of immovable property and used in the course or furtherance of business.

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.

REVENUE REPAIR – ROUTED THROUGH P & L A/C:

This is basically a highly debatable issue and as per Schedule II construction activity has been defined as “Supply of Service” and Input Service has been defined as Services taken for business or for furtherance of business and Input Tax Credit has been defined as “Credit of Input”.

Now, if we see carefully the facts supplied by XYZ Inc that they are doing repairs of recurring nature and specifically due to requirement of Tenants they get it repaired/modified and routed through P & L A/c.

CAPITAL GOODS PURCHASED & USE DIRECTLY IN SUPPLY OF SERVICES:

These items may fix or movable and it includes as per definition of Plant & Machinery – “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.

The ITC on capital goods governed by section 17(2) of GSt Act and Rule 43(1)(b) if used exclusively for direct business purposes then 100% ITC allowed and if use in business but indirectly then in 60 months say 20 quarters. 

OPINION ITEM AS SOUGHT BY XYZ INC

CAPITAL CONSTRUCTION/REPAIR:

Query 1 – ITC on Buildings eg. Cement, Steel Paint, Civil Work, Sanitary Fittings, Wires, Electricity fittings, Facia of the building, Water Tanks.

After getting completion certificate – any capital repair which is for further renting of property and as per the specific need of tenant’s modification/alteration etc.  – ITC is allowed by any type of Supply (as defined in starting of opinion).

Query 2(a)- Any additional floor or additional building/room/boundary all/permanent passage/overhead tanks general for all and all time etc shall be capitalized and ITC will not be available.

REVENUE REPAIR – ROUTED THROUGH P & L A/C:

Query 2 (b) – Repairs & renovations are done on an existing building

It is allowed. As activity explained above. The building is used for renting business & furtherance of business.

CAPITAL GOODS USED DIRECTLY & INDIRECTLY TO BUSINESS:

Query 1- Furniture and fixture eg. Chairs, tables, workstations, Doors, Windows, Glass, Plant & Machinery eg. Transformer, Lift, DG Set

ITC 100% allowed if used wholly for renting business say due to need of tenant or directly used by tenant.

The definition of Plant & Machinery includes 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. ITC on civil work of providing fixing or making any place platform, putting beams etc all will be capitalised to Plant & Machinery and because used in direct to business so under Rule 43 and as per section 16 ITC shall be allowed.

Indirectly for business purposes say Accounts/marketing/HR of XYZ Inc or it’s partners used for their official purposes then in 60 months or say 20 qtrs.

If used for personal purpose of partners or their connecting persons then it is completely disallowed.

Or it can be taken proportionately in Direct use & Indirect Use & Personal use as per actual use of asset.

As modus operandi Indirect used assets have to be calculate at today scenario of its use and formula has been given in Rule 43 itself of GST Rules.

Note: As per ITC rules if in 2A it is not reflected then you have to follow guideline of 10% ITC avail as per the Notification No.  75/2019 issued on 26th December 2019.

Also read carefully Circular No. 142/12/2020- GST dt.9/10/2020 for Feb 2020 to Aug 2020 ITC limit if it is not reflected in GSTR2A.

VERY IMPORTANT TO NOTE & IMPORTANT SUGGESTION:

The opinion is based on Advance Ruling and recent High Court Judgment as cited above but at the same time it has been challenged through SLP to the Hon’ble Supreme Court on 16/10/2019 No.026695/2019 where no stay granted but dates are still to be notified for hearing tentative next date is 02/11/2020.

So, by keeping in view above SLP – a conservative approach may be taken place and for ITC under dispute must be availed but may not be utilized. For this a Representation to the department may also be given for accumulated unclaimed ITC till date.

So, if you have already not taken ITC for 2019-20 or 2020-2021 or to have safe approach already reversed the ITC in GSTR 3B then re- claim it in GSTR 3B but do not utilize in paying the GST or do not claim refund if excess GST paid earlier after taking effect of ITC in Sep 2020 return which has last date 20, 22 & 24 –Oct 2020 as the case may be. So that in case Hon’ble SC gives order in assessee favor then whole ITC shall be claimed, avail & utilized in one go without losing your ITC paid on materials & services purchased during activity of renting.

CONCLUDING REMARKS & DISCLAIMERS:

After going through above Act, Rule, Citations of various courts the XYZ Inc can take ITC on case to case basis. It is the contracts, language, treatment in books will decide eligibility of ITC.

These are my views and recommendations as per the prevailing Law related to GST. If, in future any new ruling or Govt. notification come to negate these opinions then those notifications shall be prevailing over and above these opinions.

At any point of time Author of this opinion to case is not taking any responsibility on behalf of XYZ Inc, India having GST No.XXXXXXXXXXX of Transactions, Treatment and Language of Agreements, Disclosures & Methodology to filing GST Returns as well deposit of Tax to the Govt.

Regards Rajiv Nigam, FCA

Author Bio

Qualification: CA in Practice
Company: RAJIV NIGAM & ASSOCIATES
Location: NEW DELHI AND NOIDA, New Delhi, IN
Member Since: 17 Jul 2017 | Total Posts: 26
RUNNING RAJIV NIGAM FCA PRACTISING FIRM FOR DIRECT & INDIRECT TAXATION & VIRTUAL CFO FOR START UPS View Full Profile

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