ITC on Construction of Building for giving on rent or lease

As per Sec 17(5) (d) – Input Tax Credit is not allowed to be claimed for the GST paid on goods and services used for the purpose of Construction of Building.

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

This matter reached the Orissa High Court in a writ petition filed by Safari Retreats Private Limited (The Petitioner) and the High Court on after hearing the matter allowed availment of input tax credit (ITC) on goods and services used for construction of immovable property which is later given on Rent.

Writ Petition: – A writ petition is a filing that a party makes with an appeals court in order to secure a speedy review of some issue. A writ petition is essentially a court petition for extraordinary review, asking a court to intervene in a lower court’s decision.

Case Name: Safari Retreats Private Limited v Chief Commissioner of Central Goods & Service Tax [W.P. (C) 20463 of 2018]

Facts of the Case :-

“The Petitioner”is engaged in carrying on business activity of constructing shopping malls for the purpose of letting out of the same to numerous tenant and lessees.

As a part of construction activity, the Petitioner purchased goods like Cement, wires etc. and also availed services such as consultancy, architectural etc.

As these supplies were taxable under GST, Petitioner had accumulated the ITC on them and had applied to the authorities for availing credit.

Authorities have applied Sec 17(5) (d) of the CGST Act and opined that “input tax credit shall not be available in respect of goods and services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course of furtherance of business.”

The ITC was restricted to be availed by the Petitioner & So this issue was raised before the court by the Petitioner.

Logic behind approaching the Court :-

Where inputs are consumed in the construction of an immovable property which is meant and intended to be for the provision of taxable output services, why can’t the assessee avail the Input Tax Credit?

Orissa HC Interpretation:-

The Hon’ble Orissa High Court has interpreted the section 17 (5) (d) of the CGST Act to give benefit to the person who has paid GST  it has to be interpreted in continuity of the transaction since rent income is arising out of the malls which are constructed after paying GST on different items.

If input tax credit is denied on building meant and intended to be let out, it would amount to treating the transaction as identical to a building meant and intended to be sold.

Further, treatment of these two different types of transactions as one for the purpose of GST, is contrary to the basic principles regarding classification of subject matter of tax levy and, therefore, violating the Article 14 of the Constitution.

Article 14 of the Constitution of India reads as under: “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.” The said Article is clearly in two parts – ‘equality before law’ prohibits discrimination. It is a negative concept. The concept of ‘equal protection of the laws’ requires the State to give special treatment to persons in different situations in order to establish equality amongst all. It is positive in character. Therefore, the necessary corollary to this would be that equals would be treated equally, whilst un-equals would have to be treated unequally.

Conclusion :-

Therefore, if the Petitioner is required to pay GST on the rental income arising out of the investment on which he had paid GST, it is required to have the input tax credit on the GST. Thus as per this judgement, the GST paid on Construction of Building can be claimed as Input if the building is later given on rent.

The outcome of these ruling for cases where input tax credit is denied when the output is in the course or furtherance of business would provide relief of availing credit and clarity to trade and industry and might facilitate in eliminating the unwarranted litigation on the issues in future.