Learn about the nuances of GST Input Tax Credit (ITC) for co-operative housing societies undertaking repair works. Discover the restrictions imposed by GST laws and the interplay with a crucial circular that provides clarity on ITC for Resident Welfare Associations (RWAs).
Under GST regulations, input tax credit allows taxpayers to claim credit for the GST paid on inputs used in the course of their business activities. In the case of the co-operative housing society, the repair work on the building, including civil construction repairs and painting, can be considered as inputs for the society’s business activities. However, it is important to note that there are restrictions imposed by the GST laws regarding the availability of input tax credit on major repair activities that have a capital nature.
First, let us ascertain the nature of the transaction and determine whether it falls under capital expenditure or revenue expenditure. Capital expenditure refers to costs incurred in acquiring, extending, or improving a fixed asset. On the other hand, revenue expenditure is incurred as part of routine business operations and is considered a normal business expenditure.
As per Accounting Standard (AS) 10 “Property, Plant and Equipment”
“Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Accounting Standards.
10. An enterprise evaluates under this recognition principle all its costs on property, plant and equipment at the time they are incurred. These costs include costs incurred:
(a) initially to acquire or construct an item of property, plant and equipment; and
(b) subsequently to add to, replace part of, or service it.
Subsequent Costs
12. Under the recognition principle in paragraph 7, an enterprise does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-today servicing of the item. Rather, these costs are recognised in the statement of profit and loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and 7 consumables, and may include the cost of small parts. The purpose of such expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment.
13. Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Similarly, major parts of conveyor system, such as, conveyor belts, wire ropes, etc., may require replacement several times during the life of the conveyor system. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a non-recurring replacement. Under the recognition principle in paragraph 7, an enterprise recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 74-80).”
Referring to relevant paragraphs of AS 10, it can be concluded that costs incurred in day-to-day activities can be classified as repairs and maintenance work. On the other hand, expenses that have the potential to enhance the useful life of a property, plant, or machinery should be added to the cost of those assets or capitalized.
By examining the pertinent sections of the GST laws, we can determine whether Input Tax Credit (ITC) is available or not.
“Section 16. Eligibility and conditions for taking input tax credit.-
(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”.
The Central Government is empowered under Section 16(1) of the CGST Act, 2017, to impose conditions and restrictions on availing input tax credit. Subsequently, Section 17 of the CGST Act, 2017 has been enacted to specify and enforce these “conditions and restrictions” on claiming input tax credit.
“Section 17. Apportionment of credit and blocked credits.-
(1)… …………………
(2)………………….
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
(a) …………………
(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;
(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 (c) and (d), the expression -construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
(e) …………………”
Section 2(119) of CGST Act defines “works contract”
(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;
To make this more concurrent we can refer few relevant Advance rullings which have identical facts:
1. M/s. Mahavir Nagar Shiv Shrushti Co-op. Housing (Mumbai, Dated 10/11/2021) AAR & AAAR dated 30/09/2022.
Held that : The society is not eligible for Input tax credit in the subject case where the contractor has provided works contract service for repairs, renovations & rehabilitation works.
2. M/s. Vishal Co-Operative Housing Society Limited (Mumbai, dated 02/11/2021) AAR
Held that: ITC on GST paid on the said works contract services received by the society will not be available to the extent of capitalization as mentioned in explanation of section 17(5) of the CGST Act, 2017
Considering these regulations, rulings, and Accounting Standard 10, it’s prudent to conclude that co-operative housing societies might face restrictions on availing Input Tax Credit for major repair works with a capital nature.
Certainly, the mention of Circular No. 109/28/2019-GST dated 22nd July 2019 adds another layer of complexity and nuance to the understanding of Input Tax Credit (ITC) implications for repair work in co-operative housing societies. This circular holds particular significance as it addresses the entitlement of Resident Welfare Associations (RWAs) to claim ITC on specific expenses, including repair and maintenance services.
Circular No. 109/28/2019-GST dated 22nd July 2019 serves as a directive from the authorities, providing clarity on the treatment of ITC for RWAs. According to the circular, RWAs are permitted to claim ITC on GST paid for capital goods and certain input services, which includes repair and maintenance services. This circular is a critical reference point for co-operative housing societies, as it elucidates the scope of ITC availability for RWAs engaging in repair and maintenance activities.
However, it’s essential to approach this circular in conjunction with the broader provisions of the GST laws, especially Section 17(5) of the CGST Act, which imposes limitations on ITC for construction-related activities of an immovable property with capitalization potential. The circular’s directive on ITC for repair and maintenance services should be understood within the context of these regulatory frameworks.
Incorporating this circular into the analysis, co-operative housing societies should carefully evaluate the interplay between Circular No. 109/28/2019-GST dated 22nd July 2019 and the GST laws, particularly Section 17(5). While the circular acknowledges the possibility of claiming ITC for certain input services, it’s prudent to consider the specific nature of repair work, whether it falls under routine maintenance or constitutes a substantial improvement to the property.
In conclusion, Circular No. 109/28/2019-GST dated 22nd July 2019 is a crucial document that underscores the entitlement of RWAs to claim ITC on capital goods and specific input services, including repair and maintenance services. Co-operative housing societies should leverage this circular while factoring in the broader provisions of the GST laws to ensure accurate and compliant utilization of Input Tax Credit for repair work. However, it is important to consider the provision in Section 17(5) of the CGST Act, 2017, which indicates that the availability of ITC for capitalization purposes may be restricted. Therefore, while the society can claim ITC on capital goods, the extent of ITC available for the capitalization of works contracts may be limited based on the provisions mentioned.
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Disclaimer: The opinion expressed above is founded on the author’s best knowledge and understanding of pertinent laws, regulations, and accounting standards. This opinion is provided solely for the reader’s information and should not be used as a basis for forming opinions. It’s essential to recognize that the author cannot be held responsible for any loss or damage, whether direct or indirect, arising from the utilization or reliance upon the information presented in this opinion. The provided opinion reflects the author’s individual perspective based on the information available.
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