Input Tax Credit (ITC) is available on all type of purchases (goods or capital goods or services) if they are used for business (Sub-Section 1 of Section 16). But there are exceptions to this rule. In case of certain purchases ITC is not available even if they are used for business. Such types of purchases are listed in Sec 17(5).
One of such type is purchases for construction of immovable property listed in Sec 17(5)(d). In this article an attempt is made to understand academically what are the credits (ITC) blocked and not blocked u/s 17(5)(d):-
Relevant portions of the Section are produced hereunder:
“Section 17. Apportionment of credit and blocked credits
(5) 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 the following, namely:—
(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 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.”
Section 17(1) to 17(4) prescribes the circumstances and procedure for reversal of credit (i.e., ITC) which is already availed or taken. In contrast to these sections, Section 17(5) prescribes the circumstances wherein credit should not be taken at all.
|Blocked Credits||This was mentioned as part of the heading for Section 17. But “Blocked Credits” is not defined. However a similar meaning phrase is used in Sec 17(5) which is “not available”. So blocked credits means credits which are not available.
Not available means such credit should not be claimed & taken to e-credit ledger. It becomes part of the cost to the registered person.
|Goods or Services or both||Definition of goods:
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;
Goods include capital goods also.
Sec 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;
Definition of services:
(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
1[Explanation.––For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities;]
Meaning of “both”:
“Both” has got no special meaning. It may refer to a supply which consists of both goods & services. In GST, everything falls either under goods or services because of services definition is residuary definition which includes everything which are not goods.
|Received by a taxable person||“Received” not defined. It means receipt of goods or services. Generally goods or services are received when they are purchased. So here the test to be applied for its availability of credit is at the time of purchase of goods or services and not at the time of its actual usage.
“Taxable Person” 2(107) “taxable case experson” means a person who is registered or liable to be registered under section 22 or section 24;
|For construction||Goods or services purchased for construction of immovable property. Here the purpose of purchase is deciding factor. Whether they are actually used or not in construction of immovable property is immaterial. Because the word used is “for construction” and not “used in construction”.
“Construction” is defined in explanation to Sec 17(5)(d) as
“construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
Here important thing to be noted is capitalization of expenditure. In case expenditure is not capitalized and charged to Profit then such expenditure is not for construction. So expenses relating to repairs which are charged to Profit are not for construction, but if the same repairs are capitalized in the books of accounts then it becomes for construction.
|of immovable property||“Immovable Property” is not defined in the Act. As per The General Clauses Act, 1897
“2(26) “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”
It can be seen that it is an inclusive definition. Land is mentioned in the definition but building is not specifically mentioned.
But building is an immovable property as it falls under the limb of the definition “fastened to anything attached to the earth.”
Similarly plant & machinery which are permanently fastened to the earth also forms part of the immovable property.
|Other than plant and machinery||Government does not want to restrict ITC on plant & machinery whether they are fixed to earth or not. But as per the definition of “Immovable Property” plant & machinery which are fixed to earth form part of the immovable property. So here section excludes plant & machinery from the definition of immovable property.
Definition of Plant & Machinery:
As per Explanation after 17(5)(6):-
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.
This is very beneficial definition. Goods and Services used for laying foundation of the plant & machinery also becomes part of the plant & machinery and ITC is available on that expenditure also. In other words ITC available on purchase of iron, cement and other materials or services for construction of foundation for plant & machinery.
One of the exclusion for Plant & Machinery is “land, building or any other civil structures;” In some industries, land may be used as plant or building may be used as plant or civil structure may be used plant. So even if these are used as plant & machinery, input tax credit is not available. Example: For a person who provides training in swimming, the swimming pool is a plant for him. Though it is classified as plant in his books of accounts, ITC is not available because of this specific exclusion of civil structures from the definition of plant & machinery.
Definition of civil structure:
“Civil Structure” is not defined in the Act. It is physically built structure for providing shelter and other conveniences for humans and other living beings. Example: Buildings, storage houses, sheds, roads, bridges, railway lines, dams, canals, pipelines, towers etc.
Definition of plant:
Plant is not defined in the Act. Plant would include any article or object fixed or movable, live or dead, used by businessman for carrying on his business and it is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business.
|On his own account||This is important phrase in this Section. It means the immovable property should be own property. In other words goods or services used for construction of immovable property owned by another person are not covered under this clause (d). [It becomes works contract which is covered u/s 17(5)(C).|
|including when such goods or services or both are used in the course or furtherance of business.||Sec 17(5) starts with a notwithstanding clause. It over rides Section 16(1). By mentioning the same once again here in this clause (d), legislature wants to stress it once again that credit is not available even when they are used for business purposes.|
1. Input Tax Credit is not available on goods or services purchased for the purpose of using them for construction of own immovable property. Credit is not available even if the immovable property is used for the purposes of the business.
2. Credits which are not blocked:
a. Plant & Machinery fixed to earth is an immovable property as per the definition. But here it is excluded. It means credit is available on plant & machinery even if they are defined as immovable property as per the immovable property definition.
b. “Construction” means the expenditure which is capitalized in the books is called construction under this clause. So any construction activity such as temporary structures, repairs, renovation if debited to Profit & Loss Account in the books of accounts, then credit is available. It is not a blocked credit. Credit is not available only when they are capitalized in the books of accounts.
There are many clauses in 17(5) which prescribes various instances where credit is not available i.e., blocked. In this article clause (d) is analysed. Under this clause (d), credit is not available in case good or services or received for the purpose of construction of immovable property even though they are used for the business purposes.
17(5)(d) explained with the following examples:
Mr. Ram a registered person in readymade garments business, purchased cement for Rs.1,28,000/- wherein Basic Taxable Value is Rs.1,00,000 Lac and GST is Rs.28,000 in the month of August 2020. Cement is not trading goods for Mr. Ram as he is not a dealer in cement but a dealer in readymade garments. He purchased cement with a view to construct his own showroom building for his own business. He used the cement in construction of the building in the month of November, 2020.
Mr. Ram wants to take credit of Rs.28,000/- in the month of August(month of purchase) and reverse it in the month of November (month of utilization).
Is it correct?
The answer is no. He should not take input tax credit at all in the month of August 2020 because his intention at the time purchase is to use it for construction of immovable property (even though it is used for business purposes) which is a blocked credit under Section 17(5)(d).
Mr. Krishna is a dealer and registered person doing trading business in cement & iron in rented premises. He wants to construct a new building for his business purposes. He uses cement & iron from his shop which is already purchased. He used 300 cement bags from the stock lying in his shop for construction of building in the month of November 2020. As per the stock register maintained by him, these cement bags might have been purchased in the month of August 2020 and ITC availed in the same month.
Whether Mr. Krishna availing ITC in the month August 2020 is correct?
Answer is correct because at the time of purchase of cement his intention is to sell it only and not to use it for construction of building. So availing of ITC in the month of August 2020 is correct.
Is availment of credit is correct, then whether he is required to reverse the credit or not? If he is required to reverse the credit in which month it should be reversed and under which Section/Rule it should be reversed?
As per clause (d), test has to be made at the time of receipt of goods. Section is silent what would happen if on a later date the registered person uses such goods for construction of immovable property. Rule 42 & 43 talks about Sec 17(1) and 17(2) only i.e., exempted supply. In this goods are not supplied but retained with him. So if a literal interpretation is resorted to then such credit need not be reversed. But if the intention of the legislature is kept in mind then such credit is not available and registered person needs to reverse the credit in the month of utilization of goods for construction of immovable property. There is no specific rule prescribing the method or procedure to reverse such credit. Hence one has to reverse the credit u/s 17(5) only. It is worthwhile to mention here that there is a specific row in Form GSTR-9 to mention the reversal of credit u/s 17(5).
For getting clarity in this regard Sec 17(5)(d) may be read as follows:
“(d) goods or services or both received “or used at a later date” 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.”
How much ITC is to be reversed in such cases?
As the registered person is dealer in cement, he purchases cement regularly with different rates. So it becomes highly difficult to identify the exact purchase invoice for such goods. To discover the purchase price, it is suggested to adopt weighted average method for the month in which goods are used for construction. This method can be followed until a specific provision is introduced in the Act in this regard.
Construction of building is given on contract to another person including for materials. Contractor charged GST in his Tax Invoice. Whether ITC is available for the building owner?
The service provided by the contractor falls under the definition of “works contract” as per Sec.2(119) of CGST Act . Works Contract is a supply of service as per Schedule II of CGST Act. Under the provisions of Sec 17(5)(d), both goods or services used for construction of building is blocked. In this case ITC not available.
|Credits which are not blocked under Sec 17(5)(d)||Examples|
Disclaimer: This article is for understanding the provisions of the Act and not a professional advice.