As per Sec 16(1) of CGST act, it has put forth that every registered person is eligible to take credit of input tax charged on any supply of goods and services or both to him which are used or intended to be used in the course of business or furtherance of business. Whatever amount he is eligible to be claimed as ITC will be added to the electronic credit ledger of the respective taxpayer.
Sec 17(5) (d) of CGST act has clearly told that GST incurred on goods or services for construction of an immoveable property cannot be claimed as Input Tax Credit irrespective of use of the immoveable property for furtherance of business or not.
The term construction here also depicts the terms renovation, re-construction, additions or alterations or repairs to the immoveable property whichever end up being a capital expenditure. For the term ‘immoveable property’ the CGST act does not give a definition, so we have to refer to the definition given in the General Clause Act 1897. The act puts forth that ‘immoveable property’ inclusive of land; benefits arise out of the land, and the things attached to the land or permanently fastened to anything attached to the earth.
When the goods or services are bought for construction of immoveable property which will be used in the course of business, the GST paid on such good or service is also not eligible to be claimed as Input tax credit.If the immoveable property is constructed for own purpose, the owner will become the end user and he cannot avail ITC of cost incurred on construction goods, as there is a break in the tax chain.
But there is an exemption that when the goods or services are used for construction of a plant or machinery, the GST paid on the same can be availed as ITC.
For example, Mr.A buys goods like bricks and sand for construction of a new staircase for the office building, the GST paid on the purchase of goods cannot be claimed as input tax credit as per sec 17(5) d. But when Mr.A buys the same for construction of a plant or machinery like furnace, the GST paid on the same can be claimed as ITC even though it is permanently connected to the earth.
But this exception got questioned in a case between Tarun Realtors Pvt Ltdvs. GST AAR Karnataka. The judgement was
“Some facilities like transformers, sewage treatment plant, electrical wiring and fixtures, Surveillance systems, D.G. sets, lifts, air handling units etc., are something which are expected to be there in a commercial mall to consider the civil structure as a commercial mall and it cannot be considered separate from civil structure. So when the plant or machinery is considered to statutory for the building or when it defines the nature of the building, the GST paid on cost of the plant or machinery cannot be claimed as ITC.
As per Sec 17(5) c, when any service provided by the way of works service contract for further supply of a work service contract the GST paid for such contract can be claimed as ITC. For example, Mr.A is about to shift his office to another location and for that he gives Mr.B a work service contract to build a new office building and on the process of construction, Mr.B thought it would be better if he outsource interior designing for that building and he approaches Mr.C for a work service contract for interior designing. In this case, Mr.B can claim the ITC for the GST he paid to Mr.C for the work service contract for interior designing. Whereas Mr.A cannot claim the GST he paid on the first contract with Mr.B. It means we can claim ITC only when the contract is a subcontract for another contract of construction of immoveable property and not when the contract is a direct contract for construction of immoveable property. For claiming that ITC against the GST paid to the sub contract, the direct contract activity should qualify as a works contract as per CGST act.
For qualifying as a works contract, the following definition put forth by sec 2(119) of CGST act is to be met,
The ITC cannot be claimed on the taxable value to the extent of capitalisation. For example, if the cost of construction of the building is Rs.1 crore. In that one crore rupees Rs.0.75 lakhs comes under capital expenditure and if Rs.0.25 lakhs is spent for repairs and maintenance which is of revenue nature, the GST paid on that revenue nature of repairs and maintenance can be claimed as ITC.
When the immoveable property is constructed for letting out purpose, ITC will be available for claiming as per the view of Orissa High court decision. The petitioner was involved in business of construction of commercial malls, ultimately which are constructed for the purpose of letting out. All the goods bought for construction attracts GST but the petitioner was not availed of claiming ITC of the GST paid as per Sec 17(5) d. The principal argument put forth was the primitive objective of the CGST act is to curb down the cascading effect or double taxation which seemed to be a limitation under old tax regime, but restriction of claiming ITC breaks down the flow of credit chain and denial of availing ITC in it is unjust, arbitrary, oppressive and contradictory to the basic rationale of CGST act.
It has been told that ITC can be restricted under Sec 17(5) d, only when there is a break in the tax chain. For example, if an immoveable property is constructed and sold, it will not be taxable under CGST act, so the ITC on construction materials bought for construction of the same cannot be availed as there is a break in the tax chain. But when the immoveable property is constructed for the purpose of letting out, the rent will also be taxed under CGST act and there will be no break in the tax chain, so it will be fair to avail ITC for the GST paid for the purchase of construction materials.
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