AUGUST 07, 2018
By S Sivakumar, LL.B, FCA, FCS, MBA, ACSI, Advocate
ONE of the most important and perhaps, most confusing issues related to input tax credit are contained in Sections 17(5)(c) and (d) of the CGST Act, 2017. This section, in brief, reads as under:
17(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:—
(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 capitalisation, to the said immovable property;
Let’s also keep in mind, the definition of ‘works contract’ under Section 2(119) which reads as under:
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;
A study of Section 2(119) would indicate that, 14 types of transactions related to immovable property, are covered under the definition of ‘works contract’. In other words, there are 14 types of works contracts that are envisaged in the definition.
Be that as it may clauses (c) and (d) of Section 17(5) deny ITC, only in respect of a specific kind of works contract, viz. ‘for construction of immovable property’. It is not as if, all works contracts pertaining to immovable property are covered in Section 17. A works contract for ‘construction’ of an immovable property is all that is covered under Section 17(5)(c). Per se, works contracts for fitting out, fabrication etc. of an immovable property are not covered under this Section, indicating that, there is no bar on availment of ITC on these works contracts. One must bear in mind the fact that, the words used are ‘for construction of immovable property’ and not ‘in relation to immovable property’ and consequently, Section 17(5)(c) has to be restrictively interpreted, indicating that, GST can be restricted only for the construction of the bare/warm shell and that, GST cannot be denied on post-construction activities.Thus, GST paid on supply, delivery and installation of furniture/fit outs, by a real estate developer, is available as ITC. Also, ITC is very much available, on the GST paid to a contractor who has installed air-conditioners, DG Sets, electrical fittings, etc.
Taking this discussion forward…in terms of Section 17(5)(d), ITC is denied, in respect of GST paid on) 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. Here again, on a similar reasoning, one can conclude that, ITC is available in respect of the GST paid on movable assets such as DG sets, furniture and fittings, Elevators, Lifts, Air-conditioners, etc.
Let’s now take a look at the explanation to Section 17(5), in terms of which, the expression “construction”includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
One can see that, there are two types of situations that are envisaged in Section 17(5), viz. ITC for construction of immovable property and ITC pertaining to activities that are used post construction of the immovable property, such as, renovation, repairs, re-construction, etc. of an existing immovable property. The said explanation only covers the post construction activities and consequently, capitalization in the books of accounts cannot be a bar for availment of credit, in respect of ITC on works contracts and goods or services used for construction of the immovable property.
There is a widespread view amongst GST assessees and CAs that no ITC can be taken if the cost of the goods or services or the works contracts, are capitalized in the books of account of the GST assessee and especially, the commercial real estate developer or builder. This view would need to be revisited in the light of this piece.
There is another angle to this discussion. A very careful reading of the explanation to Section 17(5) would indicate that the expansive definition of ‘construction’ is limited to re-construction, renovation etc, to the extent of capitalization, ‘to the said immovable property’. Please mark these words, viz. ‘to the said immovable property’. This would indicate that, the expansive definition of ‘construction’ can be applied only in instances, where the GST assessee has already capitalized the immovable property, in his books of accounts. ITC cannot be denied, for instance, in a case of a lessee who has repaired or renovated the immovable property for being further let out to a sub-lessee, as the lessee, in this case, has not capitalized the immovable property in his books (in this case, it is the lessor or the owner who would have capitalized the immovable property in his books).
Of course, in terms of Section 17(5), ITC cannot be denied in respect of the GST paid on plant and machinery, as defined under Section 17, despite being used ‘for construction of immovable property’.
With the term ‘immovable property’ not being defined under the GST law, we might have to depend on the definition given in other Statutes such as, in Section 3(26) of the General Clauses Act, 1897, in terms of which, the term ‘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. We cannot lose sight of the fact that the term ”for construction of immovable property’, being only one of 14 odd types of works contracts that are defined under Section 2(119), a restricted view would need to be taken, vis-à-vis denial of credit pertaining to immovable property.
(The author expresses his gratitude to Mr K S Ravishankar and Mr B N Gururaj, Advocates, for enlightening him on the subject matter. The views expressed are strictly personal.)