MAY 27, 2019

By Dr G Gokul Kishore

WE commence this 39th part with a suggestion which is generally considered as utopian or totally unrealistic. Unthinkable becomes very much possible after a few years or decades. Brainstorming is required to eventually extend credit to goods and services used in construction of immovable property. We are motivated in this endeavour by recent judgment of Orissa High Court extending such credit.

Section 17(5)(d) of CGST Act - Unambiguous and absolute

If seamless credit is the basis of GST, then Section 17(5) has no place in CGST Act. But every law conferring a right balances the same with restrictions as well. The question or test is whether such restrictions are reasonable. This is one of the fundamental tests for determination of even Constitutional validity of law vis-à-vis fundamental rights as contained in Part III of the Constitution. Therefore, CGST Act while extending near-seamless credit, restricts the same in respect of certain goods and services in certain situations. One such restriction is contained in clause (d) of Section 17(5). This clause bars credit in respect of goods or services or both received for construction of an immovable property (excluding plant & machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

The language used in the above provision appears to be, to an extent, unambiguous and the restriction is absolute as is the case with provisions barring rights. It seeks to deny credit on goods and services which are received for construction of an immovable property. Ambiguity is visible when one tries to interpret the provision along with the words ‘on his own account'. The department may defend it on the ground that the restriction of ITC in such cases operates only if the resultant construction is for the recipient's possession and enjoyment. If the immovable property after construction is to be possessed and enjoyed by somebody else, then the person providing construction service is entitled to avail such credit. This is, of course, in line with similar restriction contained in clause (c) of Section 17(5) pertaining to works contract service.

The restriction is absolute as it seeks to override Section 16(1) which entitles a registered taxpayer to avail credit on goods or services used or intended to be used in the course or furtherance of business. Irrespective of the fact that the goods or services are used for construction of immovable property which in turn is used for conducting business, credit is not available. The seamless credit hits the wall once immovable property comes into existence.

Section 17(5) (d) to be read down - Orissa High Court

In one of first landmark judgments in GST regime, Orissa High Court has held that Section 17(5)(d) is to be read down and the narrow interpretation adopted by the department was not acceptable. It further held that the narrow interpretation adopted by the department was frustrating the very object of the CGST Act [ Safari Retreats Pvt. Ltd. V. Chief Commissioner - Judgment dated 17-4-2019]- 2019-TIOL-1088-HC-ORISSA-GST. The petitioner had argued that Section 17(5)(d) covers situation where inputs are consumed in construction of an immovable property which is meant and intended to be sold as sale of such property after receipt of completion certificate is not liable to GST. The petitioner was engaged in construction of malls and after such construction, they were leased out. Credit on goods and services used in construction was sought to be set off against GST payable on rental which was not accepted by the department.

Credit admissibility on construction

Generally, credit is available to developers though they are engaged in construction of immovable property. They are not engaged in construction on their own account but on behalf of others as the constructed portion / super-structure belongs to the buyer with whom agreement has been entered into. In such cases, the transaction precedes receipt of completion certificate and, therefore, tax on construction service is payable. In this case, credit on goods and services which went into such construction is admissible and can be utilized for payment of tax on construction service. If the developer sells the immovable property after construction and after receipt of completion certificate then the same is liable to stamp duty as a conveyance and GST is not applicable. Use of credit, therefore, does not arise and restriction on availment itself may be justifiable. Similar restriction on works contract service leads to the conclusion that credit restriction on construction related goods and services is probably linked to the fact as to whether credit chain is maintained or gets broken. Similar argument was taken by the petitioner in the above mentioned case also.

If output is taxable, credit of input tax should be allowed and this is the starting point of credit scheme. If the activity in which inputs are used results in something i.e. output (final product or service) which is exempt or not taxable, then credit to the extent attributable to such exempted or non-taxable activity is not admissible or if availed, is to be reversed. Complications set in when these fundamentals are translated into provisions. To ward off such potential complications, draftsmen labour to use expressions like ‘on his own account' which sometimes becomes counter-productive. Counter-productive because the provision as contained in Section 17(5)(d) effectively bars credit to a normal manufacturer who constructs factory shed or provides protective roof over machinery. These are termed as immovable property by the department which in most cases are. Then the expression ‘on his own account' is applied to such manufacturer. The construction is undertaken by such manufacturer on his own account as the factory shed is not for sale. The shed is immovable and, therefore, he is trapped in Section 17(5)(d).

This is one area where the GST Council and the tax administration need to take a re-look in the second and third year of GST. A manufacturer procuring goods and services for construction of shed in factory is not using goods for personal consumption. The test of use of such goods for business is squarely satisfied as the goods which went into such construction are those which are relatable to or aid in manufacture of final products supplied on payment of GST. Once such essentials of credit scheme are met, there is no rationale to deny credit to such manufacturer. Similar is the situation in respect of service providers like the petitioner in the case discussed in the earlier portion of this article. The objective sought to be achieved i.e. restricting credit when the output is not taxable stands defeated when the person engaged in non-taxable supplies and the one involved in taxable supplies are administered the same medicine. We hope serious thought is given to this issue.

(…To be continued)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal.]

See Part 38