JULY 03, 2019

By Krishnamachari Srinivasan, IRS (Retd)

THIS article is a perfect sequel to the previous one, where the Author clearly rules out any ITC on Construction activity despite the expenses being treated as revenue in books of accounts, since they are considered intrinsically capital in Nature.

Goods and services received and used by a taxable person in the construction of an immovable property, regardless of his intention to treat them as revenue expenditure to overcome the bar of Section 17(5) of the GST Act, would be clearly ineligible to any ITC, appears to be the clear dictum.

In this article, the Author clearly brings out an antithetical fact, that ITC on goods and services though used for construction of an immovable property, regardless of the fact that it is also capitalised to the immovable property, is still eligible being the sole exception of such immovable property being deployed for providing a taxable activity.

Lately, trade and industry are facing denials of ITC by the GST officials, on goods and services received by them for further use in the construction of immovable property meant for furtherance of business in the form of either renting out such immovable property or providing scores of other taxable services such as storage, warehousing, port service, etc.

The parent Law under the GST regime governing ITC and eligibility of ITC under Section 16 of the GST Act largely admits credit on goods and services used or intended to be used in the course or furtherance of business. The non-obstante clause under it, does not appear to restrict the said credit in any way there with reference to immovable property, intended for business, either.

However, there is a specific prohibition clause to block ITC under Sec 17(5) (d) of the GST Act, which prevents ITC from being availed on goods and services received by a taxable person for construction of an immovable property (other than plant and machinery) on own account, including when such goods and services are used in the course or furtherance of business.

Ideally, one more explanation under it would have eminently saved the trade of the trouble of incessant reversals and litigation, if only it had added that except when such construction of immovable property though on own account, is for the exclusive provision of taxable services.

The intention of the legislature, in this regard can however be ascertained still, in the absence of such a second explanation, from the past legislation to some extent and from the extant legislation, for the remaining.

In the past, CENVAT credit on Inputs and Services used in the construction of structures, jetty, machinery, etc., with which taxable manufacturing activity or output services were undertaken, were all held by the Law Courts, to be eligible for CENVAT credit.

The underlying rationale laid down in these cases, are that so long as the Inputs and Services are used, either at an intermediary level or at a final stage of manufacture or provision of service, would still be eligible for credits, provided the final products/Services, are chargeable to duty/tax.

Going by the above logic, post GST, in M/S Safari Retreats Private Limited case, it was held that input tax credit from construction against output GST on rental income, is allowed.

Despite output activity amounting to Construction of an immovable property, Inputs would still be eligible for ITC, within the meaning of Sec 17(5)(d), since the tax credit was to be necessarily used for off-setting tax liability on the renting of immovable property.

Therefore, an illustrative account of the past and present, state clearly the point of law, that ITC on goods and services received by a taxable person for construction of Plant and Machinery, structures such as jetties in a Port, Rental Real Estate property, Resorts etc., is allowable.

Albeit an immovable property in nature, with a clear end-purpose of providing an activity that attracts an imminent tax liability, ITC on such goods and services used are clearly eligible under Sec 17 (5) (d) of the GST Act and the bar of the Explanation under it would not act. And its concomitant use, for setting off the end-tax liability is also allowed, is the firm view of the Author.

(The Author is a Former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer GST, and currently a Senior Asssociate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)