SEPTEMBER 18, 2019

By R Sridhar, Consulting Editor, TIOL

THE negative list of items on which credit is not available, have been coded under Section 17(5) of the CGST Act. While the overarching principle, is that any Input Credit is not inherently available but is granted by the statute is true and well settled, it should also be pointed out that the discrimination in entitlement of credit is not pursued through the law. In this article we look at three components of credit falling under Clause C and Clause D of section 17(5) which have certain inconsistencies. Thirdly we also analyse certain exceptions to the negative list i.e. Works Contracts credits pertaining to installation of Plant and Machinery.

Section 17(5) (c)

With regard to Clause (c) of section 17(5) the mandate of the law, is that credit on works contract services when supplied for construction of immoveable property is not available as credit unless it is used for further supply of works contract services .There are situations factually in Construction Industry when big Works Contractors, sub contract portions of work to smaller contractors and the exception to Clause (c) covers these kind of contracts. In this regard it is pertinent to observe that Construction is defined to include renovation, repairs, reconstruction or alterations to the extent they are capitalisation to the immoveable property .There is currently a definition of capital assets in Section 2(19) of the CGST Act from which we can broadly understand that if, repairs, renovation etc. are capitalized that credit will not be available.

In India we have the common form of Community Living wherein Resident Welfare associations –RWA (taxable under GST subject to conditions, limits of maintenance fees) undertake renovation projects, whenever a condominium of flats are affected due to passage of time, wear and tear etc.. Under the Income Tax Law all Resident Welfare Associations pay tax on the surplus generated and as regards Income tax, major repairs and renovations are debited to the Income and Expenditure account. The credit of ITC available on renovation etc. is used to discharge liability of GST on Maintenance and Service Charges levied by the RWA.

While the explanation to Clause c and Clause d of Section 17(5) if read from a substance point of view will present a view that the credit of Works Contracts services are available as all repairs, renovations are on Revenue account .For example if an Association /RWA undertakes painting work through a Contractor of a Condominium which is over a decade old, the ITC would be available as it generally debits all such expenses to Income and Expenditure account. The phrase "to the extent of capitalization however is debatable if the same is interpreted as "what should be capitalized".

Secondly in large Industries and Factories, Input tax credit of GST on ongoing Major Repairs and Maintenance of Factory Buildings done through Works Contractors would be available subject to the phrase as elucidated in the Explanation .It is also relevant to articulate that the phrase should be seen or interpreted and understood from the treatment the taxpayer has given to the expenditure rather than what should be the treatment from a Revenue point of view. In other words the accounting treatment given to the expenditure by the tax payer in accordance with Accounting Standards should be final.

Section 17(5) (d)

As regards the Clause d, it is also possible for large Real Estate Companies to construct Commercial properties for the purpose of renting them out as Commercial space for offices etc. In this regard it is clear that ITC is not available even if the property is used to earn Commercial Rent which is subject to GST. It is pertinent that the Hon'ble Orissa High Court in the case of Safari Retreats Private Limited - 2019-TIOL-1088-HC-ORISSA-GST held that credit was available and read down the provision as above. While it is not certain whether the Revenue has accepted the above decision or not, the rationale for denying credits are not clear. It is also relevant to note whenever consideration for a complex, building is received after the completion certificate is issued by the State Authorities, the same is covered by GST as service (Schedule II of CGST Act) and the same is taxable .In these conditions, ITC would be available and hence a policy change is required considering that there is a discrimination which appears unjustified.

Secondly there are many large Corporations that buy land and construct offices for their own use. The stamp duty is paid as per law on the value of the land and post the acquisition, the Corporation tend to build a structure suited for its needs after securing approval from the Competent Authority. In these cases also, currently credit is being denied under 17(5) (d) and as the Office is used for the purpose of business, there appears no justifiable policy requirements to prohibit credit.

Capital Revenue Divide

Generally a sizeable portion of ad hoc disallowances in Income Tax stem from the argument of Capital Revenue divide. The Assessing authorities tend to disallow a portion of Maintenance and Repairs (other than Plant and Machinery also) and the same is added to the Building block and a depreciation is granted. In these kind of cases, there is ample opportunity for litigation from the GST side as, the entire GST Audit focus would be on books and how other Revenue Departments have looked at the books of accounts and handled their assessments .In the age of transparency, it would therefore be prudent to provide for a beneficial policy of ITC that takes into account all situations as enumerated above.

Did the CGST law borrow this negative covenant from Maharashtra VAT (erstwhile law?)

Under the erstwhile Maharashtra VAT Law the Rules for set off barred a tax payer from taking credit when purchases were made by tax payer for Works Contracts and the same resulted in any immoveable property other than Plant and Machinery .While the language employed in the CGST law is different from the Maharashtra VAT, the apparent public policy achieved in denying credits in situations under GST expressed above is not clear.

Exceptions to the negative list – Works Contracts credit pertaining to Plant and Machinery –Explanation to the Chapter V, VI of the CGST Act

In the erstwhile regime there are many decisions as to what constitutes Plant and Machinery. While only time and higher judicial forums will pronounce the impact of the old jurisprudence on the GST law, as regards Plant, there are other issues in this exception, which are dealt below

(A)  The Explanation has a "means" portion and a "includes "portion. The "includes" portion of the definition is not wide enough to be inclusive .There is a excludes portion also which resembles in essence or substance the post 2011 definition of Input services under the Cenvat Credit Rules (erstwhile law).

(B)  Apart from this the Explanation restricts Plant and Machinery credits only to those apparatus, equipment and machinery, fixed to earth by foundation or structural support. Example; What would be the status of Input tax Credit on Works Contract which is awarded for Air Conditioning lines and pipes running on the ceiling to keep a packing environment cool in a food factory. The lines are not fixed to the earth and they do not have structural support on the ground. The broader interpretation of structural support can come to the rescue of affected tax payers.

(C) The exclusion to the exception also includes items like Pipelines laid outside factory premises which have a proximate connect to the business and hence defies logical understanding .For example if a Factory is permitted to draw water from a nearby lake by the State Government for its production needs and water is used in production of food products in the factory. Let us hypothesis, that the lake which is say 3.5 Km away from the factory and inside the factory, the pipeline runs for 700 meters, then a factory (tax payer) would be within the four corners of law to take proportionate credit on 700 meters of pipe running inside the factory, which also defies the concept of completeness of credit and policy behind this denial

Prayer

A careful analysis of section 17(5) would reveal that there are genuine policy considerations in putting items into negative list for credits .We can, for example, reflect on items such as credits on Membership of Clubs, services or goods used for personal consumption etc. However, in the company of such items, we find that there are certain items that deserve to be omitted from the negative list. While restrictions on credit is driven by policy considerations, it is also true that while drafting, unintended consequences may arise. In 2018, the GST Council had beneficially considered a few issues and changed the policy on items like Input Tax Credit on services which the law mandates an employer to provide such as Canteen etc. It is prayed that the items discussed above, also be considered for inclusion in the ITC regime by the Law Committee of GST Council and scope for litigation is reduced to the bare minimum.