Maharashtra AAR denies GST ITC on construction of Immovable Property used on own account

Introduction

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.

According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.

Certain situations when ITC cannot be claimed:-

1.A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)

2. A person cannot claim ITC for the tax paid for the following:-

i. Food and beverages

ii. Outdoor catering

iii. Beauty treatment

iv. Health services

v. Cosmetic and plastic surgery

3. Services of general insurance, servicing, repair and maintenance

4. Sale of membership in a club, health, fitness centre

5. Rent-a-cab services, life insurance, health insurance

6. Travel, benefits extended to employees on vacation such as leave or home travel concession.

7. Works contract services for construction of immovable property

8. Construction of immovable property on own account

9. Composition scheme

10. Non residents

11. Supply for personal use

12. Free samples and goods destroyed

13. Restaurant services

Now, an important point mentioned above for which ITC will not be available will be the Works contract services for construction of immovable property. To elaborate on this point further ITC is not available on 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.

That means that ITC will be available on works contract service when supplied for construction of other than an immovable property or plant and machinery.

Will construction of immovable property for letting out to various tenants on which GST will be charged under the head ‘renting of immovable property’ will be considered as an immovable property (where ITC is not available) even though the same is not for personal use but for the course of furtherance of business?

Let us refer to the advance ruling in the case of Ashish Arvind Hansoti (Maharashtra AAR) where a similar issue was raised.

Facts of the Case:-

1. Applicant is involved in construction of immovable property for letting out to various tenants on which GST will be charged under the head ‘renting of immovable property’.
2. For the purposes of such construction, huge quantities of materials and other inputs were purchased by applicant and certain input services were also availed against which applicant has paid GST and now wants to avail credit of such GST paid by him, for discharging the output tax liability.

Observation of AAR:-

1. Eligibility of ITC is governed by the provisions of Chapter V of the CGST Act consisting of Sections 16 to 21.
2. While Section 16 mentions the eligibility and conditions for taking input tax credit. Section 17 speaks about apportionment of credit and blocked credit.
3. Section 17(5) states that notwithstanding anything contained in Section 16(1) and Section 18(1), ITC shall not be available in certain cases. Thus in this case it was imperative to find out whether the applicant is barred from taking under Section 17(5) of the said Act.
4. Section (17)(5)(d) bars a taxable person, from taking input tax credit for construction of immovable property (as in the subject case) which is on his own account, even when such goods or services or both are used in the course or furtherance of business (in the subject case, renting of the said property).
5. Further, it is also seen from the submissions of the applicant that the immovable property in the subject case is neither a plant nor machinery.
6. Section 17(5)(d) provides that no ITC is available in respect of any goods or services received by a taxable person for construction of an immovable property on his own account even if such inputs and input services are used in the course and furtherance of business.
7. In the instant case the applicant has himself built the immovable property for which he has received various goods or services or both and is using the said property for giving the same on rent to his customers.
8. Therefore, as per Section 17(5)(d), no ITC is available on any goods or services received by him for such construction and the same cannot be claimed by him. Thus, the provisions of Section (17)(5)(d) squarely applies in the subject case and thus the applicant cannot avail input tax credit.

Reference to Sree Varalakshmi Mahaal LLP (Tamil Nadu AAR)

1. Advance Ruling Authority in Tamil Nadu had ruled that, No Input Tax Credit is available against any goods or services received by the applicant for construction of Marriage Hall on his own account even if used in the course, or furtherance of his business of renting the place.
2. The decision made in the Sree Varalakshmi Mahaal LLP case is squarely applicable in the subject case also.

Conclusion by AAR

The applicant is not eligible to claim ITC on construction of commercial immovable property which will subsequently be used for renting.

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