Can ITC be availed on GST paid for construction of immovable property which is to be let out for Rent?

Can ITC be availed on GST paid for construction of immovable property which is to be let out for Rent?

Introduction

Utilisation of ITC is subject to a number of restrictions. One such restriction is that ITC shall not be available in respect of the goods/services/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. However, can ITC be availed w.r.t GST paid on construction of immovable property which is to be let out for rent. We will throw light of this concept with the help of an interesting case of  Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax (Orissa High Court).

Can ITC be availed on GST paid for construction of immovable property which is to be let out for rent?

The High court of Orissa has thrown light on this issue in the case of  Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax

Facts of the Case

Petitioners (Safari Retreats) are mainly carrying on business activity of constructing shopping malls for the purpose of letting out of the same to numerous tenants and lessees.

1. Huge quantities of materials, inputs and also services are required for construction purposes. Therefore, the company has to purchase/receive these goods and services for carrying out the said construction.
2. All these goods and services which are purchased/received for such construction are taxable under the CGST Act and OGST Act and as such the petitioner has to pay very huge amounts of Central Goods and Services Tax (CGST) and Odisha Goods and Services Tax (OGST) on such purchases.
3. One of the large shopping mall constructed by the Company  has been completed recently and the petitioner has made necessary arrangement for letting out different units of the said shopping mall to different persons on rental basis.
4. It is an undisputed fact that the activity of letting out the units of the shopping mall attracts CGST and OGST on the amount of rent received.
5. The petitioner having accumulated Input Tax Credit (ITC) amounting to Rs 34,40,18,028  in respect of purchases of inputs in the form of goods and services is desirous of availing ITC on the goods and services which are consumed in the construction of the said shopping mall.
6. In order to utilise the said input credits to discharge and pay the CGST and OGST payable on the rentals received by the petitioner from the tenants of the said shopping mall and approached the revenue authorities in this regard.
7. However, the petitioner was advised to deposit the CGST and OGST collected without taking input credit in view of restrictions placed as per Section 17(5)(d) and was warned of penal consequences if it did not do so. The petitioner thus has to pay very large amounts of CGST and OGST.

Provision of Section 17(5)(d)

1. The benefit of ITC has been denied by applying Section 17(5) (d) of the CGST Act as well as of the OGST Act.
2. The said Section 17(5) (d) provides that notwithstanding anything contained in Section 16(1) and Section 18(1) of both the aforesaid Acts, ITC shall not be available in respect of the goods and 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.

Issue Raised

The Petitioner has been informed by the authorities under the CGST Act and OGST Act that in view of Section 17(5)(d), he cannot avail of the benefit of ITC paid on the purchases of input materials and services which have been used in the construction of the shopping mall for set off, against the GST payable on rent received from the tenants of the shopping mall

Observation and Findings

1. The GST law was implemented with the object of avoiding the cascading effect of various indirect taxes and to reduce the multiplicity of a number of indirect taxes.
2. In view of Section 7 of CGST Act the activity of the petitioner of letting out of the units of the shopping mall to different persons amounts to “Supply” and petitioner squarely comes within the definition of `supplier’ as appearing in Section 2(105). Accordingly the Petitioner is liable to pay CGST and OGST on the said rental amounts received by it.
3. In order to avoid the cascading effect of various input taxes, Section 16 of the CGST Act provides that every registered person shall be entitled to take ITC charged on any supply of goods or services or both made to him, which are used or intended to be used in the course or furtherance of his business.
4. The sale of immovable property post issuance of completion certificate does not attract any levy of GST. Consequently, in such a situation, there is a break in the tax chain and, therefore, there is full justification for denial of ITC as, on the completion of the transaction, no GST would at all be payable and, therefore, no set-off of ITC would be required or warranted or justified.
5. But the position is totally different where the immovable property is constructed for the purpose of letting out the same, because, in that event, the tax chain is not broken and the construction of the building will result in GST revenue.
6. The denial of ITC in such a situation would be completely arbitrary, unjust and oppressive and would be directly opposed to the basic rationale of GST itself, which is to prevent the cascading effect of multi-stage taxation and the inevitable increase in costs which would have to be borne by the consumer at the end of the day.
7. In the present case also, the effect of denial of ITC would be a sharp and inevitable increase in the cost which the owner of the building would be compelled to incur, which would render the building itself uncompetitive as compared to previously existing similar built-up units.
8. The contention which has been raised by the learned counsel for the petitioners keeping in mind the provisions of Section 16 (1)(2) where restriction has been put forward by the legislation for claiming eligibility for ITC has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2). While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis.
9. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST.
10. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is, covered under the GST, but still he has to pay huge amount of GST, to which he is not liable.

Ruling and Order of Hight Court (HC)

1. In that view of the matter, the HC held that the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted
2. The very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the ITC on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.

Thus it was held that ITC can be availed w.r.t GST paid on construction of immovable property which is to be let out for rent.

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