Would GST ITC on construction of Lift be available to Hotel as it has been used in the course or furtherance of business?
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 a lift/elevator be considered as an immovable property (where ITC is not available) or movable property or Plant & machinery (where ITC is available)?
Let us refer to the advance ruling in the case of Jabalpur Hotels Private Limited (Madhya Pradesh AAR) where a similar issue was raised.
Facts of the Case:-
- Jabalpur Hotels Private Limited was incorporated with an object to construct Hotel in Jabalpur.
- Company started construction of Hotel and completed a major part of its work.
- The Hotel was in construction stage and the promoters of the hotel had some doubt on the issues of ITC and hence preferred to file Advance Ruling before the Authority.
- This application sort advance ruling for input credit on Lift used in hotel.
- The applicant sought ruling on availability of ITC of tax paid on Lift purchased and installed by the applicant in the hotel building, particularly with reference to blocked credit as defined under the provisions of Section 17(5) of the GST Act.
Submissions by Applicant:-
- The hotel is a multi-storeyed building and, thus, the provision of lift was essential for running the business.
- It was also mentioned that the room tariff of some of the rooms is proposed to be more than Rs.7500 and therefore the restaurant would be paying GST @18% and availing ITC on goods and services used in course or for furtherance of business.
- The application mentions that the said Lift is being capitalized in the books of the company and depreciation as per the Income Tax Act, 1961 is charged on the cost of lift less eligible credit of GST.
- Hence no depreciation is being applied on the GST portion credit of which is eligible in accordance with the provisions of section 16 of CGST Act 2017.
- Section 17(5) blocks credit of works contract and goods or services received by a taxable person for construction of an immovable property (other than plant and machinery)
- As Lift is machinery it does not fall in the restriction of section 17(5) of CGST Act 2017.
- It was therefore pleaded that the lift in question be termed as ‘Plant & machinery’ and hence out of purview of blocked credit in terms of Section 17(5)(d) as ‘Plant & Machinery’ has been excluded from the definition of immovable property.
Proceedings of Authority of Advance Ruling (AAR)
Is ITC available for construction of hotel building?
- According to Section 17(5)(d), Goods, services or both received by a Taxable person for construction of an immovable properly (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
- Thus, the intent of the legislature is clear that it intends to restrict ITC on any goods or services which are used or intended to be used in construction of an immovable property, even when such goods or services or both are used in the course of furtherance of business.
- Any goods or services used in construction of an immovable property shall not qualify for availment of ITC in terms of this section 17(5).
- To avoid the event of blocking of credit in terms of Section 17(5)(d), the applicant argued that ‘Lift’ merits classification as ‘Plant and Machinery’ and since ‘Plant and Machinery’ is excluded from the term ‘immovable property’, for the purpose of Section 17(5)(d), the applicant shall be entitled to ITC of tax paid on such Lifts.
- The applicant essentially seeks to avail ITC on lifts which are purchased and installed in the building which would be used as a Hotel for providing taxable service.
- Thus, the lifts are sought to be considered as ‘input’ for hotel building.
- That being the case, the ITC is blocked clearly in terms of Section 17(5)(d), even when ‘such goods or services or both are used in the course or furtherance of business’
- To be more precise, hotel building being an immovable property, any input or input service going into its construction shall not be available for availment of ITC.
Can the lift be said to a part of a building or is it distinct from a building?
- A lift comprises of components or parts (goods) like lift car, motors, ropes. rails, etc. and each of them has its own identity prior to installation and they are assembled/installed to create the working mechanism called lift.
- The installation of these components/parts with immense skill is rendition of service and without installation in the building, there is no lift.
- Lifts are assembled and manufactured to suit the requirement in a particular building and are not something sold out of shelf and, in fact, the value of goods and the cost of the components used in the manufacturing and installation of a lift are subject to taxation while the element of labour and service involved cannot be treated as goods.
- Parts of the lift are assembled at the site in accordance with its design and requirement of the building which may include the floor levels and the lift has to open on different floors or otherwise depending upon the requirement.
- It has to synchronize with the building and each door has to open on the level of each floor.
- The lift therefore becomes part of the building and is not a separate thing per se. A lift does not have an identity when removed from the Building.
- Therefore, the lift cannot be said to be separate from a Building.
- A lift is not an item that is purchased and sold. It is a customized mechanism for transportation, designed to suit a specific building. Upon piece by piece installation, it becomes an integral part of the building.
Can the lift be considered as Plant & Machinery?
- In the instant case, the applicant had procured the customized lift and gotten it installed piece by piece in the building resulting in the mechanized transportation system called lift.
- The explanation below Section 17(6), relating to the expression “plant and machinery” includes foundation and structural support.
- It has also been stated that such foundation and structural support are used for fixing apparatus, equipment and machinery.
- Further the definition has excluded land and building and any other civil structure from the definition of the “plant and machinery”.
- Prima facie, there seems to be contradiction in the inclusion of “such foundation and structural supports” and exclusion of “building or any other civil structures”.
- This apparent contradiction is however negated by the fact that the exclusion of the building or civil structure is for plant and machinery per se, while the inclusion is for foundation and structure is only to the extent that such foundation and structure is used to fasten the apparent, equipment or machinery to earth.
- Thus, if the plant and / or machinery is fixed / fastened to the earth by a foundation or civil structure then such foundation or civil structure shall be included in plant and machinery.
- Accordingly, in the explanation relating to Plant and Machinery, beneath Section 17(6), while providing the meaning of the term plant and machinery, it has been clearly stated that Buildings and Civil Structures shall not be covered under the term Plant.
- However, while so clarifying, it was accepted and understood that plant and machinery many a times requires support structure and / or foundation for installation and cannot work otherwise. Thus, civil structures and foundation as supporting structure for fastening of plant and machinery to earth has been included as part of plant and machinery.
- In the instant case, the lift has become part of the building and thus falls under the exclusion from plant and machinery
Reference to an identical case
- AAR found that an identical issue had been decided by AAR Karnataka in the matter of M/s. Tarun Realtors Pvt. Ltd, Bengaluru.
- AAR Karnataka had ruled that Lift, along with, several other such items, shall not be entitled for input tax credit when used in construction of immovable property since they take the character of Building itself.
In the instant case based on the above observations, the AAR thus held that the applicant shall not be entitled to avail input tax credit of tax paid on procuring the lift to be installed in the hotel building, as the same is blocked in terms of Section 17(5)(d) of the CGST Act 2017, as the lift become an integral part of the building.