The topic of restriction of input tax credit in respect of an immovable property shall become highest litigative issue under GST regime. In this article, we have once again covered impractical view given by an Advance Ruling Authority, disallowing input tax credit in relation to inputs and input services used for construction of commercial immovable property, which is subsequently used for renting.
We understand that these judgements are being passed without even understanding the basic concept of restrictions designed under GST law towards immovable property. All such judgement and/or decision would go long way in increasing litigation under GST on this specific issue.
Fact of the case
The Applicant is engaged in construction of immovable property with intent to sell it during construction or post completion of construction or License the premises to a suitable long term Licensee. Therefore the property is used for letting out to various tenants on which GST will be charged under the head ‘renting of immovable property’. For this purpose huge quantities of materials and inputs were purchased by the applicant. There were certain input services on which applicant has paid GST and now wants to avail credit of GST paid by him.In this regard, the Applicant want to understand whether they shall be entitled to claim input tax credit of GST paid on inputs and input services used for construction of commercial immovable property, which is subsequently used for renting.
Contention of the Applicant
The applicant contended that the provision of Section 17(5)(d) shall not be applicable in the given case since input tax credit in respect of immovable property is being used for rendering output taxable services i.e. renting of immovable property. Therefore there is no break in tax chain since he will be paying output tax in respect of such construction and therefore provision of section 17(5)(d) shall not be attracted.
Further when immovable property is sold after receiving completion certificate, the same is not chargeable to tax so credit cannot be availed on the same. But in this case since the property will be generating output revenue, denial of credit will be against the principal of GST.
The applicant also relied on a decision made by Orissa High Court2,where it was held that credit of tax paid on goods and services can be availed in case where immovable property is further rented out.
Observation of the Hon’ble Maharashtra AAR
The Advance Ruling Authority of Tamil Nadu in a similar matter 3, held that, no input tax credit can be availed against any goods or services or both used for construction of marriage hall on his own account even if the same is used in the course or furtherance of his business of renting the place.
The decision of similar case4 has also been referred by the apex body. But it is to be noted that the facts of the case are not at all similar to the facts of the present case.
In a similar case2 the Orissa High Court Bench, observed that party had constructed malls which were further given on lease and therefore the party was eligible to claim input tax credit on the same.
The apex court held that Section 17(5)(d) restricts a taxable person from claiming input tax credit for construction of immovable property, which is on his own account, even when such goods or services or both are used in the course or furtherance of business. Further, the above said property is also not a plant & machinery. In the given case applicant has himself build the immovable property on his own account even when such inputs and input services are used in the course and furtherance of business.
So the provision Section 17(5)(d) shall apply in this case. Therefore, it was held that applicant is not eligible to claim ITC of GST paid on inputs and input services used for construction of commercial immovable property, which is subsequently used for renting. Further since the Orissa High Court decision in Safari Retreats Pvt Ltd has not attained finality since the department has filed an appeal in the Supreme Court, same cannot be relied upon.
Hence in view of the above discussion and Explanation to Section 17(5) of the CGST Act, the AAR are of the opinion that the applicant is not entitled to ITC of GST paid on inputs and input services used for construction of commercial immovable property, which is subsequently used for renting.
1M/s Ashish Arvind Hansoti 2020-TIOL-155-AAR-GST
2Safari Retreats Private Limited Vs. Chief Commissioner of Central Goods and Service tax
3Sree Varalakshmi Mahaal LLP
4GGL Hotel and Resort Company Limited
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