Background
Every supplier shall be liable to be registered in the state from where he makes taxable supplies of goods/services, if aggregate turnover in financial year exceeds Rs. 20 Lakhs pa. Section 16 of the GST Act which provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49 of the GST Act, be entitled to take credit of the input tax 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 and the said amount shall be credited to the electronic credit ledger of such person.
While the registered taxable person can avail eligible credit on goods/services used in course of business, at same time there is a list of restricted or blocked credit set out as well.
In Section 17(5) of GST Act sets out that the input tax credit shall not be available in respect of the following, namely:[relevant extract]
— (a)……………. (d) goods or 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. For the purposes of clause (d), the expression 'construction' includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
It maybe noted there is no restriction to avail credit on plant machinery, equipment such as AC/transformers/UPS, apparatus and its supports/foundations which are used in making taxable supplies of goods/services
On a literal reading of the above said restriction at 17(5)(d) on credit, seems that the credit on goods/services for construction of immoveable property on own account, such as building for self-use is not permissible. Such credit is not restricted when the constructed building for own use by assessee is not capitalized to immoveable property block. Similar restriction is in place for credit on renovation, additions or alterations or repairs of building for self-use, to the extent of capitalization, to the immovable property.
However in the recent decision by Orissa High Court in Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax in W.P. ( C) No. 20463 of 2018 vide order dated April 17 2019 read down section 17 (5) (d) of the CGST Act to give benefit to the person who has paid GST since rent income is arising out of the malls which are constructed after paying GST on different items. If input tax credit is denied on building intended to be let out, it would amount to treating the transaction as different from permitting availment of credit on building intended to be sold. Further held that the treatment of these two different types of transactions as one for the purpose of GST, is violative of Article 14 of the Constitution, which sets out for equality before the law for all.
In this article the paper writer has analyzed the eligibility to construction and allied credit to supplier of taxable goods/services in context of Safari supra.
Eligibility to credit on goods/services construction of immoveable property
In order to construct building, inputs such as cement, steel, aluminum, wires, plywood, paint, are required. Similarly services such as consultancy service, architectural service, legal and professional service, engineering service design services are required for construction of building. GST would have been paid on such procurements by assessee.
Section 17(5) (d) provides that input tax credit shall not be available in respect of the goods and services or both received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business.
The term 'on his own account' is not defined. Going by Dictionary meaning 'on own account' it maybe said to be ' for self use' or 'for oneself'. When such an interpretation is taken, then the credit maybe said to be restricted when constructed building is for yourself such as factory building put for own use by supplier to manufacture taxable goods. Alternately it maybe said to be constructed other than on own account, when it is constructed for purpose of sale in course of construction to others[example commercial complex where agreement to sell shops/units are entered with end buyers in course of construction], as in such scenario it is not meant for self use. This seems to be the view preferred by dept, which seems to interpret that the credit for new construction is available when the building is sold in course of construction works to end buyer.
The details of Safari Retreats supra where held the input tax credit on the construction of mall meant for giving on rental basis to tenants is eligible given below
Safari Retreats Private Limited Decision [W.P. ( C) No. 20463 of 2018]
Facts: The shopping mall was constructed and the units were let out to different persons on rental basis. The activity of letting out units of shopping mall attracts GST on the amount of rent received, as the said activity amounts to supply of service under GST Act.
The assessee was desirous of availing credit of GST charged on supply of goods/services consumed and used in construction of shopping mall. This was in order to utilize the said input tax credit to discharge and pay GST on rentals received from tenants.
Issue: The petitioner was advised to deposit the GST without taking input tax credit in view of restrictions placed as per section 17(5)(d).
- Arguments in favour of availing such credit: The petitioner being a registered dealer is statutorily entitled to avail of the benefit of taking credit of the tax charged on the supply of goods and services utilized for the construction of the mall and set off the same against GST on the rentals from the tenants
- There is no break in the supply chain and the receipt of rentals and the tax payable thereon are the direct consequence of the construction of the mall.
- Where the immovable property is constructed for the purpose of letting out the same, the construction of the building will result in a fresh stream of GST revenues to the Exchequer on the rentals generated by the building. The denial of input tax credit 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.
- The sale of immovable property post issuance of completion certificate does not attract any levy of GST. GST would not be payable and, no set-off of the input tax credit would be justified. Further, the denial of the ITC in respect of a building intended to be let out would amount to treat it as identical to a building which is meant and intended to be sold.
- The treatment of these two different types of buildings as one for the purpose of GST is violative of the Petitioners’ fundamental right to equality guaranteed by and under Article 14 of the Constitution.
- To grant input tax credit to a builder who sells building where completion certificate has not been issued at the time of sale while denying it to a person like the Petitioner is arbitrary and discriminatory.
- Such an interpretation of Section 17(5)(d) leads to double taxation, i.e., firstly, on the inputs consumed in the construction of the building and secondly, on the rentals generated by the same building.
- It is also a settled principle of interpretation of tax statutes that interpretation should be adopted which avoids double taxation.
- It would be violative of the fundamental right to carry on business under Article 19(1)(g) of the Constitution as it would impose an arbitrary restriction which would render buildings constructed for letting out uncompetitive, by imposing the burden of double taxation of GST on such buildings, i.e., firstly, on the inputs consumed in the construction and, thereafter, on the rentals generated by the building.
Held: Section 17(5)(d) requires to be read down, by confining the provision to cases where the building in question is constructed for the purpose of sale of the same post issuance of completion certificate, thereby terminating the tax chain.
In Eicher Motors Ltd. v. Union of India [1999 (106) E.L.T. 3(S.C.)] wherein Apex Court had held that assesseees have a vested right to claim benefit of utilization of the unutilized credit.
Held 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, inasmuch as keeping in mind the language used in Eicher Supra, 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 input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.
Implication of the above judgment
This decision seems to be step in right direction as it follows the well accepted principle that when the output suffers tax, the input tax credit should be available. In light of this decision, the credit on goods/services used in construction of building which is used for supply of taxable goods/services maybe availed. There must be clear nexus established to show that the building is integrally required to the supply of goods/services.
However such credit maybe disputed by dept. Further the dept may contend that till the restriction is in place in Section 17(5) such credit should not be availed. Also that the decision in Safari supra is applicable only to that petitioner and not to others. This view may not be correct.
When the assessee is risk averse may take call to avail such credit and reverse under protest under intimation to dept by RPAD letter and then re-avail[without time limit] once there is favourable judgement by Apex Court in this regard.
Conclusion
The decision in Safari is a High Court decision which maybe relied to avail credit pertaining to construction of building and other civil structures, meant for own use in business, and which are capitalized in books. Such credit which was not availed in past maybe availed now for 2018-19[last date to avail such credit is before filing Sept 2019 return].
In this article paper writer has sought to clarify few of the aspects faced by the assessee in respect of availment of credit related to construction.
The author can also be reached at roopa@hiregange.com.
CAclubindia
