Availing of Input Tax Credit by Works Contractor / Construction of Immovable Property- Credit Blocking Scenarios


Input Tax Credit for Works Contract

As per section 17(5) of CGST Act, Input tax credit shall not be available in respect of works contract services availed by a person for constructing an immovable property (other than Plant and Machinery).

However it is not mentioned any where in the Act that Works Contractor Services Provider using goods or services are not eligible to take ITC on inward supplies. Only Service receiver using works contract services for construction of an immovable property (other than plant and machinery) are not eligible to take ITC credit. Further where Works contractors using  an input service for further supply of works contract service are also eligible for ITC;

Reference of Section 17 of Central Goods and Services Tax Act, 2017 given below for your reference : 
Apportionment of credit and blocked credits

17. (1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b)of paragraph 5 of Schedule II, sale of building.

(4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:
Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year:
Provided further that the restriction of fifty per cent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(a) motor vehicles and other conveyances except when they are used—
(i) for making the following taxable supplies, namely:—
(A) further supply of such vehicles or conveyances; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) for transportation of goods;
(b) the following supply of goods or services or both:—
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre;
(iii) rent-a-cab, life insurance and health insurance except where —
(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
(iv) travel benefits extended to employees on vacation such as leave or home travel concession;
(c) 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;
(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.
Explanation.—For the purposes of clauses (c)and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
(e) goods or services or both on which tax has been paid under section 10;
(f) goods or services or both received by a non-resident taxable person except on goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.
(6) The Government may prescribe the manner in which the credit referred to in sub-sections (1) and (2) may be attributed.

Explanation.— For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.

Taxman article  [2018] 94 taxmann.com 49  (Article)
Construction of Immovable Property- Credit Blocking Scenarios
GOPAL NATHANI
FCA
Ordinarily speaking the levy of indirect tax under Central Goods and Services tax Act, 2017 (CGST) is upon a movable property. Hence an immovable property is not subject to tax. However in the following scenario more particularly defined in Schedule –II read with section 7 of the CGST the following activities are to be treated as supply of goods or services:
(a)   Any lease, tenancy, easement, license to occupy land;
(b)   Any lease or letting out of the building including a commercial , industrial or residential complex for business or commerce , either wholly or partly;
(c)   Renting of immovable property;
(d)   construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
Explanation.—For the purposes of this clause— (1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:—
(i)   an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or
(ii)   a chartered engineer registered with the Institution of Engineers (India); or
(iii)   a licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure; Construction of a complex, building
This suggests that any consideration derived from the use of an immovable property or during the course of their construction may be taxable under the CGST Act.
Further input tax credit is admissible u/s 16 with reference to any supply of goods or services in the course or furtherance of business. However at the same time in the Act there are certain conditions and restrictions detailed in section 17(5) which deny input tax credit with reference to certain expenditure for construction of immovable property as under:
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
  (a) to (b)** ** **
(c) 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;
(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.
Explanation.— For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
  (e) to (i)** ** **
Recently the Authority for Advance Rulings in their Ruling No. 3/2018-19 dated May 04, 2018 (AAR- Uttarakhand) in the context of expenditure on sanitary fittings on newly constructed buildings conveyed an opinion that Cenvat credit of GST paid in relation with building or any other civil structure is not available and since sanitary fittings are integral part of building or any other civil structure, cenvat credit of GST paid on such sanitary fittings is not available.
Clause (c) and Clause (d) by its very nature when read in isolation point to blocking of input tax credit viz a viz building construction expenditure. Explanation below the two clauses (c ) and (d) further on excludes from the ambit of input tax credit certain amounts of expenditure and in this regard limit such blocking to the extent amount of expenditure capitalized in the books of account. In other words any expenditure that is not capitalized but charged to revenue in the books will not be subject to credit blocking. Thus any expenditure within the scope of the two clauses (c) and (d) as well as under the Explanation which when capitalized will be subject to credit blocking.
Further by the settled rule of capitalization either one can claim depreciation or input tax credit. Thus as far as credit restriction goes the provisions of sub-section (5) of section 17 is only limiting credit in respect of such expenditure to the extent of capitalization for the purpose of making a claim for depreciation under the provisions of section 32 of the Income-tax Act, 1961. If the taxpayer chooses to disclaim the benefit of depreciation the restriction imposed under section 17 (5) will become redundant.
By the very nature an immovable property is capable of earning incomes from certain services or even during their construction. The restriction in regard to input tax credit u/s 17(5) has bearing only in a situation of capitalization of such expenditure and this fact is also answered in the following FAQ series by the Central Board of Indirect Taxes (CBIT):
Q. 11. Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income-tax Act, 1961, will ITC be allowed in such cases?
Ans.The input tax credit shall not be allowed on the said tax component in respect of which depreciation has been claimed.
Even if there is reference to the terminology ‘goods’ there is no denying that an immovable property is deemed to be chargeable to goods and services tax in certain situations as outlined in Schedule –II activities scenarios and to regard credit blocking of any such services availed or goods or services received for construction of immovable property in all circumstances is like taking an extreme position which may not be strictly in accordance with the law. Thus the credit blocking is only in case of those taxpayers who intend to claim depreciation on the amount capitalized in the books as buildings and not otherwise.

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