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:
||Any lease, tenancy, easement, license to occupy land;
||Any lease or letting out of the building including a commercial , industrial or residential complex for business or commerce , either wholly or partly;
||Renting of immovable property;
||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:—
||an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or
||a chartered engineer registered with the Institution of Engineers (India); or
||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:—
(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;
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.