The legal scenario of admissibility of input tax credit in case of construction of immovable property with the intention to sell it to the prospective buyers of the erstwhile VAT regime has been mutatis mutandis adopted in the present innovative GST regime . However with the ambit of sale been enlarged by the larger concept of supply with the inclusion of services in the GST regime , the legal scenario of admissibility of input tax credit in case of construction of immovable property with the intention of letting it out to the prospective recipients has raised pertinent issues and these issues need to be addressed after careful study of all the related provisions envisaged under the present GST regime .
Section 9 of the Central Goods & Services Tax Act , 2017 ( hereinafter referred to as “the Act ” ) is the charging section which inter alia provides that subject to the provisions of sub-section (2) of section 9 , there shall be levied a tax called the Central Goods and Service Tax on all intra State supplies of goods or services or both , except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Act and at such rates not exceeding twenty percent , as may be notified by the Government on recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person .
In order to avoid cascading effect of various input taxes , section 16 of the Act 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 Act , be entitled to take credit of input tax charged on any supply of goods or services or both made to him , which are used or are 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.
Clause (d) of sub-section (5) of section 17 of the Act inter alia provides that 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 goods and services or both received by a taxable person for construction of an immovable property ( 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 .
The Explanation to this clause further clarifies that the expression ” construction ” used in this clause (d) includes re-construction , renovation , additions or alterations or repairs , to the extent of capitalization , to the said immovable property .
It is pertinent to note that paragraph 5 (a) & 5(b) of Schedule –II to the Act embody following provisions –
“5. Supply of services :
The following shall be treated as supply of service, namely:-
(a) renting of immovable property;
(b) 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,”
It is also significant to note that as per paragraph 6(a) of Schedule-II of the Act works contract as defined in clause (119) of section 2 shall be treated as supply of services . It is pertinent to note that clause (119) of section 2 embodies following provisions :
(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods is involved in the execution of such contract;
Now considering the aforesaid provisions it is quite evident that where any construction of a complex , building , civil structure or a part there of is carried out with the intention to sale it to the prospective buyers then in such cases input tax credit ( ITC ) shall be available to the person carrying out such construction i.e. the supplier . The most significant condition to get ITC in such cases is that entire consideration must not have been received after issuance of completion certificate in respect of such construction . It is pertinent to note that in such cases the tax chain is not broken at any stage but if the completion certificate is issued in respect of such construction then such construction shall be treated to be completed and therefore such immovable property can not attract ITC despite its sale because immovable property has not been included in the ambit of “goods” as defined in clause (52) of section 2 of the Act , which embodies following provisions :
“goods” means every kind of movable property other than money and securities but includes actionable claim , growing crops , grass and things attached to or forming part of land which are agreed to be severed before supply or under a contract of supply ; “
It is pertinent to note that paragraph 5(a) specifically provides that renting of immovable property shall be treated to be supply of services and therefore any renting of immovable property shall attract GST under the Act .
However where any building is constructed with the intention of renting it subsequently and such intentions are explicitly expressed by the flow of consideration from the prospective recipients to the supplier prior to the completion certificate being issued in respect of such building or complex then in such case ITC cannot be denied in respect of the goods or services or both involved in such construction . It is significant to note that in such case, there is no break of chain of GST and there is no provision under the Act which specifically prohibits admissibility of ITC in such cases .
As regards provisions embodied in clause (d) of sub-section (5) of section 17 , ITC has been denied only in such cases where goods or services or both are received by a taxable person for construction of immovable property ( 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 .
It is pertinent to note that the scope of clause (d) of sub-section (5) of section 17 is confined to such cases where any immovable property is constructed with the intention of sale or use by the taxable person .The taxable may use such immovable property by himself or for purposes other than business or in the course or furtherance of business . In such cases once the building is constructed and its completion certificate is issued , such building falls out of the ambit of GST and as such the tax chain is broken . Thus this restriction and non-admissibility of ITC as contemplated by clause (d) of sub-section (5) of section 17 does not apply to the cases where the immovable property is constructed with the intention to sale to the prospective buyers or with the intention of letting it to prospective recipients because in both such cases the tax chain is nowhere broken .
It is pertinent to reiterate that paragraph 5(a) of the Schedule-II of the Act specifically mentions that renting of immovable property shall be treated as supply of services and paragraph 5(b) of Schedule-II of the Act or clause (d) of sub-section (5) of Section 17 no where denies ITC in cases where construction of any immovable property is carried out with the intention of letting it to the prospective recipients and prior to the completion certificate being issued in respect of such immovable property , the prospective recipients have already entered into the rent agreement of such immovable property with the flow of consideration party or wholly to the supplier by such recipients .
In the Writ Petition (c) No. 20463 of 2018 , M/S Safari Retreats Private Limited and another Versus Chief Commissioner of Central Goods & Service Tax & Other ( Date of hearing and Judgment 17-04-2019 ) , the petitioners had challenged the action of the Department whereby they were denied the benefit of ITC in case of construction of immovable property intending for letting out . To the aforesaid denial Hon’ble Orissa High Court after considering at length the aforesaid issue has pronounced following judgment :
” The very purpose of the Act is to make the uniform provision for levy collection of tax , intra state supply of goods and services both Central or State and to prevent multi taxation .
Therefore , the contention which has been raised by the learned counsel for the petitioners keeping in mind the provisions of Section 16(1)(2) where restriction has been put forward by the legislature for claiming eligibility for input credit has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2) . While considering the provisions of section 17(5)(d) , the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act , in as much as the petitioner in that case has to pay huge amount without any basis . Further , the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to the completion certificate , he would not be required to pay GST . But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST , but still he has to pay huge amount of GST , to which he is not liable . (para-19)
In that view of the matter , in our considered opinion the provisions of Section 17(5)(d) is to be read down and the narrow restriction as imposed , reading of provision by the Department , is not required to be accepted , in as much as keeping in mind the language used in (1999) 2 SCC 361 (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 . ( para-20) “
The fall out of the aforesaid Judgment of Hon’ble High Court is that in case of construction of immovable property intended for letting out to the recipients , input tax credit shall be available to the person carrying out such construction except where entire consideration has been received after issuance of completion of certificate in respect of such immovable property . The provisions of clause (d) of sub-section (5) of section 17 of the Act shall not apply to aforesaid cases .
However , where any building or complex or immovable property has been rented out after its completion , the tax chain is broken in such cases and as such no ITC shall be available to the supplier in such cases .