Is it possible to avail ITC on GST paid for Construction of Immovable property?

Ashish M. Shaji

12 Mar, 2021

Availing of Input Tax Credit is subject to some restrictions. One of these restrictions include that ITC shall not be availed in respect of the goods or services or both received by taxable person for the construction of immovable property on his own account, including when the goods and services or both is used in furtherance of business. However, availing ITC on GST paid for the construction of immoveable property is possible if the property is to be used for renting purposes. 

ITC on GST paid for construction of immoveable property to be used for renting: Case Law-

The matter reached to the High Court of Orissa in a writ petition that was filed by the petitioner- Safari Retreats Private Limited and the Orissa HC heard the matter and ruled that ITC can be availed on goods and services used for the construction of an immoveable property that is to be given on rent.

Let’s dive deep into the facts of this case.

Facts of the Case-

The petitioner, i.e., Safari Retreats Private Limited, mainly carry out business activity relating to the construction of shopping malls to be rented out to tenants and lessees.

• Materials, inputs, and services are needed in huge quantities for construction purposes. Therefore the company needs to purchase/receive goods and services to carry out the construction.
• These goods and services that are purchased/received for construction is taxable under the CGST (Central Goods and Services Tax) Act, and OGST (Odisha Goods and Services Tax) Act, and the petitioner has to pay massive amounts of CGST and OGST on purchases.
• The company had constructed a shopping mall recently, and after its completion, the petitioner made necessary arrangements for renting the different units of the shopping mall to different persons.
• It’s an undisputed fact that the activity of letting out of the units of mall attracts CGST and OGST on the rent amount so received.
• The petitioner accumulated Input Tax Credit amounting to 34,40,18,028 rupees in respect of purchases of inputs in the form of goods and services sought to avail ITC on goods and services that are consumed in the shopping mall construction.
• To use the input credits to discharge and pay CGST and OGST payable on rentals received by the petitioner from the shopping mall tenants, the petitioner approached the revenue authorities.
• However, the petitioner was asked to deposit CGST and OGST collected without taking input credit due to the restrictions placed under Section 17 (5) (d) of the Act and was warned of penalty if it did not do so. Therefore the petitioner had to pay a considerable amount of CGST and OGST.

What does Section 17 (5) (d) of the CGST Act state?

The benefit of ITC on GST paid for construction of immoveable property has been denied by applying this section of the CGST Act.

The said section states that notwithstanding anything contained in Sections 16(1) and 18(1) of the CGST Act and OGST Act^[1], ITC is not available in respect of goods and/or services received by a taxable person for constructing an immoveable property on his own account including when the goods and services or both is used in furtherance of business.

The petitioner was informed by the authorities that in view of section 17 (5) (d), he is not permitted to avail benefits of ITC paid on the purchase of input materials and services that were used in the shopping mall construction for set off against the GST payable on rent received from the tenants.

Ruling of Orissa High Court

The Hon’ble HC interpreted the aforesaid section of the CGST Act to give benefit to the person who paid GST. It has to be read in continuity of the transaction as the rent income arises out of the malls that are built after the payment of GST on different items.

If ITC is denied on building meant to be let out, it shall amount to treating the transaction as similar to the building meant to be sold.

Further treating these two different types of transactions as one for GST is contrary to the basic principles of classification of subject matter of tax levy, thereby violates Article 14 of the Indian Constitution.

Article 14 of the Indian Constitution deals with equality before law. This concept of equal protection of the laws requires the state to provide special treatment to persons in different scenarios to establish equality among all. Therefore if the petitioner has to pay GST on rental income arising out of the investment on which he had paid GST, it should have the ITC on GST. 

Thus it was held by the HC that ITC on GST paid for construction of immovable property to be used for renting, can be availed.

Conclusion

This ruling by the Hon’ble HC would provide a sigh of relief of availing credit and clarity to trade and also help in eliminating unwanted litigation in the future.

Read our article: Complete Synopsis on GST Refund of Unutilised Input Tax Credit