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The law pertaining to availment of credit of tax suffered by the builders supplying works contract Construction services seems to have undergone sea change under GST regime as seen from the relevant law.

Section 17(5) provides for specific situations where ITC cannot be availed despite the fact that tax has been paid/suffered on procurement of works contract services in construction of a building. Among others, section 17(5)(c) is important with regard to restrictions of ITC against supply of construction service. Section 17(5)(c) read with explanation, is reproduced below:

'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;

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 capitalization, to the said immovable property;'

Other sections i.e. section 2(119) and section 2(60) which relevant for this article, are reproduced below:

Section 2(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 (whether as goods or in some other form) is involved in the execution of such contract;

Section 2(60) 'input service' means any service used or intended to be used by a supplier in the course or furtherance of business;

On analysis of section 17(5)(c), we find that the legislature has incorporated a general principle regarding admissibility/denial of ITC. The principle is that the ITC is not available when works contract services have been supplied for construction of immovable property. According to this principle, the builders, who are admittedly procuring or supplying (through the contractor or otherwise) works contract services to the landlord/customer (of flat), should not be eligible for availing credit of ITC suffered by us, since while supplying works contract service of construction, construction ofimmovable property i.e. a building takes place.

However, above mentioned general principle has two exceptions which are prescribed in the section itself. As per first exception, the ITC is available if the works contract services have been supplied for construction of plant and machinery which has no relevance for the purposes of this article. As per second exception, the ITC is available if the works contract service supplied for construction of immovable property is input service for further supply of works contract service.

Now the only question is as to whether works contract services with regard to construction, fall within second exception. On analysis of the language of the 2nd exception which states that credit is available when works contract service supplying construction service 'is input service for further supply of works contract service,' it is seen that to fall into this exception, the works contract service supplied by the builder, should be input service for further supply of works contract service. That means there has to be at least one more works contract service in the chain which should consume the input service of works contract supplied by the builder. The first one has to be works contract service for supply of construction of immovable property and the other one can be works contract service of any of the kinds specified in section 2(119) and may not necessarily be construction. This is illustrated as below:

Illustration1. Works contract service supplied for construction of road would not be eligible for credit (road being immovable property) but the credit is admissible if road is part of bigger works contract like construction of complex or construction of a township etc., since works contract service of construction of road is being consumed by works contract service of EPC/Turnkey project of township.

Illustration2. Works contract service supplied for construction of warehouse (immovable property) is not eligible for ITC however, if the warehouse has been built for housing pre-fabricated structures (which may further be used for storage of goods etc.), then the ITC would be admissible, since works contract service of construction of warehouse is being consumed by other works contract service of pre-fabrication contract to provide supports and shelves in the warehouse.

Illustration3. To construct air conditioned building, the works contract service supplied for construction of the building is not eligible for ITC, however, this works contract service is input service for erection and installation of air conditioning of the building, therefore, ITC would be admissible.

From the above, it is seen that the builder is not eligible to avail ITC despite the fact the GST has been suffered by him. Therefore, the builder will have to add the amount of blocked credit in his cost and structure his selling price of property, accordingly.

However, the contractor and the sub-contractor would remain eligible to avail credit. The 'input service' and 'works contract' are defined expressions as mentioned above. The services provided by the contractors and sub-contractors are input services, since these are supplied in the course of business. These are also works contract services, since while supplying construction service, the transfer of property in the inputs is also involved. Therefore, the contractors/sub-contractors are entitled to ITC.

As the law stands today, it seems that the credit chain has been legally broken here by blocking the availment of credit to the builders in situation where construction service, resulting into immovable property, being supplied as works contract service, is not input service for another works contract service. That would mean that the cost of construction of the builder would rise to the extent of denial of credit. Obviously, that would be taken into consideration by the builder while fixing price with the customer and customer will have to pay more as a consumer. Further, the builder would recover the applicable GST on construction service provided to the customer and deposit the tax with the govt. There is clear bar of availment of ITC on supply of construction Service resulting into construction of Immovable Property i.e. building.

The explanation attached to the section, in no way, seems to help the builders. Let's make analysis of the Explanation. The explanation expands the scope of the expression 'construction' by way of adding the words repair, renovation etc. That means the construction need not be new construction for the purposes of clause (c) or clause (d). It would mean that clause (c) would be applicable even if works contract service is supplied for repair/renovation of immovable property already in existence, to the extent, expenditure on goods and services used in repair/renovation, has been capitalized to the immovable property. Capitalization would mean that the tax paid on goods and input service too has been capitalized and the cost of tax has been converted into permanent assets and will be reflected in the account books accordingly. Therefore, the credit will be allowed in respect of tax suffered on inputs/services which have been capitalized in supplying repair/renovation service.

Further, in part 4 of FAQs (Times of India dated 27.08.2017), there is a clarification in question no. 33, that the builders would be eligible for ITC which, in my view, is not supported by the language used in section 17(5)(c). In case, the govt. desires to provide the right of availment of credit to the builder, suitable amendments need to be made to the GST law before the authorities start issuing notices to the builders for wrongful availment of ITC.


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