ITC on Works Contract Service and Construction of Immovable Property

Under GST law before taking credit of input tax the important test is the business nexus test where we have to check that input is used or intended to be used in the course or furtherance of business.

Section 17(5) clause C&D of CGST Act, 2017 blocks taking credit of input tax in respect of construction of immovable property both by way of giving contract to others or individually buying materials and constructing the immovable property, if the said expenses is capitalised in the books of accounts, hence one can only claim input tax credit for expenditure which is charged to P/L Account.

The meaning of word construction is wider where it includes re-construction, renovation, additions or alterations or repairs.

Immovable Property does not include plant and machinery which means apparatus, equipment, and machinery fixed to earth byfoundation or structural support that are used for making outward supply of goods or services or both, but GST law has specifically excluded the following to be treated as plant & machinery, hence Input Tax Credit on the following cannot be claimed :

1. land, building or any other civil structures;
2. telecommunication towers; and
3. pipelines laid outside the factory premises.

Example-1

M/S A Ltd is in the business of real estate development it has given subcontract to M/S G&T Ltd for construction of residential quarters for its employees ITC will not be available to M/S. A Ltd since the contract given for construction of quarters for their employees is not an input service for further supply.

Example-2

M/S B Ltd is in the business of cement manufacturing it is constructing boiler plant for which civil structural support has to be built which is outsourced as works contract service to ITC will be available.