ITC on Works Contract Service and Construction of Immovable Property

CA PRASANTH.K | Last updated: 12 November 2021

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Quick Summary

Under GST law, claiming input tax credit (ITC) for construction of immovable property is restricted. Generally, ITC is blocked if the expense is capitalised in your accounts. However, ITC is permissible for expenses charged to the Profit & Loss account, provided they are used in the course or furtherance of business. The definition of construction is broad, including repairs and alterations, but excludes plant and machinery fixed to the earth, with specific exceptions like land and civil structures.

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.

GST Input Tax Credit on Construction Services

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 :

land, building or any other civil structures;
telecommunication towers; and
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.

FAQ :

The main test is the business nexus test, which requires checking if the input is used or intended to be used in the course or furtherance of business.

ITC is blocked if the expenses related to the construction of immovable property, whether contracted out or self-constructed, are capitalised in the books of accounts.

Yes, the meaning of 'construction' is broad and includes re-construction, renovation, additions, alterations, or repairs.

GST law specifically excludes land, building or any other civil structures, telecommunication towers, and pipelines laid outside the factory premises from being treated as plant and machinery for ITC claims.

No, a real estate developer cannot claim ITC on the construction of residential quarters for its employees, as it is not considered an input service for further supply.

ITC can be claimed for works contract services if the expenditure is charged to the Profit & Loss account and relates to an activity used in the course or furtherance of business, such as building a boiler plant for a cement manufacturer.