Construction services/works contract have always faced the wrath of lawmakers as far as credit is concerned under CENVAT rules. The same plight continues under GST - probably because works contract services result in the creation of immovable property, which is outside the purview of GST.
As per Section 16, every registered person is eligible to take ITC of goods and services intended to be used in the course or furtherance of business subject to fact that other conditions as mentioned in section 16(2) are fulfilled.
Section 17(5) restricts ITC on certain goods or services although intended to be used in the course or furtherance of business. According to Section 17(5)(c), ITC shall not be available for 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.
Section 17(5) (d) specifically estates that ITC on goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business will not be available for entitlement in GST.
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 capitalisation, to the said immovable property;
On the same line, AAR Gujarat in case of Deendayal Port Trust (erstwhile Kandla Port Trust) Advance Ruling No. GUJ/GAAR/R/02/2020 dated 11.03.2020 ruled that The Input Tax Credit shall be NOT be available under the CGST Act, 2017, on the project development services like Programme management consultancy, Marketing Consultancy, Land levelling and other related works, Roads, Water, Electricity, & Drainage Infrastructure and other related works for development of SIPC i.e. construction of an immovable property.
The applicant had been directed by the Ministry of Shipping to prepare a master plan comprising future projects and for utilization of land resources for developing a port based smart city. Keeping in view the above directions and vision of the government, applicant is developing one of India’s first Smart Industrial Port City (SIPC) as part of the Sagarmala project.
The applicant is at present incurring various project development expenses like
i. Programme management consultancy
ii. Marketing Consultancy
iii. Land levelling and other related works
v. Water, electricity, & Drainage Infrastructure
vi. Other related works for developing SIPC.
AAR ruled that the said project development is nothing but construction of an immovable property and any project development services or goods or works contract used for construction of an immovable property shall attract the provisions of Section 17(5)(c) and 17(5)(d) of the CGST Act, which specifically deny ITC in respect of works contract services or goods and services used for construction of an immovable property.
Therefore the said project development services of Programme management consultancy, Marketing Consultancy, Land levelling and other related works, Roads, Water, electricity, & Drainage Infrastructure and other related works for developing SIPC shall not be eligible for ITC under the CGST Act, 2017.
We are already aware of the Landmark Judgment in case of Safari Retreats Pvt Ltd Vs C.C Of CGST 2019-TIOL-1088-HC-ORISSA-GST wherein there was same issue that whether ITC is available on the goods/services used for construction of mall if the supplier intends to let out the same in future and is liable to pay GST on the lease rentals. The High Court pronounced that the provisions of Section 17(5)(d) is to be read down as the very purpose of the credit is to give benefit to the assessee. If the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST then the assessee is eligible to an input credit of GST paid on inward supplies used for the construction of such property. However, the department has preferred appeal against this decision in Supreme Court and the matter is still pending for final decision.
The logic profounded by the High Court is logical as when GST is payable on lease rentals, the input tax credit for goods or services used in construction of mall should be allowed. The decision of the High Court acts as binding precedent in similar cases of ITC denial and restrictions that frustrate the objective of removal of cascading effect of taxes. Denying ITC on goods and services in relation to immovable property is justifiable only if there is no GST liability on further supply of such immovable property. It is hoped that the Apex Court affirms the decision of Orissa High Court allowing the input tax credit on construction of mall which is further let out.