ITC is not available for the construction of the immovable property for renting it out for commercial purposes

The Tamil Nadu Authority for Advance Ruling (AAR) has ruled that Input Tax Credit (ITC) is not available for the construction of immovable property, even if it's intended for commercial rental purposes. This applies even when the inputs and services used are for business purposes. The ruling clarifies that Section 17(5)(d) of the CGST Act blocks ITC for constructing property on one's own account.

The Tamil Nadu AAR, in the matter of Suswani Foundations (P.) Ltd., In re [Advance Ruling No. 123/AAR/2023 dated December 19, 2023] held that as per Section 17(5)(d) the Central Goods and Services Tax Act, 2017 ("the CGST Act") no Input Tax Credit ("ITC") is available in respect of any goods or services received by the Assessee for construction of immovable property on its own account even if inputs and input services are used in course and furtherance of business.

Facts

M/s. Suswani Foundations Private Limited ("the Applicant") were constructing around 1.62 Lakhs square feet of industrial building to be rented out as 'Godowns' for commercial purposes. They planned to purchase Cement, Steel, PEB sheets, Building Materials like bricks, sand, blue metals etc., and further engage consultants or architects for around INR 12 Crores for the construction of the godowns. The approximate GST amount they estimated to pay was approx. INR 2.5 Crores.

The Applicant planned to let out the godowns for rent for around INR 40 lakhs per month with GST would be charged.

As per the Applicant, Section 17(5)(d) of the CGST Act is not applicable to them as they are not constructing the godowns in furtherance of business. However, the building itself is the source of income for them, without which their business does not exist.

Hence, aggrieved by the circumstances, the Applicant has preferred an application seeking Advance Ruling.

Issue

Whether ITC is available on the construction of the immovable property for renting it out for commercial purposes?

Held

The Tamil Nadu AAR inAdvance Ruling No. 123/AAR/2023held as under:

• Observed that, Section 17(5) (d) of the CGST Act provides that no ITC is available in respect of any goods or services received by a taxable person for the construction of an immovable property on his own account even if such inputs and input services are used in the course and furtherance of business. In the instant case, the Applicant had built the godown for which he had received various inputs and input services. The Applicant was proposing to rent out to large companies for storing their stock for future sale i.e. for the furtherance of their business. Therefore, as per Section 17(5) (d), no ITC is available on any goods or services received by them for such construction and the same cannot be claimed.
• Held that, the input tax paid on the goods or services received for construction of an immovable property 'on one's own account' is unavailable. The power to restrict the flow of credit exists under Section 16(1) of the CGST Act, shows the legislative intent that the ITC may not always be allowed partially or fully. As the suitability and requirement of taxpayers varies from person to person, legislation, cannot be amended accordingly. Therefore, it is mandatory for the taxpayers to adhere to the restrictions prescribed in the law.

Our Comments

Section 17 of the CGST Act talks about "Apportionment of credit and blocked credit". According to Section 17(5)(d) of the CGST Act, ITC shall not be available in respect of 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.

However, West Bengal AAAR, in the case of Bathula Mahesh Babu, In re [Appeal Case No. 04/WBAAAR/APPEAL/2023 dated January 24, 2024] held that as per clauses (c) and (d) of Section 17(5) of the CGST Act, ITC is not available with respect to works contract services or goods or services or both received for the construction of immovable property and, therefore would fall within the purview of blocked credit. Further, the explanation stated in Section 17(5) of the CGST Act, the credit is also blocked with respect to reconstruction, renovation, addition, alterations or repairs which are capitalized in the books of accounts. Hence, the condition of capitalization in the books of accounts, is only applicable with respect to reconstruction, renovation, additions, alterations or repairs to the immovable property.