Sigmund Freud, the father of psychoanalysis once said “History is just new people making old mistakes”. While it can be said that the GST council has tried hard to not repeat the old mistakes of the erstwhile Indirect taxes, but certain issues have been gummed to the Indian Indirect tax scenario; Input Tax Credit (ITC) restrictions for real estate sector being one of them.
There have been numerous issues and case laws in the past under the VAT and Service tax law where ITC for the real estate sector has been denied, challenged, discussed, and deliberated. However, it seems those days are not over yet… here we are, again mulling over the same issues even under GST. Lately, there has been a continual discussion on the availability of ITC on the inputs and input services used in the construction of immovable property meant for letting out.
Section 17(5)(d) of the CGST Act, 2017 imposes restrictions on availing ITC on inputs and/or input services used in the construction of immovable property on its own account including when goods and/or services are used in furtherance of business. The said provision has been reproduced below:
“(d) 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.
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;”
Safari Retreats Private Limited v. CCGST [2019 (5) TMI 1278 – ORI]
In the said case, the Orissa High Court (HC) read down Section 17(5)(d) stating that the petitioner is not using the property for its own purpose, but is letting it out. The HC stated that the petitioner would have to pay GST on the rental income derived from letting out the said property; therefore he should be entitled to avail ITC of inputs and/or input services used by him in the construction of such property. The HC also emphasized on the purpose of the GST legislation, which was to bring in seamless credit flow and avoid cascading effect.
It was also argued in this case that when the property is sold after receiving completion certificate, GST is not levied on such sale. In such a case, not allowing ITC of inputs and/or input services is justifiable. However, in a situation where the property is let-out and the rental is subject to GST, the tax chain is not broken and therefore, ITC on respective inputs and/or input services should be allowed.
The said matter was appealed against by the authorities and is currently pending before the Supreme Court.
Tamil Nadu AAR in the case of Smt. Kamalavadani Udavakumar [Order No. O2/ARA/2O2O Dated 31.O1.2O2O]
In the said case, the applicant had constructed a marriage hall, which was rented out for various occasions. The applicant sought a ruling on the grounds that since the rentals of such hall would be subject to GST, denial of ITC in respect of the same would be oppressive and unjust.
The Tamil Nadu AAR held that Section 17(5)(d) is amply clear and therefore, the ITC in respect of the construction of such a marriage hall shall not be available to the applicant. Further, the AAR also distinguished the ruling of Orissa HC (supra) on the grounds that the HC had not held Section 17(5)(d) to be ultra vires and therefore there is no reason to go beyond the statutory provisions.
Maharashtra AAR in the case of M/s Ashish Arvind Hansoti [GST-ARA, Appl. No. 88 dated 4 Jan 2020]
A similar issue was raised in this case where the applicant was constructing an immovable property for letting out and thus approached the AAR for determining whether he was eligible for ITC of inputs and/or input services used in the construction of the said property. The AAR held that since the case squarely gets covered by Section 17(5)(d), the applicant cannot claim ITC in this respect. The AAR also relied upon the rulings mentioned above to say that this case is identical to the ruling passed by Tamil Nadu AAR. Further, as the Safari Retreats case is pending before the Supreme Court, the AAR did not rely upon the same.
The legacy issues of ITC availability in the real estate sector were expected to be ironed out at the time of the introduction of GST. While a lot has been done for the sector, there are still some snags which needs fixing. There couldn’t be a better time than now for the council to come up with resolutions and solutions. The sector is witnessing an all-time low with Covid-19 hitting the economy hard.
The AARs, in both cases seem to have read Section 17(5)(d) strictly and denied the ITC in this respect. The underlying matter has been analysed in depth by the Orissa HC. The HC has fervently noted that the objective or the preamble of GST was to instil seamless credit and ensure that there is no breakage in the tax credit chain. Reading the said section to mean that in no case ITC shall be allowed for construction of immovable property seems to be unreasonable.
A narrow interpretation of Section 17(5)(d) would definitely take us to a conclusion that ITC in respect of inputs and/or input services used in construction of immovable property on own account would not be available in any case. However, the point of essence is that while interpreting a legislature, it is of utmost importance to understand the intent behind the legislation as pointed out by Orissa HC. Considering that if the said Section is read in a narrow manner, no one engaged in construction of immovable property on own account would be allowed ITC. However, if the output arising from such property is taxable, it certainly seems discriminatory on the part of the Government to not allow ITC in respect of such inputs and/or input services.
Matters such as these, if clarified, could positively impact the trade in these troubled times. Considering that there is a lot of ambiguity on this issue, a clarification from CBIC would be welcome. Nonetheless, the Supreme Court’s decision on the matter would also be worth waiting for.