ITC on Construction of Immovable Properties – An analysis

Arun Soni Oct 26, 2019 2136 0

ITC on Construction of Immovable Properties – An analysis

Indirect Tax in a country works in a way that the ultimate burden of the tax is imposed on the end consumer. In line with that it creates a chain of Input Tax Credits (ITC). Whoever supplies goods/services to next buyer, pays tax on the value added to that goods/services by using Input Tax credit available.

The GST was introduced in our country w.e.f 01/07/2017 and it came with a provision through Sec. 17 of the CGST Act, 2017 which clarifies the process of how a taxable person shall apportion his ITC and also specifies the cases when ITC shall be blocked.

Clause (c) and (d) of Sec. 17(5) specifically deal with two scenarios related to Immovable Properties when ITC on Inputs/Input Services shall not be allowed to a taxable person.

Immovable Property under the GST Laws:

Before proceeding further, we should know that there is a mention of Land, Building etc. (basically Immovable Properties) in Schedule II and III to the CGST Act, 2017 :

Schedule

Heading

Content

Meaning

III

Activities/transactions which shall be treated neither as a supply of Goods nor a supply of Service.

1.Sale of Land;

2.Sale of Building (subject to Para 5(b) of the Schedule – II)

a.]If a person sells Land, such a transaction is a Non-GST Supply.

b.]Similarly, if a person constructs a building and sells it, the same is also a Non-GST Supply but in this case the condition in Para 5(b) of Schedule-II should be satisfied.

Para 5(b)

Activities/transactions to be treated as supply of Goods or Supply of Services.

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

a.]In case any building is constructed for the purpose of sale thereof, and the sale consideration for the same has been received only after – 1. Receiving a completion certificate from authority, if any; or 2. Its first occupation by the buyer, whichever is earlier

-> In this case such building falls in terms of Schedule III and it’s a Non-GST Supply.

b.] In case other than a.], it would be treated as supply of service and taxable under GST law.

Now suppose a taxable person wishes to undertake the following transactions:

Buys a piece of Land from A and sells it to B.
Buys a piece of Land from A, constructs a building and consideration is received after its first occupancy by the buyer B.
Buys a piece of Land from A, constructs a building and consideration is received in advance and balance in instalments.
Buys a piece of Land, gives a contract to construct a factory building for the purpose of business.
Buys a piece of Land, gives a contract to A, to construct a factory building for the purpose of business and A assigns this work to another contractor B.
Buys a piece of Land, constructs a factory building for the purposes of his business.

Let us understand the above points in detail:

For point 1,2,3 refer to the table above:

As per Schedule-III, it is a Non-GST Supply.
As per Schedule-III, it is a Non-GST Supply.
As per Para 5(b) of Schedule-II, it is a taxable supply as the consideration is received in advance.

For point 4,5,6 refer to the tables below:

Blocked ITC as per Sec. 17(5)(c) :

Section	Clause	Content	Meaning
17(5)	(c)	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.	When a person avails services of works contractor for construction of an Immovable Property, no ITC shall be allowed to such person.

In Point no. 4, a person gives a contract to A to construct a factory building. A is a work contractor. In this case say A raises a outward supply bill, the taxable person shall not be eligible to avail the ITC as these are prohibited as per clause (c) of Sec. 17(5). Also note that A shall also be not eligible to take ITC of inputs used in providing the works contract service.

In point no.5, A, a contractor assigns the work to a sub-contractor B, in return B raises a bill to A, in this case A shall be eligible to take ITC. After that A shall raise a bill to taxable person, but the taxable person shall not be able to take ITC as per 175(5)(c).

Taxable Person <---- Contractor A = No ITC allowed to taxable person. No ITC allowed to A.

Taxable Person <---- Contractor A <----- Sub-Contractor B = No ITC allowed to taxable person. ITC allowed to A (as mentioned in bill received from B).

Now come to point no. 6: The taxable person constructs a factory building using inputs/services procured by himself.

Blocked ITC as per Sec. 17(5)(d) : Construction of Immovable Property “on his own account” or for business purposes :

Section	Clause	Content	Meaning
17(5)	(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.	When a person procures goods/services for construction of an immovable property, which he uses on his on account including for his business purposes, then no ITC shall be allowed.

In both clauses i.e. (c) and (d) of Sec. 17(5), Plant and Machinery has been excluded which directly means that in case a person constructs a plant/machinery then he can avail ITC on Inputs used for such construction.

Relevant Definitions:

Construction:

“Construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.

If the Construction work done is capitalised in the books of accounts :	If the construction work is expensed in the P&L a/c :
ITC shall be blocked as per Sec. 17(5) (c) & (d)	ITC shall be allowed.

Plant & Machinery :

“Plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

Let us catch the entire concept in a nutshell

Case	Nature	As per	ITC to the recipient
Sale of Land	Non-GST Supply	Schedule-III	-
Sale of Building and consideration is received after completion certificate	Non-GST Supply	Schedule-III	-
Sale of Building and consideration is received in advance.	Taxable Supply of Service	Para 5(b) of Schedule-II	Not allowed unless the supply is as outward supply of works contract.
Works Contract service provided for construction of Immovable property.	Taxable Composite Supply	Schedule-II	17(5)(c) - Not allowed unless the supply is as outward supply of works contract.
Construction of Immovable property on own account including for the purpose of business	-	-	17(5)(d) – Not Allowed
Construction activity which is not capitalized in the Books.	Expensed in P&L A/c	-	Allowed
Construction of Plant/Machinery	-	-	Allowed
Construction of Telecom Towers or pipelines laid outside the factory premises.	-	-	Not Allowed
Construction of Immovable Property with an intention to let-out	Not intended for sale, not used on own account	-	Allowed as per the judgement of Orissa High Court in case of Safari Retreats P Ltd v/s Chief Comm. CGST.