GST Input Tax Credit on construction services in case the expenditure is not capitalized

[Ganeshan Kalyani]

Section 17 of Central Goods and Services Act, 2017, provides for apportionment of credit and blocked credits. Explanation to clause (c) and (d) of sub-section 5 of said section 17, states as the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property. Clause (c) and (d) of the said section is reproduced below for the sake of discussion:

(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;

(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 capitalisation, to the said immovable property;

The aforementioned explanation clearly indicates that the construction services related to new construction or re-construction or renovation or additions / alternations or repair if not capitalized in the books of accounts, then it is not covered in the section 17 i.e. the credit is not blocked.

In other words, the GST paid on inward works contract services or goods or services received for the purpose of carrying out construction work including new construction or re-construction or renovation or additions / alternations or repair is eligible for credit, if they are not added to respective fixed assets block in the balance sheet of the books of accounts. They are instead debited to profit and loss account of the books of account.

In the case of M/s. GGL Hotel and Resort Company Limited = 2019 (1) TMI 488 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL, the Authority for Advance Ruling, West Bengal has held that the Input Tax Credit is not eligible for the lease rent paid during pre-operative period for the leasehold land on which the resort is being constructed on his own account to be used for furtherance of business, when the same is being capitalized and treated as capital expenditure.

The relevant para 4, from the aforesaid order is reproduced as follows:

“The moot question, therefore, is whether the lease rental paid during the pre-operative period should be treated as part of the cost of goods and services received for the purpose of constructing an immovable property (other than plant and machinery) on the Applicant’s own account. Para 23 of AS10 is relevant. It says that the cost of a self-constructed asset should be determined using the same principles as for an acquired asset, and it is usually the same as the cost of constructing an asset for sale. When an immovable property like a building is sold the profit is computed after deducting from the sale proceeds the cost of the property, including the land. The cost of constructing the immovable asset, therefore, includes the lease rental paid for right to use the land on which the asset is built. Being an integral part of the cost of the immovable property the lease rental paid for the service of right to use the land is a supply for construction of the said property.”

The Applicant will admittedly capitalize the lease premium [refer to the fixed assets schedule:

Note 12 to the Balance Sheet as on 31/03/2018, the Application and the Applicant’s written submission on rebuttal to the concerned officer’s views]. The property is, therefore, admittedly being constructed on the Applicant’s own account and treated as fixed asset, including the lease rental paid.

In the light of the above discussion, it is held that the lease rental paid during the pre-operative period should be treated as part of the cost of goods and services received for the purpose of constructing an immovable property (other than plant and machinery) on the Applicant’s own account. Input tax credit is, therefore, not admissible on such lease rental in terms of section 17(5)(d) of the GST Act.

From the above advance ruling it is evident that if the expenditure in connection with civil works is of a significant amount and the same is not capitalized in the books of account, the assessing authority may raise a concern.