Detailed analysis of the ambit and scope of clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act, 2017 [CGST Act]

[Ramesh Patodia]

Goods and Services Tax, commonly known as “GST”, is a multi-stage consumption-based value added tax levied on the supply of goods and services and most acclaimed tax reforms of the century which was brought into effect from the 1^st day of July ‘2017 upon enactment of various State and Central GST legislation for which the roadmap was laid by the Constitution (101^st) Amendment Act, 2016.

The GST replaced the existing multiple cascading taxes levied both by the Centre and the State and all powerful GST Council was assigned the task of Implementation of the law. The Council prescribed five tax slabs for collection of tax viz. 0%, 5%, 12%, 18% and 28% including various rules and regulations.

The rationale behind introduction of GST is laid down in the Rajya Sabha Select Committee Report on the Constitution (One Hundred and Twenty Second) Amendment Bill, 2014 as under:

• To do away with the multiplicity of taxes at the State and Central levels which has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry with no uniformity of tax rates and structure across States.
• Secondly, to do away with the cascading effect of taxes due to ‘tax on tax’ and to allow seamless flow of credit across goods and services as under the erstwhile indirect tax regime no creditof excise duty and service tax paid at the stage of manufacture was available to thetraders while paying the State level sales tax or VAT, and vice-versa. Further, nocredit of State taxes paid in one State could be availed in other States. Hence, theprices of goods and services got artificially inflated to the extent of this ‘tax ontax’.

The above rationale behind the Introduction of the GST Law is well understood and the GST council with the avowed objective of effective implementation has had multiple meetings and in each of these meetings various issues arising upon the implementation has been addressed though multiple issues still remain.

While no doubt it would take years for the GST law to become perfect in view of the diverse nature of the Country with several prominent sectors, Real Estate Sector is one of the sectors of the country which is gripping with multiple issues of falling sales, rising cost of inputs, labour issues, income-tax issues etc. One prominent issue which is hotly debated across the country as far as real estate sector is concerned, is the Issue of allowability of input credit towards inputs and input Services used in the construction of a Shopping complex, Mall and/or office complex. The general consensus amongst the various stakeholders seems to be that such input credit is not allowable in view of the express provisions as contained in Section 17(5)(d) of the CGST Act, 2017 and similar provisions as contained in the multiple SGST Acts.

The present article examines the ambit and scope of clause (d) of sub-section (5) of section 17 of the CGST Act, 2017, particularly the following question:

Whether the credit of GST paid on receipt of inputs and input services used by a Real Estate Service provider engaged in the construction of a building and/or shopping complex/mall can be utilised by him for payment of GST liability on the output supply by way of Real Estate services taxable under the HSN Code 9972.

In order to answer the above question, it is important to understand the relevant provisions regarding the availment of input tax credit under the GST Law as contained in Section 16 of the CGST Act which lays down the basic provisions regarding the eligibility and conditions for taking input tax credit. Further Section 17 deals with the provision regarding apportionment of credit and blocked credits.

Provisions of Section 16(1) of the CGST Act

Primarily, it is to be noted that Section 16 of the CGST Act, 2017 (hereafter referred to as Act) deals with the ‘Eligibility and Conditions for taking Input Tax Credit’ wherein sub section (1) states that “every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner as specified in section 49, be entitled to take credit of input tax charged on supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person”.

On reading of the above stated provision, it is clear that subject to certain conditions, every registered person is eligible to take credit of input taxes charged on the supply of goods or services or both to him provided the goods or services -

i)   are used; or

ii) Intended to be used in the course or furtherance of his business

Provisions of Section 17(5)(d) of the CGST Act

However, section 17 of the Act dealing with the provisions relating to ‘Apportionment of credit and blocked credit’ vide sub clause (d) of Sub section (5) restricts the utilisation of input tax credit 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.”

The above section 17(5)(d) has been understood to mean that the CGST Act intends to block the input credit in respect of goods or services or both received by a taxable person for construction of an immovable property on his own account for the purposes of renting or leasing out.

A simple Interpretation of Section 17(5)(d) is that  if the goods or services or both are received by a taxable person for construction of an immovable property on his own account then the input taxes paid with respect to such goods or services or both are not eligible for being taken as credit.

Meaning of the phrase “on his own account”

Now a question arises is - what is the meaning of the phrase “on his own account”. The CGST Act nowhere defines the said phrase and therefore ordinary meaning of the said expression has to be taken. The plain and simple meaning of the said term would be “for his own purposes”. The phrase “on his own account” cannot be taken to refer to a situation where any taxable person who is engaged in any business or profession and uses the goods or services or both on his own account. This is because immediately after the phrase “on his own account”, the words “including when such goods or services or both are used in the course or furtherance of business” is written. Apparently if the meaning of the phrase “on his own account” is deemed to be wide enough to cover every situation of business or commerce including the situation where a real estate company is intending to utilise the Immovable property for the purposes of renting, then there was no need of saying” including when such goods or services or both are used in the course or furtherance of business. If the usage of the words “on account of furtherance of business” was already covered within the phrase “on his own account” then there was no need of further qualifying the said phrase with “including when such goods or services or both are used in the course or furtherance of business”. Obviously therefore, “on his own account” would not cover a situation where a taxable person intends to use such goods or services or both in the course or furtherance of business.

In this respect, it is to be noted that primary provision relating to the claim of Input tax credit is contained in Section 16(1) of the Act and the said Section allows only that input tax credit in respect of goods or services which are used or intended to be used in the course or furtherance of business. The said section itself does not allow the availment of input tax credit when utilised by any person ‘on his own account’ unless the input tax credit is used or intended to be used in the course or furtherance of business. Therefore, what is not allowed by section 16(1) cannot be said to have been restricted via Section 17(5).

Rationale behind introduction of the provisions as contained in Section 17 of the CGST Act

Now it is to be seen as to what is the rationale behind introduction of the provisions as contained in Section 17 of the CGST Act which starts with the heading “ Apportionment of credit and blocked credit. The first four sub-sections of section 17 viz. sub-section (1) to (4) deals with the situation where the credit is apportioned between eligible and ineligible credit depending upon the utilisation of the goods and services for the purpose of any business and the other purposes and it is Section 17(5) which deals with the cases relating to the blocked credit where the input tax credit is blocked in certain situations as contained in the said sub-section.

A glance at the provisions as contained in the said Section 17(5) would reveal that the blocked credit is in respect of such situations where the goods or services or both are not utilised for the purposes of making interalia further taxable supply or where the taxable supply is taxed at a reduced rate viz.,

1. Motor vehicles when they are not used for further supply of such vehicle or for transportation of passengers etc
2. Goods and services on which tax has been paid under composition scheme.
3. Goods and services or both used for personal consumption
4. Goods lost, stolen, destroyed, written off or disposed off by way of gift or free samples.

Therefore, it is clear that the blockage of credit is intended to cover situations where there is no outward taxable supply or the outward taxable supply is taxed at a lower rate than the normal GST rate.

With this background, the interpretation of Section 17(5)(d) has to be done.

Interpretation of Section 17(5)(d) of the Act

The general rule of interpretation is that there should not be additional inclusion of words while interpreting the provisions of a statute. The provisions must be construed strictly on the basis of plain language used by the legislature.

It is also well-settled principle of law that at first one has to apply "literal interpretation" and only in cases of absurd results, one has to apply "purposive interpretation”. It is well settled law that while interpreting a statute the basic principle of literal rule of interpretation has to be followed (See B. Premanand and Ors. v. Mohan Koikal and Ors. reported in 2011 (3) TMI 1590 - SUPREME COURT .

The relevant portion of the said decision is as follows:

"9. It may be mentioned in this connection that the first and foremost principle of interpretation of a statute in every system of interpretation is the literal rule of interpretation. The other rules of interpretation e.g. the mischief rule, purposive interpretation etc. can only be resorted to when the plain words of a statute are ambiguous or lead to no intelligible results or if read literally would nullify the very object of the statute. Where the words of a statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than literal rule.

Therefore primarily the provisions of Section 17(5) have to be interpreted on the basis of literal rule of interpretation. In this regard, it is imperative to understand, what had led the law makers to separately disallow such input tax credit with respect to goods and services in case of construction of immovable property when utilised by any person on his own account.

The interpretation is very clear that the provisions seeks to block credit when an immovable property is being constructed on own account. The said provision cannot be interpreted by assuming that the said phrase “on own account” intends to allow input credit in respect of an immovable property “which is intended for re-sale” or seeks to block input credit in respect of an immovable property “which is intended for the purposes of leasing out”. The said interpretation will be patently against the decisions of the Apex Court cited hereinabove and will result in an absurd situation where a company which is engaged in the construction as well as rendition of Real Estate services will be denied the input tax credit in all cases since primarily a real estate company is expected to be engaged in the selling of the properties or renting of the properties and the property in such a situation may be constructed by it on its own account as it is not expected that a real estate company will know in advance the purpose for which the construction is being done i.e., for the purpose of sale or for the purpose of renting out and till such time, the decision is made whether the company will sell or rent out, the construction will always be on own account and therefore if the interpretation of the phrase “own account” is done in the manner as is being done, the said interpretation will be against the basic framework of the GST law as per which the inputs tax credit is available in respect of goods or services or both which are used for the purpose or intended to be used for the purpose of furtherance of business as provided in Section 16(1) of the CGST Act.

Law relating to Real Estate taxation -multiple disputes

The law relating to the taxation of services provided by Real Estate Sector has been subject matter of manifold litigations and the issue whether Renting of immovable property itself is a service or not is yet to be settled as the matter is pending before the Apex Court in the case of Retailers Association. It is pertinent to refer to the minutes of the 7th GST Council meeting wherein there was a detailed discussion regarding the GST on Land & Building in Agenda No 2A and interalia it was discussed that there existed an anomaly in the manner of taxation between under construction property and the constructed property. Though the GST Council did not deal specifically with the issue at hand but what is to be seen is that there are disputes in the manner of taxation of real estate sector while implementing the GST Law.

In the light of the discussion hereinabove, it can be safely concluded that the phrase “own account” by any stretch of imagination cannot be interpreted to mean that it covers a situation where the property is intended to be leased out. It is not permissible to assume or intend when the intention of the law makers is very clear. Even if the purposive interpretation is applied, from a simple reading of the provisions as contained in Section 17 , it is apparent that in a situation where a movable asset after purchase is rented out then there are express provisions in Section 17 to allow the Input tax credit on purchase of the movable asset against the output taxable supply of the renting of the movable asset and thus it cannot be said that the law makers wanted the supply of movable and immovable property (in so far as utilisation of the property for the purposes of renting) to be treated differently thereby resulting in violation of Article 14 and 19(1)(g) of the Constitution of India. 

Plant or machinery excluded from the blockage in Section 17(5)(d)

Even assuming but not admitting that the said clause “on own account” covers the taxable supply of leasing of the property, it may be noted that the provision excludes “plant or machinery” from the ambit and scope of blockage of the credit and therefore it is to be seen that what could be plant or machinery in the context of an immovable property.

Interpretation of the words and expressions “plant or machinery” as employed in section 17(5)(d)

The Apex court in the case of CIT Vs Taj Mahal Hotel reported in 1971 (8) TMI 2 - SUPREME COURT observed as follows:-

If the dictionary meaning of the word “ plant” were to be taken into consideration on the principle that the literal construction of a situate must be adhered to unless the context renders it plain that such a construction cannot be put on the words in question- this is what is stated in Webster’s third new International Dictionary:

“Land, buildings, machinery, apparatus and fixtures employed in carrying on trade or other industrial business”

The said decision of the Apex Court was considered by Hon’ble Allahabad High Court in the case of CIT Lucknow-II Vs Kanodia Warehousing Corporation reported in 1979 (11) TMI 97 - ALLAHABAD HIGH COURT   and the Hon’ble Court observed as follows:-

In order to find out if a building or a structure or part thereof constitutes “plant” the functional test must be applied. It must be seen whether the subject matter involved, that is, the building or structure or part thereof, constitutes an apparatus or a tool of the tax payer or whether it is merely a space where the tax payer carried on his business. If the building or structure or part thereof is something by means of which the business activities are carried on, it would amount to plant but where the structure plays no part in the carrying on of those activities but merely constitutes a place within which they are carried on, it cannot be regarded as plant.

The aforesaid decision was followed by Hon’ble Allahabad High Court in the case of S K Tulsi & Sons Vs CIT reported in 1990 (9) TMI 68 - ALLAHABAD HIGH COURT and the said decision was approved by the Apex Court in the case of CIT Vs Dr B Venkata Rao reported in 1999 (2) TMI 11 - SUPREME COURT .

The aforesaid decisions no doubt are from Income-tax space but can be relied upon while interpreting the ambit and scope of the word “plant”.

In this regard, it is also pertinent to note that there is an explanation below Section 17 which defines the term “plant and machinery” for the purposes of Chapter V and VI of the CGST Act. However, the said Explanation defines the term “plant and machinery” and not “plant or machinery”. “Plant and machinery” and “plant or machinery” cannot be taken to mean the same thing and the definition of the phrase “plant and machinery” as given in the explanation in our opinion can be applied in Chapter V and VI only where the phrase “plant and machinery” has been used and not where “plant or machinery” has been used. In this regard, it may be noted that the word “or” is normally disjunctive and “and” is normally conjunctive but at times they are read as vice versa to give effect to the manifest intention of the legislature as disclosed from the context. One does sometimes reads “or” as “and” in a statute but one does not do it unless you are obliged because “or” generally does not mean “and” and “and” does not generally mean “or”. Where provision is clear and unambiguous, the word “or” cannot be read as “and” by applying the principles of reading down (See Principles of Statutory Interpretation 13th edition 2012 Page No 485-486).

In the instant case, while section 17(5)(c) of the Act uses the phrase “plant and machinery”, Section 17(5)(d) uses the phrase “plant or machinery” . Obviously the law makers wanted to differentiate between the blockage of credit as contained in Section 17(5)(c) and Section 17(5)(d) and the said difference is explained hereinabove whereby the lawmakers wanted to keep the blockage out of Section 17(5)(d) in case an immovable property was in nature of plant or machinery.

In a case where a real estate company leases out the property and earns income by way of taxable supply, the building in such a situation will be said to be the plant of the assessee even though it is an immovable property and thereby it would be eligible to get the input tax credit on the goods and services or both which are used in the construction of the said building.

Conditions prescribed for availment of input tax credit in notification prescribing the Central Tax Rate for different supplies

It is pertinent to note that Notification No. 11/2017- Central Tax (Rate) dated 28-06-2017 prescribes the rate of Central Tax in respect of different kinds of supply of services wherein the rate in respect of supply of renting of immovable property service has been prescribed under heading No. 9972 (Real Estate Services) as  18% (CGST and SGST).

Also, the said notification contains a table wherein in Column No. 5 restrictions in respect of utilisation of input tax credit have been prescribed in respect of certain kinds of supply of service but no such restrictions have been prescribed therein in respect of renting of immovable property service taxed under the heading Real Estate Services.

In this regard it is pertinent to note that while prescribing different bands of tax rate in respect of GST, five bands of tax rate has been prescribed viz. 0%, 5%, 12%, 18% and 28%. These bands of tax rate has been prescribed on the basis of principle that 0%, 5% and 12% is in respect of essential and needy area and also where there are certain restrictions on the allowability of input tax credit, 28% in respect of luxurious area, etc. and the tax rate of 18% has been said to be the ordinary general rate of GST.

In this respect it is to be noted that in notification prescribing the Central Tax Rate for different supplies as referred to hereinabove, the restriction in respect of availment of Input tax Credit has been prescribed only in respect of those items for which tax rate is lower than its ordinary rate i.e. 18% and not in respect of the ordinary rate. The tax rate for supply of renting of immovable property service being 18% which is the ordinary rate, one cannot assume that the law makers wanted to restrict availment of any input tax credit in respect of renting of immovable property service.

Provisions under the erstwhile service tax law restricting the credit of input services used in construction of immovable property

It will not be out of place to mention that  provision restricting the claim of tax paid on input and input services in relation to construction of immovable property against the output services of Renting in the erstwhile service tax legislation were specifically brought in indirectly by amending the Cenvat Credit Rules, 2004, only after catena of judgements held that the input tax paid on inputs used and construction services utilised for the construction of property used for the provision of renting services shall be allowed as cenvat credit on the pretext that renting service could not have been rendered without construction of property.

However, unlike the amended provision under the service-tax as stated herein above, there is no such express provision under the GST law.

GST law itself was introduced in order to allow seamless input credit of tax paid on input and input services used for the provision of output taxable supply and if the interpretation as being sought to be done is allowed to be done; it will be patently against the legislation itself without there being reasonable justification for such differentiation.

Interpretation of the phrase “including when such goods or services or both are used in the course or furtherance of business” in Section 17(5)(d).

Now coming to the phrase “including when such goods or services or both are used in the course or furtherance of business”, it has to be seen as to what is the meaning and purpose of this phrase. It is obvious that the goods and services referred to in the said phrase refers to the goods and services received by a taxable person for construction of an Immovable property and therefore the plain and simple meaning is that if such goods and services for construction of an immovable property which is used in the course or furtherance of business, then that is also covered by the blockage of credit.

An obvious meaning therefore would follow that the phrase “on own account” by itself cannot be said to cover the usage of such goods or services or both in the course or furtherance of business. Had this been so, there was no need to insert the phrase at all and it was sufficient to restrict the provision to “own account”. Therefore the interpretation that the taxable supply by way of renting of the property is covered within the meaning of “own account” is ruled out, unless it is read in conjunction with the phrase including when such goods or services or both are used in the course or furtherance of business.

Now the question arises whether when one is using the goods or services or both for the purpose of construction of an immovable property, can it be said that such goods or services or both are used in the course or furtherance of business. It is not so. The goods and services when used for the construction of an immovable property directly, they cannot simply by such usage be said to have been used in the course or furtherance of business. If the intention of the law makers was to restrict the credit in case the immovable property was used in the course or furtherance of business, then the law makers would have stated “on own account including when such immovable property is used in the course or furtherance of business”. Having not said so, it cannot by intendment be read that the said phrase “including when such goods or services or both are used in the course or furtherance of business” seeks to include the immovable property used for the purposes of business of renting or leasing out.

Moreover, if it is so interpreted that every use of goods or services in the construction of an Immovable property in the course or furtherance of business is covered by the blockage of credit in Section 17(5)(d) then it would mean that the Real Estate Sector would be denied entire credit in respect of utilisation of goods or services or both against its business which can be multifarious like, sale or lease of Immovable property, construction of immovable property, time share, renting etc. This is not really so. The real estate sector is eligible for input credit of taxes paid and this is one of the reasons given by putting this sector in the normal tax bracket of 18% by saying that the sector is now eligible for the input credit in respect of the supply of materials like cement, steel etc.

The business of a Real Estate player can be that of construction for sale, renting, leasing, time share and others. All these businesses are inextricably linked and it is difficult to carve out one from another and the analysis of the provisions has to be therefore done in the light of this.

The plain and simple interpretation of the said phrase can be to say that the said phrase seeks to disallow the input tax credit when the goods or services or both are used in the course of any business i.e., where the immovable property is used as a space for the purpose of running the business.

Recently, one writ petition has been filed in Karnataka High Court on this issue and is awaiting the judgement.

Conclusion:

Across the globe, in similar situations VAT on construction cost is eligible to be allowed as input credit against output supply of renting or leasing. Recently, Cyprus introduced VAT on renting with effect from 13/11/2017 and an Interpretative circular was brought out on 2/1/2018 to clarify certain situations. However, there are no restrictions imposed regarding the input credit re construction cost. Similarly under the UK Law, VAT on construction cost is eligible for being allowed under a 10 year CGS scheme.

Therefore, in the light of the above discussions, it can be stated, that inputs and input services used by any company in respect of construction of immovable property wherein the business of the company is in real estate only and that too of renting, it cannot be said to be utilised for the purpose of his ‘own account including when used in the course or furtherance of business’ and therefore input tax credit on purchase of such inputs and on receipt of input services cannot be said to be blocked to be utilised against the output GST liability for provision of renting service,  vide sub clause (d) of section 17(5) in view of detailed reasons hereinabove.

However, obviously the last word cannot be said to have been said unless settled by Courts.