ITC eligibility on works contract and construction activities

[Saurabh Chokhra]

Topic: ITC eligibility on works contract and construction activities Impacted Industry: Construction, Works Contract

         Definition of works contract and construction under GST law

• “Works contract” has been defined u/s 2(119) of the CGST Act, 2017 as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

• It is worthwhile to note that the above definition covers only certain works performed on immovable property as works contract.  Unlike the service tax regime the works contract no longer cover works performed on movable property. Further, it is only when there is transfer of property in goods involved is there would make the cont-ract as works contract i.e. there must be a supply of goods along with supply of service by the supplier (contractor).

• “Construction” is defined under explanation to sec 17(5)(c) and (d) for the purpose of these provisions to include re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.

• Therefore, for any work to qualify as construction, the cost of construction work must be capitalised in the books of accounts which is guided as per Ind AS 16- Property, Plant and Equipments issued by the Institute of Chartered Accountants of India and notified by the Ministry of Corporate Affairs (MCA).

          ITC provisions on works contract and construction activity

• Section 17(5)(c) and (d) of the Act restricts certain credits, these provisions read as under

..........

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 this Chapter and Chapter VI, the expression “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.

• The provisions restrict credit of works contract services for works to be performed on immovable property and also restrict the credit of construction related activity of immovable property even when construction activity not fall into the scope of works contract. However, works contract and construction activity is eligible for ITC if done in respect of plant and machinery. Plant and machinery has been specifically defined as any equipment, apparatus attached to earth by foundation or structural support used for supply of goods or services. Plant and machinery to specifically exclude telecom towers, pipelines etc.

    Works contract and Construction- How they are different:

• As per the definition of works contract, the works contract inter-alia include construction of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

• Construction has been defined under explanation to sec 17(5) (c) and (d) as reconstruction, repairs, renovation, additions etc. to an immovable property the cost of such work is capitalised.

• Construction activity will not qualify as works contract if there is no transfer of property in goods involved i.e. the contractor is supplying service only without any supply of goods.

• Works contract may or may not be a construction. Like there may be activities like installation, fabrication, which may qualify as works contract but cannot be covered in the definition of construction.

   Test of immovable property:

• It is important to determine whether property is movable or immovable as it is first and foremost thing which include or exclude the activity  from the scope of works contract or construction activity and will  have impact of ITC eligibility or otherwise. The term has not been defined in GST law.

• Immovable property is defined in Section 3(26) of the General Clauses Act, 1897 to include land, benefits to arise out of land and things ATTACHED TO THE EARTH, or permanently fastened to anything attached to the earth.

• Further, test of immovable property to be applied on the totality basis. For instance- the doors of building are movable and can be removed but the same are integral part of building and to be treated as immovable property.

• Further, test of immovable property not relevant for plant and machinery as the language used in sec 17(5)(c) and (d) exclude plant and machinery from immovable property. Since, plant and machinery are excluded from immovable property, construction and other activity in relation to plant and machinery shall be eligible for ITC unless otherwise restricted. The restriction of ITC is only on the telecom towers, pipelines which are not treated as plant and machinery by virtue of explanation to sec 17(5) (c) and (d).

    Instances of construction/ works contract eligibility thereon:

    1. EARTH WORK EXCAVATION IN FOUNDATION:

• Earth excavation is the process of digging the soil to lay a foundation to support any building or other structure.

• ITC is not allowed if the foundation to be laid down to support building or anything which is immovable and cost is capitalised as per Ind As 16. ITC is allowed if foundation laid down support moveable property and or cost is charged off to revenue.

           2. FIXING OF DOOR-

• Door which is fixed to complete a room will be integral part of the building and therefore, will be immovable property if seen along with building.

• Fixing of door is alteration/addition to building (immovable property) is covered in the definition of “construction” as defined under sec 17(5)(c) and (d)  and therefore, works contract, if the cost of renovation is capitalised.

• ITC not available if the cost of construction is capitalised. If the cost charged to revenue then ITC is available.

        3. Renovation of security office located at the entry gate

• Such renovation is covered in the definition of “construction” as defined under sec 17(5)(c) and (d)  and  therefore, works contract, if the cost of renovation is capitalised.

• ITC not available if the cost of construction is capitalised. If the cost charged to revenue then ITC is available.

       Crux of determination of ITC on works contract and construction activity:

Step 1: Check if the activity is to be performed on or in relation to immovable property?

Step 2: If answer to Step-1 is “Yes”, then check whether the activity is a type of works contract or construction (other than works contract) activity. If answer to Step-1 is “No” then test of ITC eligibility concludes here only and ITC is eligible as property is movable

Step 3: If answer to Step-2 is “Yes”, then if the expenditure incurred if capitalised in the books – ITC is not eligible.  If the expenditure is charged to revenue then ITC is available. If answer to Step -2 is “No”, ITC would be available as the activity is not even in nature of works contract or construction.

  Conclusion:

• Determination of ITC eligibility on works contract and construction services is bit different in GST regime as compared to service tax/excise regime as in the GST regime capitalisation of cost or charging off the same to P&L carry paramount importance in deciding the eligibility or otherwise. Further, ITC not allowed only in case of immovable property that to other than plant & machinery.

-------

Thanks for reading the article, author may be contacted at [email protected]

Best Regards

Saurabh Chokhra

B.Com, ACA, DISA(ICAI)

Discussions to this article

[Swaminath V]

If repair work of building has a life of more than one year... e.g water proofing of cieling of factory building to protect the plant and machinery inside it.... .shiuld it be charged to revenue and avail ITC or capitalised and forego ITC

[Arunagiri Guhaneswaran]

My client is running a serviced apartment as well as letting out rooms on hire basis. He is constructing additional rooms. Whether GST paid on Architect's services can be claimed as ITC? Whether GST paid on purchase of materials for above activity be claimed as ITC?

What will be the consequence if ITC claimed on above?