Input Tax Credit eligibility on works contract services & goods or services or both received by a taxable person for construction of an immovable property

[Ganeshan Kalyani]

Section 17 of CSGT Act, 2017 provides for a list of goods and services on which input tax credit is not allowed. One of the item is mentioned in sub-section 5 (c) & (d) of section 17 of CGST Act, 2017. The extract of the said provision is reproduced below for ease of reference:

 (5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of  section 18, input tax credit shall not be available in respect of the following, namely:-

(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 a  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 input tax credit is not allowed on the works contract services when supplied for construction of an immovable property except when such services are received for the construction of plant and machinery. Similarly, input tax credit is not allowed on goods or services or both received by a taxable person for the purpose of construction of an immovable property except when the same are used for the construction of plant and machinery.

However, the explanation gives a clarity that input tax credit on works contract service when supplied for construction of immovable property & goods or services or both received by a taxable person for construction of an immovable property is not allowed only to the extent of capitalisation. Thus, it would not be wrong to say that input tax credit is allowed if the expenses are of revenue in nature. That is the expenses are debited to profit and loss account and not capitalised in the block of asset in the balance sheet and whereby are not offered for the benefit of depreciation.

The Authority for Advance Ruling - Rajasthan has ruled to the application filed by M/s Rambagh Palace Hotels Pvt. Ltd.[ 2019 (5) TMI 248 - AUTHORITY FOR ADVANCE RULING - RAJASTHAN ], on the eligibility of input tax credit as follows:

Q1 Building Repair work

Q 1.1 Whether GST paid on building materials, such as cement, concrete, bricks, cement or marble or stone slabs or tiles, paint, polish and any other building materials meant for repair of building shall be available for ITC?

Answer- ITC will not be available to the extent of capitalization of building materials.

Q 1.2 Whether GST paid on labour supply for carrying out repair of building shall be available for ITC, where material and supervision is provided by the applicant?

Answer- ITC will not be available to the extent of capitalization of GST on labour supply.

Q 1.3 Will it make any difference if aforementioned works are carried out in a composite manner as a works contract, where material as well as labour is supplied by a contractor as a composite supply under works contract?

Being routine repairs, the amount spent on the above mentioned all scenarios are charged to revenue as per accounting standards.

Answer- ITC will not be available to the extent of capitalization of building materials and service of labour supply.

Q2 Repair Work relating to Electric Installation / Sanitary Fittings

Q2.1 Whether GST paid on electrical fittings, such as Cables, Switches, NCB, and other electrical consumables meant for repair of existing electrical fittings shall be available for ITC?

Answer- ITC will not be available to the extent of capitalization of electrical fittings.

Q2.2 Whether GST paid on sanitary fittings, such as tiles, commode, bath tub, wash basin, PVC pipes and other bath room sanitary fittings and consumables meant for repair of existing sanitary fittings shall be available for ITC?

Answer- ITC will not be available to the extent of capitalization of sanitary fittings.

Q2.3 Whether GST paid on labour supply for carrying out repair of electrical installation and/ or sanitary fittings shall be available for ITC, where material and supervision is provided by the applicant?

Answer- ITC will not be available to the extent of capitalization of service of labour supply.

Q2.4 Will it make any difference if aforementioned works are carried out in a composite manner as a works contract, where material as well as labour is supplied by a contractor as a composite supply under works contract?

Being routine repairs, the amount spent on the above mentioned all scenarios are charged to revenue as per accounting standards.

Answer- ITC will not be available for works contract service to the extent of capitalization of supply of goods and services.

Q3 Furniture & Fixture repairing work

Q3.1 Whether GST paid on wood, board, mica, tapestry, paint, polish and other consumables meant for repair of existing furniture & fixtures shall be available for ITC?

Answer- ITC for GST paid on supply of above mentioned goods will be available in accordance with Section 16 of CGST/RGST Act, 2017.

Q3.2 Whether GST paid on labour supply for carrying out repair of furniture & fixtures shall be available for ITC, where material and supervision is provided by the applicant?

Answer- ITC will be available for service of labour supply in accordance with Section 16 of CGST/RGST Act, 2017.

Q3.3 Will it make any difference if aforementioned works are carried out in a composite manner as a works contract for carrying out repair and maintenance job on movable furniture & fixtures such as, Sofa, Table, Chairs, Door, Cabinets, etc. where material as well as labour is supplied by a contractor as a composite supply under works contract?

Being routine repairs, the amount spent on the above mentioned all scenarios are charged to revenue as per accounting standards.

Answer- ITC will be available for GST paid on composite supply of goods (furniture & fixtures) and services (manpower supply) in accordance with Section 16 of CGST/RGST Act, 2017.

Q3.4 whether input tax credit can be availed by the applicant of GST paid on purchase of new ready to use furniture such as chairs, etc, in terms of section 17 of the RGST Act, 2017?

Answer- ITC will be available for GST paid on purchase of new ready to use furnitures in accordance with Section 16 of CGST/RGST Act, 2017.

From the above ruling the key take away is that the input tax credit on the works contract services supplied for construction of an immovable property is eligible if the expense are not capitalised. input tax credit of such service of construction of plant and machinery is eligible. And, when the same service is used as an input service for further supply of works contract service the input tax credit is eligible.

Similarly, the goods or services or both received by a taxable person for construction of an immovable property the input tax credit is not eligible. If the same are received for the construction of plant and machinery then input tax credit is eligible.

In nutshell, GST has widen the scope of input tax credit eligibility. Works contract services used to be in a negative list for the purpose of claiming input tax credit. However, now the same is allowed to the extent of non-capitalisation.

Discussions to this article

[Sanketh Meri]

I Disagree with the author on Electrical Fittings area. Only Construction items used for immovable property are not eligible for ITC if capitalized. Electrical fittings like Transformers, MCB, Panels, Switches, Overhead Wirings etc., are allowed ITC even if capitalized similar to Furniture and Fittings. Only in case of Earthing, it might not be allowed if capitalized as it may fall under Construction Items.

Please share your view on reasons for bringing Electrical Fittings as part of Blocked credits when no where does it explicitly mentions about electrical fittings.

[Bharath Kumar]

Yes.I too agree with Sanket Mary.The electrical fittings will not fall within the ambit of immoveable goods.

K.Palaniswamy Deputy Commissioner(Commercial Taxes) Rtd Coimbatore

[Ganeshan Kalyani]

Dear Sanketh Meri Sir,

Do you mean to state that you capitalise the electrical fittings and at the same time input tax credit is also taken.

[CSSANJAY MALHOTRA]

What if taxpayer intentionally book the transaction as expenses ( revenue) instead of capitalisation. ITC would not be eligible until and unless it’s proved that the activity is of revenue nature. Constructing building and showing under revenue item will make person ineligible. Assessee has to proove that he has rightly availed the ITC. (section 155 of CGST Act.)

Further recording / capitalisation of item under other head if the same item is part of building would also make person ineligible for ITC.

Above are my personal views.