Input Tax Credit not available for lease rent during pre-operative period for construction of resort on leasehold land

The ruling determined that Input Tax Credit is not available for lease rent paid during the pre-operative period for construction of a resort on leasehold land when treated as capital expenditure. The lease rent was considered part of the construction cost for immovable property, falling under section 17(5)(d) of the GST Act. The ruling clarified that such lease rental is not eligible for input tax credit, as it does not have a direct or indirect nexus with the construction of the resort.

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Issues:
1. Availability of Input Tax Credit for lease rent paid during pre-operative period for leasehold land being constructed for business purposes.

Analysis:
The Applicant, engaged in hospitality and real estate, sought an Advance Ruling on the eligibility of Input Tax Credit for lease rent paid during the pre-operative period for a leasehold land where a resort is being constructed. The officer contended that credit is allowed only for immovable property in the nature of plant and machinery, as per the GST Act. The Applicant argued that the lease rent is not directly related to construction and should not be considered part of construction cost.

The Applicant, a subsidiary of a larger entity, entered into a lease agreement for a land parcel in New Town Area for a resort project. The lease agreement specified escalating annual lease rent, to be capitalized during the pre-operative period. The officer's stance was that input tax credit is not admissible for lease rent paid during pre-operative period for construction of immovable property other than plant and machinery.

The Applicant cited relevant sections of the GST Act, emphasizing that the lease rent was not for construction purposes but for the right to use the land. They argued that the lease rent was capitalized under 'Leasehold Land,' not 'Building Block,' indicating it was not used for construction. The Applicant contended that the lease rent did not have a direct or indirect nexus with the construction of the resort.

The ruling authority analyzed the situation, considering AS10 guidelines on self-constructed assets and the nexus between lease rental and construction. It was determined that the lease rental paid during the pre-operative period should be treated as part of the construction cost for immovable property. The ruling clarified that input tax credit is not available for such lease rental, as per section 17(5)(d) of the GST Act.

In conclusion, the ruling stated that Input Tax Credit is not available for lease rent paid during the pre-operative period for construction of a resort on leasehold land, when capitalized and treated as capital expenditure. The ruling's validity is subject to provisions under Section 103 unless declared void under Section 104(1) of the GST Act.

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