Set off of ITC on Construction Against Output tax of Rental Revenues

[MADHAV TULSYAN]

Hello

I came across a Case wherein A builder has multiple commercial properties. They earn Rental incomes from existing Commercial properties. They have undertaken construction of a new commercial property, which looking at the current market scenario will take time to sell. Hence they are not generating any output tax @ 12% on the property under construction. But while the construction is on going, plenty of inputs are being accumulated.

Can they then offset these 'Construction Input tax credits' against the Rental Output. The Project is Registered under RERA, which implies that the builder intends to sell the Project, but is unable to find Buyers at present.

If not, con u plz site any notification or section in this regard

[KASTURI SETHI]

Not allowed. You cannot use construction input and input service credit (ITC) for providing/supplying Renting of Immovable Property Service. Clearly blocked under Section 17 (5) (c) &(d) of CGST Act, 2017 as amended. Here is also an extract of FAQs 3rd Edition December, 2018. When any thing is clear in law, we do not require shelter of case law or notification. However, extract of 3rd Edition of FAQs (December, 18) is appended below:-

Q 22. Can a registered person get ITC with respect of goods or services used for construction of a building for business purposes?

Ans. No. ITC on goods or services by a person for construction of immovable property, other than plant and machinery, is not allowed. Plant and machinery cover only apparatus, equipment, and machinery fixed to earth by foundation or structural support, and excludes land and building, among other things.

 

[MADHAV TULSYAN]

Sir there lies my confusion... if that is a case, then where does it state in the law that a builder can take ITC against the output generated by him @ 12%, when he sells the property under construction.

I want the written wording of the law, but am unable to find it...

[CA Seshukumar]

Hi Madhav,

If we carefully observe , in sec.17 it says credit not available for,,,,,

(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;

Please read explanation.it says construction means.......Etc...Etc....But to the extent capitalized in the books.

So if the builder is constructing a building with a view to sell then he will not capitalize in his books. So credit is available.

One point to be noted, if the property is sold before getting OC from municipality then he can charge tax on output and use this input credit. If he sells the property after CC then he can't charge tax and need to reverse the credit.

Coming to point of utilizing the same for tax on output of rent coming from some other property ....Yes it's available as long as this property is going to be sold before CC.

[Mahadev R]

Query - I came across a Case wherein A builder has multiple commercial properties. They earn Rental incomes from existing Commercial properties. They have undertaken construction of a new commercial property, which looking at the current market scenario will take time to sell. Hence they are not generating any output tax @ 12% on the property under construction. But while the construction is on going, plenty of inputs are being accumulated.

Answer: I understand that there are two supplies - Renting + Construction. If single GST registration obtained, there would be single ITC pool. Therefore, the credits can be claimed in respect of construction activity and used for payment of GST on renting income. There is no need to match / co relate credits. If the property is sold after completion certificate, then credit reversal as per Rule 42 would be needed.

Can they then offset these "Construction Input tax credits" against the Rental Output. The Project is Registered under RERA, which implies that the builder intends to sell the Project, but is unable to find Buyers at present.

[KASTURI SETHI]

Dear Querist,

My further views are as follows:-

(i) I agree with the factor of, 'to the extent capitalized in the books '.

(ii) I agree with the factor of, 'Completion Certificate'.

(iii) I agree with the view that there is no requirement of one-to-one correlation.

(iv) I do not agree with the view that 'Common Pool' allows to use ITC earned con construction activity for providing/supply 'Renting of Immovable Property'.

[KASTURI SETHI]

(In continuation of above,), inasmuch as when there is any specific exclusion or restriction on availment of ITC 'Pool' will not come to rescue. The possibility of litigation cannot be ruled out. Issue being debatable, the better option is to go ahead for Advance Ruling. Throw the ball in the court of AAR and be tension free. Dust will be settled once for all.

[BALKISHAN CHHABRA]

Set off of ITC on Construction Against Output tax of Rental Revenues may be allowed.

Plz go through the below.

Judgment of Hon’ble High Court of Orissa in the matter of M/s Safari Retreats Private Limited interprets provisions of Section 17(5)(d) of CGST Act, 2017 to check admissibility of Input Tax Credit paid on procurement of goods or services used for construction of immovable property for own purpose of assessee.

Hon’ble High court has held that as petitioner is paying GST on rental income which is arising out of investment on which GST has been paid and since there is no break in chain of business from point of procurement of material and services for construction till renting of immovable property, ITC should be allowed on construction of immovable property when used for further renting.

[KASTURI SETHI]

In my view, the matter will travel to Supreme Court. In such cases, the department always fights to the end. Litigation is always costly.

AI Summary

Can Construction ITC Offset Rental Output Tax? Section 17(5) CGST Act Debate and Court Ruling Insights A builder with multiple commercial properties sought advice on whether construction input tax credits (ITC) could offset rental output tax, as the new property under construction isn't generating output tax. Responses varied: one stated ITC on construction cannot be used for rental services due to Section 17(5) of the CGST Act, 2017, while others argued ITC could be utilized if the property is sold before receiving a completion certificate. A court ruling suggested ITC should be allowed if GST is paid on rental income. The possibility of litigation and seeking an Advance Ruling was also discussed.