Industry bodies FICCI and Assocham have demanded that real estate developers be allowed to claim Input Tax Credit (ITC) under the Central Goods and Services Act (CGST) on commercial assets constructed for leasing purposes. The associations have written letters to the finance ministry and urged the latter to permit using the ITC, where the immovable property is constructed to provide leasing services.
They have argued that the potential revenue impact would not be high by allowing ITC, and instead, this would help maintain the credit chain, besides spurring growth in the real estate sector and the overall economy.
The representations come from a recent Budget proposal relating to a retrospective amendment to the CGST law, which experts feel will override the Supreme Court ruling related to the ITC claim on leased assets.
In its representation, FICCI has requested the ministry to issue clarification permitting the availing of ITC to the extent where the immovable property is constructed to provide leasing services under Schedule II of the CGST Act.
This clarification would align with the Supreme Court decision in the case of Safari Retreats Private Ltd and would be equitable to the leasing industry, suitably acknowledging the continuity in the credit chain for construction undertaken for leasing, the industry body said.
In this year's Budget, the finance ministry said that "clause (d) of sub-section (5) of section 17 is being amended to substitute the words' plant or machinery' with words' plant and machinery'."
Section 17 (5) provides an exhaustive list of where input tax credits will not be applicable. The amendment will be effective retrospectively from July 1, 2017, notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority, it added.
The Budget proposal came in the backdrop of a Supreme Court order in the case of Safari Retreats Pvt Ltd. The apex court held that if the construction of a building is essential for supplying services like leasing/renting out, it could fall under the 'plant' category on which ITC can be claimed under Section 17(5)(d) CGST).
Earlier, experts had said that this proposed legislative change effectively overrides the Supreme Court's ruling in the Safari Retreats case, where the Court had permitted businesses to claim ITC on properties classified as 'plant' under the functionality test.
In the representation, FICCI said that the potential revenue impact can also be determined based on the existing annual commercial space built up in India. The commercial leasing sector, on average, adds about 55-60 million square feet of built-up area annually.
Given the prevalent construction cost in India, assuming a modest amount of Rs 2,500 to 2,800 per square feet as construction cost before taxes, the GST revenue arising on account of construction would be Rs 2,500-3,000 crore on an annual basis on a go-forward basis, the association estimated.
Not all developers have availed of the credit for the past periods. Many developers have opted to capitalise the GST component with the cost of the building and have claimed depreciation benefits.
Hence, by allowing ITC for past periods, the association said the potential revenue impact for the past period would also be less than Rs 900-1,100 crore per annum.
FICCI has recommended that a specific clarification be issued to clarify that where goods and services (including works contract services) are used for the construction of premises by a person for leasing, the same would not qualify as construction on their account.
