15 May ITC is Not Available for the Construction of Immovable Property for Renting it Out for Commercial Purposes
Introduction:
The taxation landscape is often riddled with complexities, especially when it comes to the eligibility of Input Tax Credit (ITC) in the construction sector. A recent ruling by the Tamil Nadu Authority for Advance Rulings (AAR) in the case of Suswani Foundations Private Limited has brought to light a crucial aspect regarding ITC availability in the context of constructing immovable property for commercial rental purposes.
Facts of the Case:
Suswani Foundations Private Limited, referred to as “the Applicant,” embarked on the construction of an industrial building spanning approximately 1.62 lakh square feet. This construction aimed to create ‘Godowns’ intended for commercial leasing. To materialize this project, the Applicant planned to procure various construction materials such as Cement, Steel, PEB sheets, and Building Materials like bricks, sand, and blue metals, among others. Additionally, they intended to engage consultants or architects for the construction, estimating an expenditure of around INR 12 Crores. The projected GST amount for this construction was approximately INR 2.5 Crores.
The Applicant envisioned renting out these godowns for commercial purposes, foreseeing a rental income of around INR 40 lakhs per month, subject to GST.
The contention arose when the Applicant argued that Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (CGST Act) shouldn’t be applicable to them as they weren’t constructing the godowns for furthering their business activities directly. However, they emphasized that the income generated from these rented properties was crucial for sustaining their business operations.
Issue:
The primary issue at hand was whether Input Tax Credit (ITC) is available for the construction of immovable property intended for commercial leasing purposes.
Held:
The Tamil Nadu AAR, in Advance Ruling No. 123/AAR/2023, made the following observations and rulings:
- Section 17(5)(d) of the CGST Act explicitly states that no ITC is available for goods or services received for the construction of immovable property on one's own account, irrespective of whether such inputs and services are used in the course and furtherance of business.
- In the case of the Applicant, despite the intention to lease out the godowns for commercial purposes, the construction was undertaken for their benefit, thus falling under the purview of 'on one's own account.'
- Consequently, the AAR ruled that the Applicant is not eligible to claim ITC on any goods or services utilized for the construction of the immovable property intended for commercial leasing.
- The ruling reaffirmed that the legislative intent, as manifested in Section 16(1) of the CGST Act, allows for the restriction of ITC flow in certain scenarios. This underscores the importance of taxpayers adhering to the prescribed regulations.
Conclusion:
The ruling by the Tamil Nadu AAR clarifies the stance on ITC availability in the context of constructing immovable property for commercial leasing purposes. While the Applicant sought to avail of ITC citing business necessity, the AAR’s interpretation of the law emphasizes adherence to statutory provisions.
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