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ITC admissible for building let out, Concept of Tax Chain : Analysis by KRG Legal:


ITC admissible in respect of building used for rental purposes, Concept of Tax Chain : Analysis by KRG Legal:


Odisha High Court in the recent case have held that expenditure made on the construction of building for letting out shall be permissible. The moot point before the court was whether section 17(5)(d) of the CGST Act 2017 restricts the admissibility of input tax credit in respect of construction of building used for letting out by the taxpayer. The Court held that the taxpayer was indeed eligible for claiming input tax credit as the said building was used for making outward taxable supply.

Concept of Tax Chain:
The petitioner pleaded that in their case the tax chain was not breaking and hence ITC should be allowed. As per this case, the concept of continuation of tax chain has emerged to a large extent. It was on this ground that there was no break in the tax chain, court held that the credit shall be allowed in respect of construction of building utilised for the purpose of making outward taxable supply. The let out building was compared with the building sold prior to issuance of completion certificate. It was put up before the court that letting out was similar to sale of building and hence in either of the case there was no breakage of tax chain, therefore credit must be allowed. The petitioner contested that where completion certificate is granted in respect of building, it automatically moves out of the ambit of GST, hence the tax chain is immediately halted. The court while accepting the contention of breakage of tax chain, has held that restriction u/s 17(5)(d) can only be imposed where the building is used for own purpose by the taxpayer. Where taxpayer uses the same for making an outward taxable supply, the denial of input tax credit shall be bad in law and unconstitutional in terms of Article 14 and Article 19 of the constitution of India.

Ambiguity:
If the department accepts the judgment of H’ble High Court and does not file appeal in supreme court or makes necessary amendments in the law, there are certain issues which are going to crop up:
1.     Whether the analogy of tax chain can be applied everywhere without any restrictions/guidelines. For instance in case of beauty services, rent-a-cab or any other personalised services which are necessary for upkeep of employees to perform, will that also be permissible as input tax credit. Or where the motor vehicles in given for commutation of management who are vested with responsibility of ensuring outward supplies would also be eligible. May be the clarification in this respect shall soon be provided once the new government enters into office.
2.     Will the input tax credit in respect of administrative offices which are used by the management would also be allowed? As this very building is used for providing the outward taxable supplies.
3.     Will KPO/BPOs be permitted to claim input tax credit in respect of building used by their staff members for meeting out international calls and serving their overseas clients?
4.     Whether the input tax credit in respect of other expenses such as generator set, architect fees or any other expenditure on the said immovable property would also be permitted?

Interpreting “On its Own” in section 17(5)(d):
The term “on its Own” used in section 17(5)(d) has been interpreted in respect of end use by the taxpayer. The court has held that where the property is used by taxpayer himself and is not making any outward taxable supply, ITC shall not be allowed. But where the same building is used for making outward taxable supplies, ITC shall be permissible. Further as we understood from section 17(5)(d), we interpreted “on its own” in respect of construction carried out by the taxpayer himself. Where taxpayer acquires construction material for carrying out construction of immovable property, ITC shall not be allowed. There might be divided view in this respect and we feel that this is subject matter for clarification by the government.  

Regards

CA. Keshav R Garg
c/o KRG Legal
3328, F Floor Sector 27 D, Chandigarh, India 160 019
Phone: 0172-461-3328
E-mail: krglegal@gmail.com



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