ITC of GST paid on building repairs not allowable to the extent of capitalisation – AAR

ITC of GST paid on building repairs not allowable to the extent of capitalisation – AAR

The allowability of ITC of GST paid on building repairs is a matter of confusion among the various professionals and prone to litigation. The building repairs may involve the following among other things:

  • Purchase of building materials, such as cement, concrete, bricks, cement or marble or stone slabs or tiles, paint, polish and any other building materials meant for repair of building; or
  • Labour supply for carrying out repair of building; or
  • Supply of material as well as labour by a contractor as a composite supply under works contract
  • Purchase of electrical fittings, such as Cables, Switches, NCB, and other electrical consumables meant for repair
  • Purchase of sanitary fittings, such as tiles, commode, bath tub, wash basin, PVC pipes and other bath room sanitary fittings and consumables meant for repair
  • Purchase of wood, board, mica, tapestry, paint , polish and other consumables meant for repair

Recently, the Authority for Advance Ruling -Rajasthan in the case of M/s Rambagh Palace Hotels Pvt. Ltd.  observed that as follows:

The applicant is a hotelier engaged in supply of various services viz. Short term accommodation service, Restaurant service, Mandap keeper service, SPA and other club facilities, Renting of Space or Lawn etc.

The applicant in routine manner or as and when required is involved in repair and maintenance of the building and its components in order to ensure that the high standards of hospitality service are maintained. In a way, the repairs of hotel are for furtherance of business in respect to hospitality and supply of services as mentioned above.

Further, nature of work undertaken by the applicant is predominantly for immovable property involving transfer of goods and services, therefore, the activity is works contract for carrying out repair and maintenance work. The relevant provisions of the act in this regard is reproduced below:

Section 2(119) of CGST Act, 2017 defines “works contract” which means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Hence, to qualify an activity as “works contract”:

(i) The activities to be undertaken under a works contract may be one or more of the following in relation to any immovable property viz. Building, Construction, Fabrication, Completion, Erection, Installation, Fitting out, Improvement, Modification, Repair, Maintenance, Renovation, Alteration, or Commissioning etc.

(ii) Such activities shall be in relation to any immovable property.

(iii) Transfer of property in goods is involved.

Immovable property is defined in Section 3(26) of the General Clauses Act, 1897 as under:

Immovable Property shall include land, benefits to arise out of land and things attached to earth, or permanently fastened to anything attached to the earth.

The Section 16 of CGST/RGST Act, 2017 provides eligibility and conditions for taking input tax credit which are reproduced as below-

“(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying documents as may be prescribed;

(b) he has received the goods or services or both.”

Further, the Section 17 of CGST/RGST Act, 2017 debars certain activities/ supplies/work from the eligibility to claim ITC. The relevant portion of sub-section 5 of Section 17 of CGST/RGST Act, 2017 in this regard is reproduced below:-

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(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;”

Held

In view of above, input tax credit in general is not available for construction, reconstruction, renovation, addition, alteration or repair of an immovable property even when such goods or services or both are used in course or furtherance of business. However, the limitation in such a scenario is extent of capitalization.

The applicant is paying GST on building materials, such as cement, concrete, bricks, cement or marble or stone slabs or tiles, paint, polish etc and on some services such as labour supply. This activity of repair and maintenance which encompasses supply of goods for a construction activity is of immovable nature. The provisions of ITC for the said supply of goods is covered under Section 17(5)(d) read with explanation mentioned therein. Therefore, ITC on GST paid on such goods as mentioned above will not be available to the extent of capitalisation of the said goods as mentioned in Explanation of Section 17(5) of the CGST/RGST Act, 2017.

Further, the applicant is engaging manpower supply for the construction purpose which is a supply of service. The supply of manpower service is also covered under Section 17(5)(d) read with explanation mentioned therein. ITC on GST paid on such supply of service as mentioned above will not be available to the extent of capitalisation of the said service.

The aforementioned supply of goods and services supplied for construction work of an immovable nature can be done in composite manner also i.e. works contract. The works contract service for supply of above mentioned goods and service is covered under Section 17(5)(c) read with explanation mentioned therein. Therefore, ITC on GST paid on above said works contract service will not be available to the extent of capitalisation of the said goods as mentioned in Explanation of Section 17(5) of the CGST/RGST Act, 2017.

The applicant is paying GST on electrical fittings, such as Cables, Switches, NCB, and other electrical consumables and sanitary fittings, such as tiles, commode, bath tub, wash basin, PVC pipes and other bath room sanitary fittings etc. This activity of installing electrical fittings and sanitary fittings encompasses supply of goods for a construction activity is of immovable nature. The provisions of ITC for the said supply of goods is covered under Section 17(5)(d) read with explanation mentioned therein. ITC on GST paid on such goods as mentioned above will not be available to the extent of capitalisation of the said goods.

Further, the applicant is engaging manpower supply for the construction purpose which is a supply of service. The supply of manpower service is also covered under Section 17(5)(d) read with explanation mentioned therein. ITC on GST paid on such supply of service as mentioned above will not be available to the extent of capitalisation of the said service.

The aforementioned supply of goods and services supplied for construction work of an immovable nature can be done in composite manner also i.e. works contract. The works contract service for supply of above mentioned goods and service is covered under Section 17(5)(c) read with explanation mentioned therein. Therefore, ITC on GST paid on above said works contract service will not be available to the extent of capitalisation of the said goods as mentioned in Explanation of Section 17(5) of the CGST/RGST Act, 2017.

The applicant is paying GST on wood, board, mica, tapestry, paint, polish and other consumables meant for repair of existing furniture & fixtures and buying of new furniture & fixtures such as Sofa, Table, Chairs, Door, Cabinets, etc. This activity of supply of said goods and services of manpower for repair in relation to furniture & fixtures is a composite supply of goods and services. Therefore, ITC on GST paid on supply of goods and services as mentioned above will be available in accordance with provisions of Section 16 of CGST/RGST Act, 2017.

The furniture and fixtures are not immovable property in most cases but can be when used as a floor or fixed for a structure. In the scenario where, the furniture and fixtures are fixed or immobilized or considered as a part of construction activity of immovable nature then the input tax credit will not be available to the extent of capitalization of such goods and services as per provisions mentioned in Section 17 of CGST/RGST Act, 2017.

The applicant can avail ITC of GST paid on purchase of new ready to use furniture such as chairs, etc as per provisions mentioned in Section 16 of the CGST/RGST Act, 2017.

Conclusion

The above advance ruling is an important considering the confusion relating to the ITC amongst professionals . In my view, the advance ruling correctly laid down the legal position. The admissibility or non-admissibility of ITC on building repairs would depends on the accounting treatment of an expense in the books of accounts i.e. whether capitalised or charged to revenue. However, it must be noted that the advance ruling is only binding on the applicant who has obtained it, for others it has only persuasive value.

CA. Chitresh Gupta
FCA, B. Com(H), IFRS (Cert.), IDT (Cert.)
Author of book “GST –Law, Analysis & procedures”
Faculty on Goods & Services Tax by ICAI
Member of IDT Committee of PHD Chamber of Commerce

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