Let us see the eligibility of ITC on works contract service and goods or services of both availed for the purpose of construction work –
ITC on works contract services is hit by section 17(5) of CGST Act
Input tax credit is not allowed on works contract service availed for construction of immovable property. Similarly, goods or services procured for the purpose of construction of immovable property is also not eligible for ITC.
Plant and machinery has been excluded from the exclusion list. As such the ITC on works contact service or goods or services procured for construction of civil structure for plant and machinery is eligible for credit.
The re-construction and renovation work is included in the term construction. Whereas, the additions or alterations or repairs to the immovable property are termed as construction only when they are capitalised in the books of accounts .
Capitalisation of an expenses related to asset depends upon the number of years the asset would yield benefit. Generally if the asset gives benefit for more than a year then the same is capitalised.
If the expenses on construction are capitalised then ITC is not allowed. And if the same is debited to P& L then the ITC becomes eligible.
In order to verify the expense is capitilised or not you may verify the fixed asset register. The fixed asset register has invoice wise listing of goods and services procured and which are capitalised.
It may also happen that the goods or services are yet to be capitalised and they are parked in ‘Capital work in progress’ account. Go through the ledger as well.
In the VAT regime, the officer used to ask to submit the invoices of the asset capitalised along with a reconciliation of a fixed asset register. But due to digitalization, the importance of physical paper is diminishing. Officers rely on 2B reconciliation for the ITC claim in 3B. If the invoice is not there in the 2B report the ITC is denied despite having a physical invoice copy in possession.
Repairs of air conditioners, factory wall / civil work, factory road repair, motor repair, etc which are of routine fix for keeping the asset in working condition, the ITC is eligible.
Construction of a cabin in the admin office , making file cabinet , setting up additional work station, pantry renovation, painting work, etc is also eligible for ITC.
Consultation and certification of statement of civil work from chartered engineering is also an eligible ITC.
The important point is that the ‘capitalisation’ of the works contract service or goods or services procured for construction purpose.
ITC on construction of shops in mall for giving the same on rent
Safari Retreats case was much widely spoken by tax fraternity. The question involved was about ITC eligibility on construction of shops in a mall which are then given on rent. The ITC on construction of shop expense should be allowed to offset against the GST payable on renting of the constructed shops in the mall.
ITC is hit by section 17(5) but the contention of the taxpayer is that when GST is payable on renting of shops then the ITC on construction of same shop to be allowed.
The matter went to Supreme Court, where the ITC was allowed but subjected to ‘Functionality test’. If the mall qualifies the functionality of a plant then ITC is eligible. Also, the term plant or machinery was touched upon and clarified it to interpret as plant and machinery instead of plant or machinery. This amendment is made to discourage the recipient to claim ITC on construction related service.
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