GST ITC on Work Contract Services : Issues and Suggestions

Suggestions on GST Acts (July 2017) by Institute of Chartered Accountants of India

21. Disallowance of Credit in respect of works contract services

Clause c Section 17(5) of CGST Act provides that works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service.

Clause d provides that goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business.

Explanation 1.- For the purpose of this clause, the word “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Issue

 Works contract is already limited to immovable property; hence the current language is redundant.
 Further, suppose that a person constructs a Factory Building, Hotel Building or a building which he wants to or has let out on rent, as per provisions of Section 17(4) (c) and (d) of the CGST Act, credit of any taxes paid on construction of Immovable property would not be allowed. This is a differential treatment being laid out that firstly where being a tenant of a building, a person would be getting the credit of the taxes paid on the rent to the owner of the Immoveable property but if a person has constructed building himself, then he would not be getting any credit of the taxes paid. This would be a huge negative for the Hotel Industry or the Manufacturing Industry wherein large investment is required in Building for the rendering of the supplies. Immovable Property in case of Hotel Industry, Industries and used in Letting out on rent forms an important part of the supply chain and cannot be treated as being used for self-consumption.

 It leads to cascading of taxes which is not the spirit of GST Law, as to provide seamless credit.

Suggestions

 It is suggested that clause c be rephrased as “works contract and goods or services used in a works contract except where it is an input for further supply as works contract”.

 It is suggested that the provisions under Section 17 relating to the Input Tax Credit be rationalized and brought at par with the simple concept that if outward supplies of a person are taxable then the inward supplies of the goods or services or both should be allowed as credit.

 Further, it is suggested that renovation works, repairs etc. be eligible for credit if they are in course / furtherance of business.

 The restriction of ITC in respect of all works contracts resulting in immoveable property at large be removed since in large number of contracts which qualify as works contracts, the end result would be immovable property’.

Read ICAI Suggestions on GST Act to Govt : July 2017

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