ITC on works contract & construction services
The basic idea of bringing GST in India was to allow seamless credit of taxes paid on supply of goods and services and to avoid cascading effect of indirect taxes. However, in the GST law itself, there are certain provisions which restricts the seamless credit of taxes which is known as “Blocked Credit”. Section 17(5) of CGST Act prescribes those cases where ITC in respect of goods and services shall not be available to the recipient. One of such case is “ITC in respect of works contract service”. In this article, we are going to discuss this issue in the light of the provisions of GST law. Before moving to ITC on works contract service, we will first understand the definition of “Works Contract”. Section 2(119) of the CGST Act defines works contract as follows: -
“Works Contract” 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.
The definition of works contract clearly indicates that only composite contracts relating to any immovable property are covered under ‘works contract’. Such contracts certainly have an element of goods wherein the ownership of goods is transferred in the execution of such contract alongside.
Now, we shall move to section 17(5) of CGST Act to understand the ITC provision in respect of works contract services. Section 17(5) reads as below: -
“Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (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 & machinery) except where it is an input service for further supply of works contract service
(d) goods or service 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 clause (c) & (d), the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
Explanation- For the purpose of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-
(i) Land, building or any other civil structure
(ii) Telecommunication towers and
(iii) Pipelines laid outside the factory premises”
On analysis of the above provision, following inferences may be drawn in respect of ITC in respect of works contract services and construction services: -
ITC in respect of output works contract services
ITC in respect of works contract services shall be allowed if such services are used for further supply of works contract services. For example: - Shyam is providing services of carpenter, plumbing and electrical work for an under-construction house. All such services are to be provided to customer including material. Thus, it is falling under the ambit of “Works Contract Service”. For the execution of this contract, he sub-contracts the plumbing work to Ram. In this case, Shyam has taken input works contract service from Ram ITC of which can be claimed by him towards his output works contract services.
In other cases, ITC of works contract services shall not be available if such services are availed towards construction of an immovable property (other than plant & machinery). Further, it should be noted that the credit of ITC on works contract services shall be available to the builders as they themselves are supplying works contract service to their customers.
ITC in respect of construction on own account
Clause (d) of section 17(5) clearly blocks the ITC for goods and services which are used by a person for construction of an immovable property (except plant & machinery) on his own account. Therefore, if you are planning to construct your factory building and you procure cement, tiles etc. then the ITC shall not be available for such input cement, tiles etc. because such material is used for construction of an immovable property on own account.
ITC in respect of work contract services or goods or services used for construction of plant and machinery
Clause (c) and (d) of section 17(5) restricts ITC in respect of works contract services and goods or services used towards construction of immovable property. However, both the clauses clearly exclude ‘plant and machinery’. This means that the ITC restrictions are applicable only in case of immovable property. These restrictions are not applicable on plant and machinery.
Thus, if any works contract service or any other goods are services are used towards construction or installation of plant and machinery, ITC shall be admissible thereon. It should be noted that the ‘Plant and Machinery’ has also been defined for this purpose in the explanation to section 17(5). So, the definition of ‘Plant and Machinery’ should also be taken care to decide the nature of asset i.e. whether it is classifiable as an immovable property or as plant & machinery in the books of accounts.
ITC allowable where works contract service is procured for construction not eligible for capitalization
Clause (c) and (d) of section 17(5) uses the word ‘construction’. As such, it is also pertinent to understand the definition of ‘construction’. Explanation to section 17(5) states that the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
The effect of this explanation is that ITC on input of any goods or services including works contract service used towards construction of immovable property that is desired to be capitalized in the books of accounts shall not be admissible. As such, you will also not be eligible to claim ITC of various inward supplies like architect services, interior decorator services etc. But it should be noted that the ITC restriction is only in respect of those inputs which are used for construction that is meant for capitalization in the books of accounts. So, if any expenditure is incurred towards repairs or renovation which are classifiable as revenue expenditure, ITC shall be admissible.
Relevant Judicial Pronouncements
Tarun Realtors P. Ltd. (2020) – AAR Karnataka
Transformers, DG set, lift, air handling unit, electrical wiring and fixtures, sewage treatment plant etc. for construction of shopping mall are not eligible for ITC as these cannot be considered separate from building or civil structure.
Tewari Warehousing Pvt. Ltd. (2019)- AAR WB
Warehouse constructed using pre-fabricated structure is immovable property and thus ITC of inputs used in such warehouse construction is not allowable.
Maruti Ispat and Energy Pvt. Ltd. (2018)- AAR-AP
Shed constructed to protect plant and machinery is a civil structure and ITC is therefore not available.
