ITC eligibility on works contract services
Section 16 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) allows Input Tax Credit (‘ITC’) on all goods and services procured in course and furtherance of business. However, the legislature has barred ITC on several supplies enlisted in Section 17(5) even if such supplies are received in course and furtherance of business. The provision seems to be contrary to intent of GST law of seamless flow of ITC. Pertinently, few sub-sections of Section 17 like Section 17(5)(c) and (d) stands challenged across different High Courts on being violative of Article 14 of the Constitution of India.
In this Outlook, we will examine possible scenario where ITC can be availed on procurement of works contract services despite existence of restriction under Section 17(5)(c).
Section 17(5)(c) of the CGST Act restricts ITC on works contract services supplied for construction of an immovable property. This restriction is not applicable if:
- Such constructed immovable property qualifies as Plant and Machinery; or
- Works contract services are used as an input service for further supply of works contract services
In recent past, there have been varied Advance Rulings revolving around what qualifies as ‘Plant and Machinery’. However, what qualifies as ‘further supply of works contract services’ has not yet been deliberated. We have discussed scope of this expression through following illustration:
- XYZ Limited (‘XYZ’) is engaged in business of providing works contract services of installation and commissioning of solar power plants.
- XYZ has procured works contract services for construction of its office building. This office building is used as workspace by different departments of XYZ including engineering & technical team that plans, designs & executes contracts for solar power plants.
- Now, the question is whether XYZ can avail ITC on works contract services for construction of office building.
A perusal of second clause discussed above indicates that works contract service used as an input service for further supply of works contract service is eligible for ITC. The expression ’further supply of works contract service’ has wider ambit and permits ITC even in scenarios where inward and outward supplies are of different nature. Like in above example, inward supply is of construction of office building while outward supply is of setting up of solar power plants.
It is pertinent to note that there is a similar bar under Section 17(5)(a) restricting ITC on motor vehicles. Interestingly, in this exception, word ‘such’ has been specifically used after the expression ‘further supply’ to allow ITC on motor vehicles used for ‘further supply of such motor vehicles’. Notably, the legislature has not used word ‘such’ with further supply of works contract service in Section 17(5)(c). Therefore, where taxpayer is supplying works contract service, then all works contract services (being input services) will fall under the exception and ITC shall be available. There is no mandate for inward supply to be directly used for providing outward works contract service.
Hence, in the above illustration, ITC on works contract service used for construction of office building is available since outward supply is works contract service. ITC is available in this situation irrespective of nature of outward supply.
Irrespective of challenge to constitutional validity of Section 17(5)(c), taxpayers providing works contract service can irrespective avail ITC on all inward works contract services basis aforesaid interpretation. This interpretation aligns with the objective and intention of seamless flow of credit under GST. Further, Section 17(5) being restrictive in nature, should be read strictly and not liberally. Amount of ITC in such cases is often substantial and can result in significant savings to taxpayers.
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 1) Delhi International Airport vs Union of India & Or, 2020 (7) TMI 696 – Delhi High Court and:
2) DLF Cyber City vs Union of India & Or, 2019 (12) TMI 413 – P&H High Court