“There are no facts, only interpretations”
It is not far-fetched to say that law and love are analogous. In fact, law is a step ahead of love. While it is said that every love has one soul with two bodies; similarly, every law also has a single soul i.e. the written law with multiple interpretations. Law is a game of interpretations and tax laws are amongst the hardest levels in this game. Introduce the credit provisions into the scene and the game becomes nail biting. With almost two years of GST, the complex legal issues have started arising. The real game has just begun!
In this article, the authors will discuss the legal issues in light of the recent judgement of Orissa High Court in the case of Safari Retreats Private Limited v. UOI, 2019-VIL-223-ORI. The judgment dealt with the issue of availability of Input Tax Credit (‘ITC’) on the construction of building used for letting out.
Section 17(5) (d) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) restricts ITC on goods and services received by a recipient and used for the construction of immovable property on his own account. In other words, ITC is available only where the immovable property is being sold prior to issuance of completion certificate.
In the instant case, the petitioner was engaged in the construction of shopping malls (for the purposes of letting out) and it intended to claim ITC on goods and services used in the construction. The petitioners contended that the expression ‘on his own account’ does not encompass a case where the immovable property is rented out.
The High Court concurring with the taxpayer’s view, held that the petitioner cannot be said to use the property ‘on his own account’ as it lets out the same to various tenants for their use. The Court drew a parallel between the sale of immovable property (before issuance of completion certificate) with the renting of immovable property and observed that the supply chain should not be broken in such cases (since GST would be payable on the outward supply of letting out) and thus, ITC is available. While reading down the provision, the Court held that disallowance of ITC, in this case, would frustrate the purpose of enacting GST which was to remove the cascading effect and allow seamless flow of credit throughout the value chain. Consequently, ITC on goods and services used for the construction of immovable property could be availed by a taxpayer who rents out the same.
Robert Kennedy once said that lawyers have special duties as lawyers apart from their normal duties as citizen of a country. Their obligations go deeper than earning a living as specialists incorporation or tax law. They have continuing responsibility to uphold the fundamental principles of justice from which a law cannot depart.
In this background, though the above judgment is favourable to the taxpayer, the authors do not concur with the view laid down by the Court. The judgment does not decipher Section 17(5)(d) of the CGST Act in a right manner and has merely laid down that letting out of property does not fall under the expression ‘on his own account’. The Court seems to have applied the ‘usage test’ to interpret this expression i.e. whether the constructed property will be used by the taxpayer or will be sold/let out.
It is imperative to note that Section 17(5) (d) uses the expression ‘on his own account’ along with the activity of construction of the immovable property. The same should exclude only cases where the taxpayer undertakes construction for some other person (i.e. where construction service is being provided). In case of a rented property, the landlord gets the construction done for itself and hence, the landlord gets construction done ‘on his own account’. Consequently, the landlord should not get ITC on goods and services used for the construction of property to be let out.
Another independent point to ponder upon is the constitutional validity of the restriction under Section 17(5) (d) of the CGST Act which the High Court refrained from deciding in this case. It is well settled that the legislature has unlimited power to allow or deny credit while levying taxes. At the same juncture, the denial of ITC should not be violative of the principles enshrined in Article 14 or Article 19 of the Constitution of India (‘Constitution’). The CGST Act allows ITC to a person undertaking the construction of immovable property but not to a person renting out immovable property. By virtue of this judgment, ITC is being allowed on renting of immovable property service but not on the construction of property on own account. This dichotomy lacks the intelligible differentia and thus, is violative of Article 14 of the Constitution. Further, the building is essential for any business to operate and restricting ITC on the same, would inflict an excessive burden on the business. Hence, vires of such restriction can be challenged under Article 19 of the Constitution.
This point has also been raised in the case of. Bamboo Hotel and Global Centre (Delhi) Pvt. Ltd [W.P.(C) 5457/2019] wherein notices have been issued to the Union of India. It will be important to watch the outcome of this as well as similar litigations in times to come.
Given the above ruling, the taxpayers getting immovable properties constructed (like malls, factories or commercial spaces) and renting out the same, are likely to avail ITC on goods and services used for construction. The Court’s rationale will equally apply to hotels, guest houses etc. that provide accommodation services that are akin to rental. Given the nature of the interpretational issue and quantum of stakes involved, this issue is expected to be contested before various forums before being finally settled by the Apex Court. It is important to note that under the GST law, the taxpayers who do not avail ITC now, will not be able to avail the same post last date of taking the same.
Further, the tax arbitrage between getting the factory/office constructed for self-use (where no ITC is available) and getting the same on rent (where ITC on goods and services used for construction will be available to the landlord and ITC on rent will be available to the taxpayer), also creates a meticulous tax planning opportunity for the taxpayers to avail ITC.
As discussed above, the game has just begun. As is rightly said that it’s just a game. Sometimes you win, sometimes you lose. For now, the ball is in the taxpayer’s court which is a plus point. However, one never knows when the tides will turn. Till that time as Michael Jordan said ‘Just play. Have fun. Enjoy the game.
The article was originally published by TIOL, Republishing it with the permission of Authors