Detailed analysis of the ambit and scope of clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act, 2017 [CGST Act]
By: – RameshKumar Patodia
Goods and Services Tax – GST
Dated:- 21-11-2018<\/p>\n
Goods and Services Tax, commonly known as “GST”, is a multi-stage consumption-based value added tax levied on the supply of goods and services and most acclaimed tax reforms of the century which was brought into effect from the 1st day of July '2017 upon enactment of various State and Central GST legislation for which the roadmap was laid by the Constitution (101st) Amendment Act, 2016.
\nThe GST replaced the existing multiple cascading taxes levied both by the Centre and the State and all powerful GST Council was assigned the task of Implementation of the law. The Council prescribed five tax slabs for collection of tax viz. 0%, 5%, 12%, 18% and 28% including various rules and regulations.
\nThe rationale behind introduction of GST is laid down in the Raj<\/p>\n
= = = = = = = =<\/p>\n
Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n nd the GST council with the avowed objective of effective implementation has had multiple meetings and in each of these meetings various issues arising upon the implementation has been addressed though multiple issues still remain. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n rimarily, it is to be noted that Section 16 of the CGST Act, 2017 (hereafter referred to as Act) deals with the 'Eligibility and Conditions for taking Input Tax Credit' wherein sub section (1) states that “every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner as specified in section 49, be entitled to take credit of input tax charged on supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person”. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ot eligible for being taken as credit. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n when utilised by any person 'on his own account' unless the input tax credit is used or intended to be used in the course or furtherance of business. Therefore, what is not allowed by section 16(1) cannot be said to have been restricted via Section 17(5). = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n Act = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ty “which is intended for re-sale” or seeks to block input credit in respect of an immovable property “which is intended for the purposes of leasing out”. The said interpretation will be patently against the decisions of the Apex Court cited hereinabove and will result in an absurd situation where a company which is engaged in the construction as well as rendition of Real Estate services will be denied the input tax credit in all cases since primarily a real estate company is expected to be engaged in the selling of the properties or renting of the properties and the property in such a situation may be constructed by it on its own account as it is not expected that a real estate company will know in advance the purpose for which the construction is being done i.e., for the purpose of sale or for the purpose of renting out and till such time, the decision is made whether the company will sell or rent out, the construction will always be on own account and therefore if the interpretation<\/p>\n = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n under construction property and the constructed property. Though the GST Council did not deal specifically with the issue at hand but what is to be seen is that there are disputes in the manner of taxation of real estate sector while implementing the GST Law. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n hat the literal construction of a situate must be adhered to unless the context renders it plain that such a construction cannot be put on the words in question- this is what is stated in Webster's third new International Dictionary: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n t and machinery” and “plant or machinery” cannot be taken to mean the same thing and the definition of the phrase “plant and machinery” as given in the explanation in our opinion can be applied in Chapter V and VI only where the phrase “plant and machinery” has been used and not where “plant or machinery” has been used. In this regard, it may be noted that the word “or” is normally disjunctive and “and” is normally conjunctive but at times they are read as vice versa to give effect to the manifest intention of the legislature as disclosed from the context. One does sometimes reads “or” as “and” in a statute but one does not do it unless you are obliged because “or” generally does not mean “and” and “and” does not generally mean “or”. Where provision is clear and unambiguous, the word “or” cannot be read as “and” by applying the principles of reading down (See Principles of Statutory Interpretation 13th edition 2012 Page No 485-486). = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n e) dated 28-06-2017 prescribes the rate of Central Tax in respect of different kinds of supply of services wherein the rate in respect of supply of renting of immovable property service has been prescribed under heading No. 9972 (Real Estate Services) as 18% (CGST and SGST). = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n lation to construction of immovable property against the output services of Renting in the erstwhile service tax legislation were specifically brought in indirectly by amending the Cenvat Credit Rules, 2004, only after catena of judgements held that the input tax paid on inputs used and construction services utilised for the construction of property used for the provision of renting services shall be allowed as cenvat credit on the pretext that renting service could not have been rendered without construction of property. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n no need to insert the phrase at all and it was sufficient to restrict the provision to “own account”. Therefore the interpretation that the taxable supply by way of renting of the property is covered within the meaning of “own account” is ruled out, unless it is read in conjunction with the phrase including when such goods or services or both are used in the course or furtherance of business. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ne of the reasons given by putting this sector in the normal tax bracket of 18% by saying that the sector is now eligible for the input credit in respect of the supply of materials like cement, steel etc. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n","protected":false},"excerpt":{"rendered":" Detailed analysis of the ambit and scope of clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act, 2017 [CGST Act]By: – RameshKumar PatodiaGoods and Services Tax – GSTDated:- 21-11-2018 Goods and Services Tax, commonly known as “GST”, is a multi-stage consumption-based value added tax levied on the supply … Continue reading “Detailed analysis of the ambit and scope of clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act, 2017 [CGST Act]”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-15088","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/15088","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15088"}],"version-history":[{"count":0,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/15088\/revisions"}],"wp:attachment":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15088"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15088"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15088"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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\nWhile no doubt it would take years for the GST law to become perfect in view of the diverse nature of the Country with several prominent sectors, Real Estate Sector is one of the sectors of the country which is gripping with multiple issues of falling sales, rising cost of inputs, labour issues, income-tax issues etc. One prominent issue which is hotly debated across the country as far as real estate sector is concerned, is the Issue of allowability of input credit towards inputs and input Services used in the construction of a Shopping complex, Mall and\/or office complex. The general consensus amongst the various stakeholders seems to be that such input credit is not allowable in view of the express provisions as contained in Section 17(5)(d) of the CGST A<\/p>\n
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\nOn reading of the above stated provision, it is clear that subject to certain conditions, every registered person is eligible to take credit of input taxes charged on the supply of goods or services or both to him provided the goods or services –
\ni) are used; or
\nii) Intended to be used in the course or furtherance of his business
\nProvisions of Section 17(5)(d) of the CGST Act
\nHowe<\/p>\n
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\nMeaning of the phrase “on his own account”
\nNow a question arises is – what is the meaning of the phrase “on his own account”. The CGST Act nowhere defines the said phrase and therefore ordinary meaning of the said expression has to be taken. The plain and simple meaning of the said term would be “for his own purposes”. The phrase “on his own account” cannot be taken to refer to a situation where any taxable person who is engaged in any business or profession and uses the goods or services or both on his own account. This is because immediately after the phrase “on his own account”, the words “including when such goods or services or both are used in the course or furtherance of business” is written. Apparently if the meaning of the phrase “on his own account” is deemed to be wide enough to cover every situation of business or commerce including the situation where a real estate company is intending to utilise the Immovable property for the purpo<\/p>\n
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\nRationale behind introduction of the provisions as contained in Section 17 of the CGST Act
\nNow it is to be seen as to what is the rationale behind introduction of the provisions as contained in Section 17 of the CGST Act which starts with the heading ” Apportionment of credit and blocked credit. The first four sub-sections of section 17 viz. sub-section (1) to (4) deals with the situation where the credit is apportioned between eligible and ineligible credit depending upon the utilisation of the goods and services for the purpose of any business and the other purposes and it is Section 17(5) which deals with the cases relating to the blocked credit where the input tax credit is blocked in certain situations as contained in the said<\/p>\n
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\nThe general rule of interpretation is that there should not be additional inclusion of words while interpreting the provisions of a statute. The provisions must be construed strictly on the basis of plain language used by the legislature.
\nIt is also well-settled principle of law that at first one has to apply "literal interpretation" and only in cases of absurd results, one has to apply "purposive interpretation”. It is well settled law that while interpreting a statute the basic principle of literal rule of interpretation has to be followed (See B. Premanand and Ors. v. Mohan Koikal and Ors. reported in 2011 (3) TMI 1590 – SUPREME COURT .
\nThe relevant portion of the said decision is as follows:
\n"9. It may be mentioned in this connection that the first and foremost principle of interpretation of a statute in every system of interpretation is the literal rule of interpretation. The other rules of interpretation e.g. the mischief rule, purposive interpretatio<\/p>\n
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\nIn the light of the discussion hereinabove, it can be safely concluded that the phrase “own account” by any stretch of imagination cannot be interpreted to mean that it covers a situation where the property is intended to be leased out. It is not permissible to assume or intend when the intention of the law makers is very clear. Even if the purposive interpretation is applied, from a simple reading of the provisions as contained in Section 17 , it is apparent that in a situation where a movable asset after purchase is rented out then there are express provisions in Section 17 to allow the Input tax credit on purchase of the movable asset against the output taxable supply of the renting of the movable asset and thus it cannot be <\/p>\n
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\n“Land, buildings, machinery, apparatus and fixtures employed in carrying on trade or other industrial business”
\nThe said decision of the Apex Court was considered by Hon'ble Allahabad High Court in the case of CIT Lucknow-II Vs Kanodia Warehousing Corporation reported in 1979 (11) TMI 97 – ALLAHABAD HIGH COURT and the Hon'ble Court observed as follows:-
\nIn order to find out if a building or a structure or part thereof constitutes “plant” the functional test must be applied. It must be seen whether the subject matter involved, that is, the building or structure or part thereof, constitutes an apparatus or a tool of the tax payer or whether it is merely a space where the tax payer carried on his business. If the building or structure or part thereof is so<\/p>\n
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\nIn the instant case, while section 17(5)(c) of the A<\/p>\n
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\nAlso, the said notification contains a table wherein in Column No. 5 restrictions in respect of utilisation of input tax credit have been prescribed in respect of certain kinds of supply of service but no such restrictions have been prescribed therein in respect of renting of immovable property service taxed under the heading Real Estate Services.
\nIn this regard it is pertinent to note that while prescribing different bands of tax rate in respect of GST, five bands of tax rate has been prescribed viz. 0%, 5%, 12%, 18% and 28%. These bands of tax rate has been prescribed on the basis of principle that 0%, 5% and 12% is in respect of essential and needy area and also where there are certain restrictions on the allo<\/p>\n
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\nHowever, unlike the amended provision under the service-tax as stated herein above, there is no such express provision under the GST law.
\nGST law itself was introduced in order to allow seamless input credit of tax paid on input and input services used for the provision of output taxable supply and if the interpretation as being sought to be done is allowed to be done; it will be patently against the legislation itself without there being reasonable justification fo<\/p>\n
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\nNow the question arises whether when one is using the goods or services or both for the purpose of construction of an immovable property, can it be said that such goods or services or both are used in the course or furtherance of business. It is not so. The goods and services when used for the construction of an immovable property directly, they cannot simply by such usage be said to have been used in the course or furtherance of business. If the intention of the law makers was to restrict the credit in case the immovable property was used in the course or furtherance of business, then the law ma<\/p>\n
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\nThe business of a Real Estate player can be that of construction for sale, renting, leasing, time share and others. All these businesses are inextricably linked and it is difficult to carve out one from another and the analysis of the provisions has to be therefore done in the light of this.
\nThe plain and simple interpretation of the said phrase can be to say that the said phrase seeks to disallow the input tax credit when the goods or services or both are used in the course of any business i.e., where the immovable property is used as a space for the purpose of running the business.
\nRecently, one writ petition has been filed in Karnataka High Court on this issue and is awaiting the judgement.
\nConclusion:
\nAcross the globe, in similar situations VAT on construction cost is eligibl<\/p>\n
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