Ficci, Assocham urge input tax credit on commercial properties

Industry bodies FICCI (Federation of Indian Chambers of Commerce and Industry) and Assocham are advocating for a significant change in the Input Tax Credit (ITC) provisions under the Central Goods and Services Tax (CGST) Act. They have formally demanded that real estate developers be allowed to claim ITC on commercial assets constructed specifically for leasing purposes. The organizations have reached out to the finance ministry with letters urging it to permit the use of ITC, particularly for immovable properties constructed to provide leasing services. The associations argue that allowing this claim will not adversely affect revenue but instead support the credit chain, stimulate growth in the real estate sector, and ultimately benefit the broader economy. This push comes in light of a recent Budget proposal that seeks to amend CGST laws retroactively, which experts believe may contradict a Supreme Court ruling regarding ITC claims on leased assets.

Amendments to the CGST Law

In its representation, FICCI has called for the finance ministry to issue a clarification that permits the availing of ITC for properties constructed for leasing services under Schedule II of the CGST Act. They assert that such a clarification would not only align with the Supreme Court’s decision in the Safari Retreats Private Ltd case but would also ensure fairness in the leasing industry. The proposed amendments to the CGST law include substituting certain terms to clarify the eligibility of ITC claims. Specifically, the government’s Budget proposal aims to replace the phrase ‘plant or machinery’ with ‘plant and machinery’. This change would be effective retroactively from July 1, 2017, despite any existing court judgments or orders. Such legislative changes have raised concerns among industry experts, who believe that they could effectively counter the Supreme Court’s ruling, which allowed businesses to claim ITC on properties categorized as ‘plant’.

Economic Implications and Revenue Estimates

FICCI has emphasized that the economic implications of allowing ITC claims for leasing services could be significant. They suggest that the potential revenue impact can be gauged from the current annual commercial space construction in India, which averages around 55-60 million square feet. Assuming a conservative construction cost of Rs 2,500 to 2,800 per square foot, the estimated GST revenue generated from construction activities could reach Rs 2,500-3,000 crore annually. Furthermore, the association noted that many developers have not claimed credit for past periods and instead opted to capitalize GST costs with building expenses, thereby claiming depreciation benefits. Thus, the potential revenue impact from retroactive ITC claims for the past could amount to less than Rs 900-1,100 crore per annum. FICCI has recommended issuing specific clarifications that would ensure works contract services used for constructing leased premises do not count as construction on the developer’s account, which could provide further clarity and support for the industry.

Conclusion

The ongoing discussions between industry bodies and the finance ministry concerning ITC claims for leasing services highlight the complexities of the real estate sector. As stakeholders aim for clarity and fairness in taxation, the outcomes of these discussions could reshape the landscape of commercial leasing in India.