Real estate leasing companies in a fix over blocked credit eligibility
If a developer constructs a commercial building and sells it before obtaining an occupancy certificate, they may be eligible to claim credit, provided they pay the output GST on the sale transaction.
However, if the developer uses the building for leasing, such an ITC is not available for set-off.
«This impacts the overall business as this increases the cost of construction, thereby increasing rentals. Multiple representations have been sent to the government, but developers have yet to get any relief.
As India is becoming the preferred choice for office space and global capability centres for MNCs who typically prefer to lease property, such an anomaly tends to impact the economics of operating in India negatively,» said Gaurav Karnik, national leader, real estate, EY India. According to one such representation by CII, construction costs typically account for 32% to 38% of the total project cost, and given that GST is applicable at the rate of 18% on such services (which becomes the cost for the company), there is a significant cost that the industry bears due to the specific restriction on the availment of ITC.
«The moot point before the court is whether input tax credit can be denied when goods and services are used for the construction of the building on own account.
These buildings are used by the businesses for rendering output services such as leasing, hotel services, and warehouse services», explained Abhishek A. Rastogi, founder of Rastogi Chambers, who is arguing the matters before the Supreme Court and various high courts.
Both sale and leasing are different ways to monetize value from the property; however, the tax treatment is different, as is the tax burden, which is against the principles of equality,
