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The government is examining industry concerns over the denial of input tax credit (ITC) on goods and services used to construct immovable property for its own use, according to senior government official.
ITC is goods and services tax (GST) paid by a business on its purchases. This it can set off against the tax it has to pay on its sales.
The issue is being discussed with states, but no agreement has been reached yet on easing the restriction, the official said at an industry interaction organised by the Bengal Chamber of Commerce and Industry (BCC&I).
“Discussion with states is going on,” the official said, adding that he would not comment further on the matter because of this.
The issue relates to companies being unable to claim GST paid on certain goods and services used to construct immovable assets such as offices, factories, and global capability centres (GCCs).
Industry’s position is that the restriction increases the cost of large investment because the GST paid becomes part of the project cost instead of being available as credit.
The official’s remarks assume significance amid industry expectations that the issue could be considered by the GST Council. However, he indicated that the matter had not reached a stage where any decision could be announced.
According to Vivek Jalan, partner with Tax Connect Advisory Services, the Supreme Court in the case of Safari Retreats in October 2024 had said that, based on the functionality test, ITC on goods and services used for constructing immovable property “not for own use” but for further renting out could be taken.
“However, even here it is sometimes disputed by certain authorities in central and state jurisdictions. Further, ITC is not available for constructing business assets such as factories and warehouses for own use. A full relaxation under Section 17(5)(c) & (d) of the CGST (Central Goods and Services Tax) Act, 2017, by the GST Council would help unlock costs and strengthen India’s business competitiveness,” he said.
The official said there was some misunderstanding over Section 16(2)(c), which requires that the tax charged on supply should have been paid to the government.
According to the official, a distinction needs to be made between cases where a supplier exists but has failed to file its return or pay the tax and cases where the supplier is subsequently found to be non-existent.
For a supplier that has not filed the return, GST rules already provide a mechanism for reversal and subsequently reclaiming credit, he said.
The official referred to Rule 37A, saying that a recipient could take credit but would have to reverse it if the supplier did not fulfil the prescribed conditions within the relevant period.
If the supplier subsequently pays the tax, the recipient can again get the credit, he said.
In cases where the supplier is found to be non-existent, the department’s position is different because the existence of the underlying supply itself comes into question.
The official estimated that only 1-2 per cent of cases fell in this category, although the figure could not be independently verified.
He also said tax authorities made efforts to recover dues from the supplier. If the supplier eventually pays the tax, the recipient can again claim the corresponding credit.
The official said the broader direction of the GST administration was towards greater automation, greater trust in taxpayers, and less intervention and litigation.
The government wants businesses to be treated as partners in nation building and economic development, he said, adding that future reforms would focus on making GST processes simpler and easier.
The approach, he said, would be reflected in the next phase of GST reforms.
Sanjay Kumar Mishra, president of the Goods and Services Tax Appellate Tribunal (GSTAT), said that the body was adopting a mechanism of bunching similar cases and assigning them to Principal Bench to deal with common legal issues.
The move is intended to provide clarity on issues that arise across states and sectors and ensure that a legal principle decided by the tribunal is followed uniformly across the country.
He said the tribunal had discussed the approach among its judicial and technical members before deciding to take up certain cases together.
The approach could help deal with the transition phase of the GSTAT, and also where similar disputes involving the same taxpayer, industry or legal issue arise in multiple states.
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