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Industry bodies have sought relief from goods and services tax (GST) rules that prevent businesses from claiming input tax credit (ITC) — the credit for GST already paid on goods and services used for business — on certain expenses, according to people familiar with the matter.
A key demand is to allow companies to claim ITC on GST paid on construction work and materials such as cement and steel used to build warehouses, data centres, and other properties that are later used to provide taxable services.
Currently, Section 17(5) of the Central GST Act restricts ITC on certain construction-related expenses for immovable property, including works contract services and goods and services used for construction, subject to specified exceptions.
Industry argues that this increases the cost of setting up such facilities. For instance, a data centre may pay GST on construction work, cement and steel, but cannot fully use the tax paid as a credit against the GST it collects on its services.
Industry bodies have also sought a review of Section 17(5)(b), which blocks ITC on several expenses that are part of regular business operations. These include food and beverages, outdoor catering, health services, leasing, renting or hiring of motor vehicles, and life and health insurance, subject to specified exceptions.
These expenses can account for a significant share of spending in employee-heavy sectors such as global capability centres (GCCs), industry representatives said. Allowing ITC on such expenses would reduce tax costs, improve the competitiveness of Indian operations, and support the government’s ease-of-doing-business objective, they said.
Industry has proposed amending Section 17(5)(b) to allow ITC on these expenses. It has also cited practices in countries such as the UK, Canada, Singapore, and Germany, where indirect taxes paid on certain business expenses can, subject to local rules, be offset against tax liabilities.
“The construction cost for warehouses and data centres used to provide taxable services stops credit from getting stuck as a cost in the supply chain. That lower cost of doing business will make India a more attractive investment destination, especially for capital-intensive sectors like data centres, logistics and warehousing,” said Nitin Vijaivergia, partner, PwC & Co LLP.
He said allowing such credit would also bring India closer to global value-added tax (VAT) norms, where credit on construction costs is generally allowed as part of the VAT system.
“The same logic applies to food, health insurance, and other employee-related spends. These blocks were written when GST was new; business models have since moved on, with companies investing heavily in employee wellness as part of retention strategy or statutory need. Freeing up credit here will meaningfully cut operating costs and bring India’s ITC regime in line with global practice,” Vijaivergia said.
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