Input Tax Credit in respect of goods purchased and works contract services used for construction and maintenance of warehouse are restricted services

The topic of restriction of input tax credit in respect of an immovable property shall become highest litigative issue under GST regime. In this article, we have once again covered an illogical view given by an Advance Ruling Authority, disallowing input tax credit in relation to construction of the warehouse on the ground that such warehouse becomes part and parcel of an immovable property i.e. building.
We understand that these judgements are being passed without even understanding the basic concept of restrictions designed under GST law towards immovable property. All such judgement and/or decision would go long way in increasing litigation under GST on this specific issue.

Fact of the case

The Applicant is engaged in providing clearing and forwarding agent services and therefore while carrying out such services it stores goods of other company and charges rent for the same. The revenue of the applicant consists of C&F commission, warehouse rent and other reimbursement freight etc. The applicant charges GST on rent realized from warehouse as applicable. The Applicant has proposed the construction and maintenance of warehouse.
In this regard, the Applicant want to understand whether they shall be entitled to claim input tax credit of GST paid on goods purchased and service received for the purpose of construction & maintenance of warehouse such as Vitrified Tiles, Marble, Granite, ACP sheet, Steel Plates, TMT (saria), Bricks, Cement, Paint and other construction materials and works contract service.

Contention of the Applicant

The applicant contended that being a registered dealer they are entitled to avail the benefit of input tax credit paid on goods and services consumed or utilized for construction of warehouse and thereby set off the same against the tax payable on rental income received.
Further it was highlighted that in case of sale of immovable property after issuance of completion certificate GST is not charged and therefore there is a break in tax chain. Hence denial of input tax credit on the above transaction was justifiable as no GST was payable on such transaction therefore input tax credit shall not be  allowed to be set-off against the said transaction. Whereas in the given case the position is totally differentthere is no break in the tax chain and the receipt of rentals from warehouse is taxable service under GST. The payment of the GST on the inputs goods and services which have been consumed and utilized for the construction of warehouse is for the furthrance of business and eligible for input tax credit.

Observation of the Hon'ble Madhya Pradesh AAR

The warehouse being an immovable property, the input tax credit in respect to construction of the same is considered to be restricted under section 17(5) of the CGST Act. Further, explanation to section 17(5) is very clear that ITC is available for plant and machinery but excludes land building or any other civil structures.

Hence in view of the above discussion and Explanation to Section 17(5) of the CGST Act, the AAR are of the opinion that the applicant is not entitled to ITC of GST paid on purchase of goods and services used for construction and maintenance of warehouse.

M/s Unity Traders, v.Commissioner, Commercial Tax -2020-TIOL-46-AAR-GST¹