1. Would the set-off of Input Tax Credit (“ITC”) be available to housing and office premises societies, in respect of major repair works undertaken by them, against the GST liability which they have to incur, under the Central Goods and Services Tax Act, 2017 (“GST Act”)?
2. At the outset, it is absolutely undisputed that housing / office premises society would come within the ambit of GST in view of the fact that section 2(17) of the GST Act, includes, under sub-clause (e) thereof, “provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members”. Of course, this is subject to other parameters for taxability (after taking into account exemptions provided) being met. It is not the intent of this article to set out the conditions under which such societies would fall within the ambit of GST and the limited purpose is to set out whether ITC on major repairs in the case of such societies which fall within the ambit of GST would be available as set off against GST payable by the society.
3. The reason why this issue has become important is because of decision of Maharashtra Appellate Authority for Advance Ruling (“MAAAR”) in the case of Mahavir Nagar Shrushti CHS Ltd. (Order No.MAH/AAAR/AM-RM/10/2022-23, dated 30.09.2022). In this case, the MAAAR took the view that “… the appellant society was not eligible to avail ITC of the tax paid on the works contract services received from their appointed contractor in terms of limitations provided under section 17 (5) (c ) of the GST Act, 2017, as it cannot be said to be providing works contract services to their members.”
4. Though this Order is an Advance Ruling and is binding only on the parties to the Ruling, it has a persuasive effect in respect of other parties as well and the revenue authorities will be emboldened to take the view expressed by the MAAAR.
5. At the outset, it must be mentioned here that under section 16 (1) of the GST Act –
“Every registered person shall subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course of furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”
It will, therefore, be seen from the above that generally there is no restriction in claiming any input tax credit as along as concerned input services are utilized in the course of furtherance of the business of the service recipient. The restrictions, if any, in claiming such ITC as set-off are set out, inter alia, in section 17 of the GST Act.
6. One of those restrictions is under section 17 (5) (c ) of the GST Act. This clause, as extracted by the MAAAR, reads as under:
“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:
(a) ……
(b) ……
( c) Works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service”
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
‘Explanation – For the purposes of clauses( c) and (d), the expression “construction includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immoveable property’.
7. It is clear that the MAAAR has ignored the explanation. Clearly the works contract must be for construction of an immoveable property in order for the ITC not to be available. The explanation purports to enlarge the ambit of the expression ‘construction’ to include, inter alia, alterations and repairs. However, this inclusion of such alterations and repairs, etc., is only if the concerned expenditure is capitalized in the books of the service recipient. If such expenditure is not so capitalized, there should be no reason for the ITC on the repairs being not allowed as a set-off in the hands of the society for the purposes of the GST Act, since such repairs would not be in the nature of construction of an immovable property.
8. Then, why has the MAAAR taken the view that the ITC would not be available in respect of the repairs undertaken by the appellant society in that case? This is because of two factors –
(i) Firstly, the case of the appellant society was that the works contract was a sort of pass-through from the service provider through the society to its members – which argument did not meet with the approval of the MAAAR.
(ii) Secondly, and more importantly the issue that the ITC was not proscribed from being set-off because the works contract was not for construction of an immoveable properties was never argued.
9. The above view also takes grist from the following –
(a) the decision of the Maharashtra Authority for Advance Ruling (“MAAR”) in re Vishal Co-op. Housing Society Ltd., being No.GST-ARA-75/2019-20/B-83 dated 02.11.2021. In this case, MAAR has held in response to Q.No.2 posed by the Applicant Housing Society as under:-
“In view of the discussions made above, ITC on GST paid on above said works contract service received by the applicant will not be available to the extent of capitalisation as mentioned in Explanation of Section 17(5) of the CGST Act, 2017” (emphasis supplied); and
(b) The decision of the Maharashtra Authority for Advance Ruling (“MAAR”) in re M/s. Mahindra Splendour CHS Ltd., bearing No.GST-ARA-38/2020-21/B-103, dated 01.12.2021. In this case, MAAR has held in response to Q.No.6 posed by the Applicant Housing Society as under:
“In view of the discussions made above, ITC on the expenses incurred for heavy repairs and maintenance of the society building will not be available to the extent of capitalisation as mentioned in Explanation of Section 17(5) of the CGST Act, 2017.” (emphasis supplied)
10. The problem arises because the MAAR in the case of Mahindra Splendour CHS Ltd. (supra), set out at para 5.8.6. as under:
“The applicant is engaged in club or association supply of service as a business and the construction service is used for furtherance of the said business. Thus the supply rendered by the applicant is also covered under Section 17(5)(d) read with explanation mentioned therein. ITC on GST paid on such supply of service as mentioned above will not be available to the extent of capitalisation of the said service. Any expenditure benefit which is likely flow over a few years needs to be capitalized, so no ITC is available for such expenditure. Major repairs involve large expenditures that extend the useful life of an asset. For example, the replacement of a building roof is considered a major repair if it allows the building to be used beyond its normal operating life or, if the engine / main motor in a lift is replaced, thereby results in extending the lifespan of the said lift equipment. In accounting, major repairs are capitalized as assets and depreciated over time. Minor repairs do not extend the useful life of an asset, and so are charged to expense as incurred. Proper facts regarding nature of work and whether benefits of such major repair shall flow over the years or not; are not produced, so no further comments in this respect can be made.”
What the MAAR in effect saying is that, per se, if the expenditure is capital expenditure, in any event, the benefit of ITC would not be available (whether or not it is capitalised). In my opinion, this is not a correct view for, in a taxation statute, there is no scope for departing from the clear wordings of the statute. If an exemption is granted, it should be liberally interpreted in favour of the tax payer. Therefore, if the major repairs are written off, there is no scope for treating that amount as capital expenditure.
11. Besides factually most major repairs are in the nature of guniting and painting of the building and prevention of leakages in the building. The whole purpose of the major repairs is only to retain the life of the building and not to extend the life of the building. In general, major repairs are considered as capital expenditure, if they –
(i) extend the useful life of the asset;
(ii) increase the capacity or efficiency of the asset and/or;
(iii) improve the quality and performance of the asset
Most major repairs generally neither increase the useful life of the asset; nor does it increase its capacity; nor does it increase the quality of the performance. The building continues to be a building as earlier and at best the repairs would bring it back to its earlier state. Such major repairs, therefore, cannot be categorised as capital expenditure.
12. Therefore, such major repairs which are revenue in nature and which are not being capitalised in the books of the service recipient would be available for the benefits of set-off on ITC.
13. Therefore, in my view, ITC on the said repairs would be allowable as a set-off against the GST payable by the society, if the said major repairs and renovations are not capitalized in the books of the society.
DISCLAIMER
The views expressed in this article:
- are the views of the author of the article;
- are based on the facts as set out in this article and the orders, judgements, circulars and other material of courts, tribunals, the CBDT, CBIC, et.al., as on date;
- are as per the existing law and would be subject to changes in the law and to orders, judgements, circulars, et.al., post this article;
- may not be in tandem with the views of the concerned executive authorities, appellate authorities, tribunals or courts.
Ashok Rao
Place: Mumbai
Date: 6th November, 2023.
Tax Talk with Ashok Rao 