Is GST ITC available for project development expenses?

Introduction

Input Tax Credit (ITC) fundamentaly implies reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 44, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or advancement of his business and the said sum will be credited to the electronic credit record of such individual.

However there are certain situations when ITC cannot be claimed, such as:-

1. A person cannot avail ITC wherein the given motor vehicle is used to transport people . . and has a seating capacity of less than or equal to 12 +1 (driver)
2. A person cannot claim ITC for the tax paid for the following:-
• Food and beverages
• Outdoor catering
• Beauty treatment
• Health services
• Cosmetic and plastic surgery
3. Services of general insurance, servicing, repair and maintenance
4. Sale of membership in a club, health, fitness centre
5. Rent-a-cab services, life insurance, health insurance
6. Travel, benefits extended to employees on vacation such as leave or home travel concession.
7. Works contract
8. Construction of immovable property on own account
9. Composition scheme
10. Non residents
11. Supply for personal use
12. Free samples and goods destroyed
13. Restaurant services

Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.

Project development is however not covered in the above list. So, will ITC be available on project development expenses?

Let us refer to the Gujarat Advance Ruling of M/s. Deendayal Port Trust (erstwhile Kandla Port Trust) (2020) pertaining to a similar situation.

Facts of the Case

1. The applicant had been directed by the Ministry of Shipping to prepare a master plan comprising future projects and for utilization of land resources for developing a port based smart city.
2. Keeping in view the above directions and vision of the government, applicant is developing one of India’s first Smart Industrial Port City (SIPC) as part of the Sagarmala project.
3. The applicant is at present incurring various project development expenses like
• Programme management consultancy
• Marketing Consultancy
• Land levelling and other related works
• Roads
• Water, electricity, & Drainage Infrastructure
• Other related works for developing SIPC.

Issue of the Case

Can the applicant avail the benefit of ITC for the below mentioned expenses?

1. Programme management consultancy
2. Marketing Consultancy
3. Land levelling and other related works
4. Roads
5. Water, electricity, & Drainage Infrastructure
6. Other related works for developing SIPC.

Proceedings of AAR

1. The issue involved in this case pertains to ‘Input Tax Credit’ (ITC) under the CGST Act, 2017.
2. The applicant is a port trust running a major port at Kandla.
3. Section 16(1) of the CGST Act provides that every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take ITC charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.
4. It is further observed that Section 17(5) of the CGST Act denies input tax credit in respect of goods and services specified there-under.
5. The applicant is engaged in development of port based smart city i.e. Smart Industrial Port City (SIPC). The said project development is nothing but construction of an immovable property and any project development services or goods or works contract used for construction of an immovable property which shall attract the provisions of Section 17(5)(c) and 17(5)(d) of the CGST Act, which specifically deny ITC in respect of works contract services or goods and services used for construction of an immovable property.
6. According to Section 17(5)(c), ITC shall not be available for 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.
7. Section 17(5)(d), disallows availability of ITC when 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.
8. For Section 17(5)(c) and Section 17(5)(d), “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
9. Therefore the said project development services of Programme management consultancy, Marketing Consultancy, Land levelling and other related works, Roads, Water, electricity, & Drainage Infrastructure and other related works for developing SIPC shall not be eligible for ITC under the CGST Act, 2017.

Conclusion

The “Input Tax Credit” shall be NOT be available under the CGST Act, 2017, on the project development services like Programme management consultancy, Marketing Consultancy, Land levelling and other related works, Roads, Water, Electricity, & Drainage Infrastructure and other related works for development of SIPC as the same pertain to construction of an immovable property which is covered under the provisions of Section 17 (Pertaining to apportionment of credit and blocked credit)