GST Audit Case Study 4 - Availment of ITC of GST paid on services of leasing of land

ITC not available on GST paid for transfer of rights of industrial plot for construction of immovable property: The AAR, Gujarat  NO: GUJ/GAAR/R/55/2021 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2021/AR/29)Dated: 18-10-2021.

Aims and objectives of GST Audit

Audit in GST should intend to evaluate the credibility of self-assessed tax liability of a taxpayer based on the twin test of accuracy of their declarations and the accounts maintained by the taxpayer. Thus, Audit in GST should have the following objectives:

• Measurement of compliance levels with reference to compliance strategy of the tax administration.
• Detection of non-compliance and revenue realization
• Prevention of non-compliance in the future.
• Discovering areas of non-compliance to prevent taxpayers from continuing with such deviations from expected compliance behaviour that results in erroneous declaration of self-assessed liability.
• Providing inputs for corrections in/amendments to the legal framework which are being exploited by taxpayers to avoid paying taxes.
• Encouraging voluntary compliance.
• Any other goals deemed worth pursuing by the GST administration.

GST Audit Para: 

As per clause (d) of Sec. 17(5) which is reproduced hereunder, the credit of ITC paid lease premium is blocked. The provisions of Clause (d) of Section 17(5) are as under:

Section 17 (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)%u2026..

(b)%u2026..

( c)%u2026.

(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 re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

It is observed from the above legal provision that input tax credit is barred in respect of goods or services used for the construction of immovable property (other than plant or machinery) including when such goods or services are used in the course or furtherance of business. It is informed during Audit that the lease premium charges were paid for the lease of land from INKEL. It is seen that the lessor has charged GST on lease premium charges at the rate of 18% (9% CGST + 9% SGST) treating them as services. The periodical lease premium is also charged at the same rate.

Accordingly, the input tax credit availed amounting to Rs. XXXXX/- each of CGST and SGST on the lease premium charges paid to INKEL is inadmissible and is liable to be reversed along with interest under Section 50(3) and penalty as applicable.

Author’s Note

ITC not available on GST paid for transfer of rights of industrial plot for construction of immovable property: The AAR, Gujarat  NO: GUJ/GAAR/R/55/2021 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2021/AR/29)Dated: 18-10-2021

Fact of the Case

The applicant purchased rights of an industrial plot situated in an industrial estate from transferor. The transferor charged GST at 18% on the sale of transferring the rights of the industrial plots by executing the deed of assignment. It filed an application for advance ruling to determine whether it would be entitled to claim ITC.

Decision of the Case

The Authority for Advance Ruling observed that the applicant purchased rights of industrial plot from transferor and building would be constructed after land was acquired on lease. The legislature has clearly expressed its intent that ITC shall not be available in respect of services pertaining to land received by a taxable person for construction of an immovable property even when such services are used in course or furtherance of business. Therefore, GST amount paid by applicant on leasing services received was blocked credit vide section 17(5)(d) and thereby ineligible for availment of ITC.

Author's Suggestion

ITC of GST paid on services of leasing of land is inadmissible as the same is blocked under Section 17 (5) and is hence it is advised don’t take ITC on it and if any tax payer already taken reverse it before issuance of notice by the department then interest liability on it may decrease if the taken ITC utilized already.