(This
is the first article on GST in this Blog and it may not be that relevant for a non
GST professional. So I have divided the article in two parts- first part is
general discussion about taxes which I think is relevant for everybody and
second part is specific to the GST issue but even in this part the views about
immovable property are relevant even for a non GST professional)
PART-1-General
discussion about Taxation
Tax laws should
be simple
If we keep ourselves aside then objectively,
on its own, life does not seem to have any higher purpose….except reproduction.
Everything around us- whether a flower, an animal or an insect…everybody is
just seemed to have one motive and that is to reproduce before death. Life- if
one can see appears to support and favors reproduction only not anything else.
It does not care if a poor baby is being killed or an innocent girl is being
raped…no law of life intervenes…nothing. We may be having larger than life
aspirations from our short term life here but life does not seem to expect much
from us. But still, all this massive universe and gigantic phenomenon couldn’t
have been planned just for creating this worthless cycle of birth and death.
There must be some higher purpose behind so much pain and plan in creation. But
by looking at the relentless focus of life and support system mainly upon
reproduction- it seems that the life system still has deficiencies and its
design (like short life) is not fully supporting the basic purpose behind the
creation. Or we are living in a Tier 3 world with a chance to upgrade into
higher dimension world.
Taxation is a nightmare for most
of the humanity. The language used to draft the tax laws is a nightmare even
for the highly educated fellows. we see extremely talented professionals
debating in courts over tax disputes where we see that the cases involving tax
disputes of hundreds of crores are settled by courts over the interpretation of
phrases like “in respect of”, “in relation to” , “means” or ”includes”. And when
we see that the small useless phrase “in respect of” can be of so much
importance we just tremble in awe. This extremely complex web of taxation seems
to suggest that this is something very superior…that something extremely
important, worthy is being planned and done…that these things are meant only
for some chosen ones and this realm will remain out of the reach of normal
beings like us. But for all the charisma around it, taxation system has only
one purpose- to collect money and in most cases from normal ordinary human
beings.
So one day, in the process of evolution,
it is possible that an ape from a zoo would ask if the objective is so trivial
(just collection of money, no contribution to the life and its objective) then
why so much complexity in taxation system? Why to waste so much time and energy
in creating such a complex system at first and then fighting for ages in courts
for proving what is the “real” meaning/interpretation/coverage of a particular
section of law? A beggar also collects money from other people without giving
any service to them directly. Similarly taxation system also collects money
from other people without giving any service to them “directly”. I am saying
“direct service” because the use of the money collected from taxes for the
welfare of the people may return something of value to them indirectly. But
that is related to the use of money collected from taxes which if we can see
suffers from even worse problems- the use of public money for productive uses
is very scarce and most of the money is wasted in useless subsidies and
freebies just to attract votes.
But we can see that the “usage”
of money collected from taxes can be revolutionary for society and humanity-
take for example that money can be used for doing revolutionary research in the
field of medicine which can prolong the use full life of the human beings (not just
old age where they just can breathe). But “collection” and “usage” of the tax
money are altogether different and there is no doubt that “usage” definitely is
more worthy and valuable. So both “collection” and “usage” need some systems to
carry out the desired objectives of their creation but “collection” is a
subordinate to “usage” and the efficiency of “collection” system is crucial to
the ultimate objectives of “usage” system.
And the efficiency of taxation
system is not in the complexity but in the simplicity. Complex system does not
result in more tax revenues but more disputes and so much of the productive
resources of an economy are consumed in this process of litigation. People
confirm the efficiency of taxation structure on the basis of cost incurred for
tax collection. The same is around 1% for most of the taxes but this is the
direct cost. If we can count the indirect costs due to years of litigation,
lack of clarity and doubt, money spent on court and lawyer fees, social costs
and most importantly lack of investment due to fear of complex taxation. If one
can count these then the same will outweigh any incremental tax revenue
collected by creating a complex and arbitrary taxation system. That’s why I
always say that tax system should be simple. It can’t be allowed to be so
complex to create havoc to the society and economy. Its construction and
composition should not burden businessmen so as to discourage investment and
innovation but encouraging corruption and anarchy. Taxation system should not
burden people with time wasting and costly compliances. Unnecessary and large
numbers of compliances like monthly and annual tax returns etc. just increase
the cost of doing business and hinder the economic growth because so much of
the economic resources like manpower and money are spent on ensuring these tax compliances
and disputes which adds nothing/little to the GDP. These
forces act more like rentier forces or toll booths on economy collecting money…a charge on economy. Without any second thought, taxation system
should be simple just like 2 plus 2 is four.
If there is anything in our
society which indeed deserves complexity is the easy entry of anybody in public
services, administration and politics. Any fool can enter these very important
social structures without any testing. Just by passing an exam anybody can
become a public servant and can play with gigantic economic and social resources.
We attempt to test and measure their intelligence by taking exams/tests etc.
but no tests for judging the integrity, ethical buildup, compassion and thirst
for social welfare in the candidates which are more important for public
services than intelligence because in the absence of these attributes
intelligence will lead to corruption in almost all the cases. If you ask me, compassion
is also a major part of IQ not intelligence alone. No doubt that any attempt to
judge these abstract attributes of human character will make the selection
process very complex but this is what and how it should be- the selection
process of public servants should be very complex to discourage easy entry.
Only a compassionate, honest and ethical policeman can do his job meaningfully
making valuable contribution to the society and where general public can have
faith and confidence not fear and disgust.
Things are very strange in our
society. Governments distribute much of the resources collected through taxes
to poor through many social schemes. As this distribution is targeted and
involved scarce money/economic resources hence there should be extreme caution
and focus to not to waste or misuse this money. So this indeed requires
devising a very high tech, complex, transparent system so that money does reach
the needy and corruption free. But situation is just the opposite- Huge
quantity of food in the form of wheat/rice is wasted in the shabby warehouses
by government meant for public distribution not to forget the widespread
corruption. Highly subsidized Urea is used wastefully in excess because it is cheap-
in some cases around 10-20 times the required input. So this inefficiency is
everywhere wherever public money is involved instead of being highly efficient.
But on the contrary, taxpayers
(Income tax) work day and night and then from their hard earned money they part
away very significant portion as taxes. So government should be thankful to
them but instead these taxpayers are burdened with unnecessary large number of
compliances and in some cases making their life miserable. Instead of giving
some exclusive benefits (like lower toll charges etc.) taxpayers are burdened
with huge obligations although they give money (as tax) for free but the receiver
of this (both direct and indirect taxes) money (including Government) who are receiving
this for free have virtually no obligation towards proper and authentic
utilization.
Similar is the case for indirect
taxes. It is true that the collectors (businessmen/firms/companies etc.) of
these taxes are dealing with public money so it must be ensured that they are
doing this in good faith and there is no misappropriation and avoidance but
still the prime responsibility for ensuring this lies with the tax department
not on the assesse. So tax departments should devise systems to ensure most of the
compliances indirectly rather than assessees spending big time and money on
ensuring the same.
PART-2 GST
GST is one such attempt to bring
simplicity to the taxation and to create an environment of flexibility, freedom,
fearlessness, clarity, perspective and lower compliances. It is indeed a step
in the right direction but as of now it still needs fine tuning.
Low compliances is one area where
simpler rules/formats can ensure easy life for businesses. But seamless Input tax
credit (ITC) is another area of equal importance and in no case a law should arbitrarily
deny input tax credit to a business. In my view, for a business which is
discharging output tax (GST) liability the right to avail ITC is a fundamental
constitutional right. No law should attempt to disallow ITC just for the sake
of revenue.
Disallowance
of ITC of certain supplies in GST
GST act has disallowed the ITC of
many input goods and services under section 17(5) of CGST act. One such
disallowance (Clause (c &d) of section 17(5)) is against works contract
services and goods/services used for the purpose of construction of immovable
property other than plant and machinery even when these are used for the
purpose of furtherance of business. Apart from exception in the form of plant
and machinery the other exception is where works contract service is the input
service for further supply of works contract service. Below is the reading of
the Clause (c &d) of section 17(5):
input tax credit shall not be
available in respect of the following, namely:
(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.
To explain the impact of this let’s
take the example of Mahindra logistics Ltd which is a logistics player.
Mahindra has built a warehouse for storing the goods of his customers and earns
income from storage charges. Mahindra has incurred huge costs/investments in
constructing this warehouse and must have paid GST on the procurement of all
the goods and services which is Input tax for Mahindra. But as this warehouse
is an Immovable property so due to the restrictions imposed by this section
(immovable property and services offered not being of works contract but
storage charges) Mahindra can not claim the ITC of the GST paid on its input goods
and services used for the construction of warehouse. These logistics firms do
not have large variable costs and their biggest cost is the cost of construction
of warehouses etc. Their employee cost is lower than depreciation charge. Even
if Mahindra take the warehouses on lease there will not be any difference
because the firm who is leasing the warehouse to Mahindra must have forgone its
ITC and thus the same has become its cost of construction which will increase
the lease charges for Mahindra.
For a warehouse costing 50 cr the
loss of ITC of GST will be around 9 cr which is substantial. One can easily see
that this does not look very logical because Mahindra is paying the output GST
on storage charges earned from its customers so it should get the ITC of input
goods and services. The right to avail input credit is related to the payment
of output tax and it can’t be restricted on any “particular” class of goods and
services per se. same is the case with hotel industry where assets created are
immovable but services offered are not works contract.
Violation of
constitutional Right to Equality
There is no doubt that it is
against the right to equality accorded by Article 14 of Indian constitution
which is one of the six fundamental rights in the Indian constitution. Right to
equality ensures that there shall not be any arbitrary discrimination between
one citizen and the other. It applies to all persons like corporates which are
legal persons. For more clarity, take the case of some steel pipe maker like
Jindal. Jindal is buying steel and other goods and services for manufacturing
steel pipes and is paying GST on all these input goods and services. Jindal is
also paying output GST on its sale of steel pipes and as per GST law it can
avail the ITC of GST paid on input goods and services. If we can see there is
not any difference in the business model- both are paying output GST on their
products but Jindal is entitled to claim the ITC of its major input goods and
services while on the other hand Mahindra can’t claim the ITC of its major
input goods and services. So one can clearly see that both are not treated as “equal”
by the law and hence the same is unconstitutional and there are high chances
that the Apex court may declare it so on one fine day. But I am leaving this
constitutional part here due to length of this article but will explain the
same in detail in some other post.
ITC of enabling
works by Infrastructure firms
The issue I am going to discuss
in this post is related to availment of ITC of enabling works by Infrastructure
firms. Generally Infrastructure firms like L&T takes the orders from customers
for construction of things like Power plants, Dams, road, Railway lines etc. Take the example of an order received by
L&T from NTPC for construction of a power plant of 800 MW. Here, L&T
will be constructing the power plant on land belonging to NTPC. In most cases,
NTPC buys the equipments related to power plants like Boiler, Turbine from
other firms like BHEL and the same it hands over to L&T for erection and
construction of power plant.
These construction firms need to
construct sheds/stores for the storage of various materials it receives from
NTPC and its own, development of open yard, fencing, electrification work of
the open yard and Sheds for security and traceability, building approach roads
etc. All this basic infrastructure is collectively called enabling works. The
land for constructing store etc. is given by NTPC and as per contract terms
L&T is required to demolish the same after the project is completed and no
charges are charged by NTPC for the usage of the land.
These days infrastructure firms
are using Pre-fabricated/pre-engineered materials (PEB) for the construction of
enabling works (Closed and semi closed sheds) at their project sites. PEB
building consists of a structural steel framing system, supporting a metal
roofing system and the wall panels of varying materials. In PEB buildings, the
building structure is built of steel frames instead of concrete and in most cases
these steel frames are fabricated elsewhere in a factory and then brought to
the site and then the same are installed using screws and welding etc. Also,
the side walls and roof of the storage shed is also made of steel panels and
roofing sheets. Apart from reduced construction time and lower cost, the main advantage
of PEB structure is that the material is re-usable. The steel structure can be
removed from site office without damaging the same and same can be reused at
other project sites and after transporting the same to other sites it retains
its original functionality. So this is a true green material.
Now the question here is- whether
PEB building/enabling works is an immovable or movable property as the
availment of ITC of GST paid on construction of the enabling works is dictated
by this factor and if PEB building is immovable then no ITC will be available
and cost implications are huge. General
industry view is that the same is immovable. Further doubts have been raised
over this in the wake of recent ruling given by Advance ruling Authority West
Bengal in case of Tewari Warehousing Co Pvt Ltd that ITC is not admissible on
construction of a warehouse with prefabricated building blocks.
So in the next paragraphs I’ll
try to explain the same. Whether some structure is immovable or movable is
relevant not only from the perspective of ITC of GST but also in cases where a building
is sold for significant amount and costly machinery is also installed/fabricated
in the same building. So now the question may arise whether this transaction is
one of sale of immovable property and will attract registration and stamp duty
charges on registration/transfer of the building on the entire transaction
value or else the transfer of machine is not sale of immovable property but one
of sale of goods and thus GST is required to be paid on the same. One can see
the involvement of huge sums in the form of registration & stamp duty
charges and GST.
As per the Act, the ITC is restricted on the basis of Immovability not on the basis of capitalization. In fact, the ITC is allowed even for immovable property if the same is not capitalized hence we need to test whether the construction of enabling work falls under movable or immovable property.
As per the Act, the ITC is restricted on the basis of Immovability not on the basis of capitalization. In fact, the ITC is allowed even for immovable property if the same is not capitalized hence we need to test whether the construction of enabling work falls under movable or immovable property.
(A)
Construction of PEB enabling Structure is movable or immovable?
First of all we need to find out
what actually is immovable property. The same is defined in General clauses
act 1897, Registration act 1908 and Transfer of property act 1882 which say
that Immovable property includes land, benefits to arise out of land and things
attached to earth. General clauses act and Registration act do not define the
meaning of “attached to earth” but the same is done by Transfer of property
act. It defines it as:
(a) rooted in the earth, as in
the case of trees and shrubs;
(b) imbedded in the earth, as in
the case of walls or buildings; or
(c) attached to what is so
imbedded for the permanent beneficial enjoyment of that to which it
is attached;
As per above, there is no doubt
that land and a concrete building is an immovable property. But matter becomes
complex when it is about movable things becoming immovable after being attached
to these immovable civil structures like a machine or PEB material. To settle
the same guidance is provided by the clause (c) above which provides for the permanent
beneficial enjoyment of that to which it is attached.
This clause provides that a thing
becomes immovable if the same is attached to an immovable structure and such
attachment is for the permanent beneficial enjoyment of the immovable property
(not of the thing) to which it is attached. These things are not immoveable
properties per se but they become immovable as they are permanently
attached/fixed to a foundation embedded in earth. So the pressing issues and
tests here are 1) permanent attachment and 2) thing to be
enjoyed. Major issue involved in deciding permanent attachment is the intent
which further involves Object and Mode/extent/degree
of annexation to the earth. Let’s have a look at these issues:
1)Thing to be enjoyed:
As per this clause, if a thing is attached to an immovable structure embedded
in land like wall or civil structure then that thing becomes part of immovable
property if by attachment the intention is to enjoy the benefits of wall/civil
structure not of the thing which is attached to that structure. So if a chattel
is attached to a wall for beneficial enjoyment of wall then the chattel becomes
part of immovable structure. However If the attachment is made for the
beneficial enjoyment of the chattel itself, then it remains a chattel not
immovable property, even though fixed for the time being so that it may be
enjoyed.
This explains why door/windows
are considered immovable structure because when we attach a door to a wall,
then we are not enjoying the door but through door we are enjoying the benefits
of room because door on its own is incapable of providing any enjoyment. The
same thing is also true for windows as they are just allowing us to enjoy the
beneficial enjoyment of our house. But the same thing is not true for AC
because when we attach an AC to the wall then the intent is not to enjoy the
benefits of wall but of AC as a separate fixture and further we can remove the
same without any damage to wall and AC and the same can be reused. So AC
fulfills the twin tests of destructibility and beneficial enjoyment of the
chattel itself.
1(a) Applying the above test
on Construction of PEB Enabling shed at project sites: When we apply
same analogy to construction of PEB structure at project sites, one can see
that when we attach PEB material to the civil structure or foundation then the
intention is not to enjoy the civil structure/foundation (means land) but PEB
material itself (of space not land). So by constructing PEB shed the intention
is to enjoy the PEB shed itself hence PEB shed is a movable property. Similarly
when we make civil foundations, we are getting beneficial enjoyment of land so
civil foundations are immovable structure.
Further, even without
constructing walls and roof from PEB material we can still enjoy the benefits
associated with land as we can place all the materials on land (civil structure/floor)
without walls and roof. So the purpose of walls and roof is not to enjoy the
benefits associated with land but to ensure security and safety from
environment damage. But if the purpose of walls and roof (if made of concrete)
is not to enjoy the benefits associated with land then why they are regarded as
immovable property. Actually walls/roofs are regarded as immovable property not
because they get beneficial enjoyment of land but because walls and roofs are
embedded into the earth (as per clause (b) above of Transfer of Property act)
which fulfills the condition attached to earth and so the same is immovable
property. But it has no relation with beneficial use of land.
Same view has been taken by
various courts in a number of cases:
In case of SRI VELAYUTHASWAMY
SPINNING MILLS (P) LTD vs THE INSPECTOR GENERAL OF REGISTRATION Madras High
court settled: “In the case before us, the attachment of the oil engine to
earth, though it is undoubtedly a fixture, it for the beneficial enjoyment of
the engine itself and in order to use the engine, it has to be attached to the
earth and the attachment lasts only as long as the engine is used. When it is
not used, it can be detached and shifted to some other place. The attachment,
in such a case, does not make the engine part of the land and as immovable
property”.
Calcutta High Court in
Janchand v.Kishore (AIR 1960 Calcutta 301) has held that the test is
whether the annexation is with the object of the permanent beneficial enjoyment
of the land or building. The Court held that the machinery was not attached for
the mere beneficial enjoyment of either the soil or the concrete; it was
actually a case of the structure being built around the machinery to protect
it.
2) Tests of Permanent
attachment: Technically nothing can be attached, annexed or embedded
into earth permanently. So “attached forever” can’t be the test for judging the
annexation to earth. Here, the intent/purpose behind the attachment confirms
the annexation to earth because the things under consideration are itself
movable but they are considered immovable due to attachment to the immovable
structure so intent behind such annexation is the primary factor. The
intent is guided by the “mode” of annexation and “object” of annexation. The mode/nature
of annexation involves the test of destructibility while object
of annexation further (apart from thing to be enjoyed) involves the intended duration
(long term vs short term) of the annexation i.e. whether attachment is
intended to be permanent.
Various Indian courts have
considered these tests as most relevant while deciding the immovability. The
object of annexation is determined by facts and the circumstances of each case.
However, most important thing to be kept in mind is
that the permanent attachment test is relevant only when the thing is not
embedded into earth like wall or building because when it is so then that wall
or building is an immovable property courtesy clause (b) of the definition of
“attached to earth” of Transfer of Property act. If a thing is not embedded
into earth like wall or building then the relevant factor is whether the intent
is to attach the thing permanently into earth. That’s why for our PEB structure
this test is more relevant as PEB structure is not embedded into earth like
wall or building. So the intent behind attachment (permanent or temporary) of
this structure into earth is to be checked.
The English law has also evolved
the twin tests of degree/nature or mode of annexation and the object of
annexation. In Wake v. Halt (1883) 8 App Cas 195 where, speaking for the Court of
Appeal, Lord Blackburn stated: “The degree and nature of annexation is an
important element for consideration; for where a chattel is so annexed that it
cannot be removed without great damage to the land, it affords a strong
ground for thinking that it was intended to be annexed in perpetuity to the
land.”
Supreme Court in CCE v. Solid
& Correct Engineering Works and Ors 2010 (252) ELT 481 (SC) has opined
that an attachment without necessary intent of making the same permanent
cannot constitute permanent fixing, embedding or attachment in the sense that
would make the machine a part and parcel of the earth permanently. Hence, the
Supreme Court held that the plants in question were not immovable property.
Here, SC observes that attachment
of the plant to the foundation is not comparable or synonymous to walls and
buildings embedded in the earth, because a building embedded in the earth is
permanent and cannot be detached without demolition.
Apart from destructibility test,
another important aspect is the whether the intention is of temporary or
permanent (duration) attachment of the structure. There are cases where
machinery installed by monthly tenant was held to be a moveable property as in
cases where the lease itself contemplated the removal of the machinery by the
tenant at the end of the tenancy. The same point was also considered by SC in
CCE v. Solid & Correct Engineering Works.
Also, in the above case of Tewari
Warehousing Co Pvt Ltd, AAR West Bengal, while giving the ruling, has taken
into consideration the fact that the Applicant has taken the land to build
warehouse on 30 years lease and the same is further extendable after this
period so the intention is to use the warehouse as permanent structure as they
are not going to (have no plans) to remove the same in the near future.
In Subramaniam Chettiar v.
Chidambaram Servai ('40) 27 A.I.R. 1940 Mad. 527 it has been pointed
out that when the owner of a building installs machinery therein he may well
have intended to make a permanent improvement to the premises which he owned in
order to facilitate the user of those premises but that a tenant in
temporary occupation of leased premises is not likely to have had any such
intention in making the improvement and he accordingly held that the oil
engine did not become and was not therefore immovable property.
Madras High Court in
Mohammed Ibrahim v. Northern Circars Fibre Trading Co has opined that
'when the owner purchases the land and the machinery, he cannot be said to have
the same intention which his vendor had.
Calcutta High Court in Jnan
Chand Chugh vs Jugal Kishore Agarwal And Ors. on 21 September, 1959 has
observed that “the important test is what was the intention of the owner when
bringing the machinery on the land and setting the same up. The owner only
had a monthly tenancy. The nature of the structure in which the machinery
was housed shows that the object was somehow to keep off wind and water. The
reason is obvious; the land was held on the basis of a monthly tenancy and but
for the legislation now in force the tenant could be asked to quit on a few
months' notice at the most. The whole building seems to me to have been put
up in such a way that it could be dismantled and removed elsewhere at a short notice
and without much expense. In my view, it is clear that the owner did not
want to make the machinery a part of the land at all.
2(A) Applying the above 2 tests
on Construction of PEB shed at project sites: In order to decide
whether the construction of enabling sheds by PEB material in our project sites
is resulting in immovable property we need to apply above two tests of Mode
& object of annexation and permanent annexation.
(1) Testing intention for
permanent annexation: As explained above, for PEB structure this test is
more relevant as PEB structure is not embedded into earth like wall or
building. So the intent behind attachment (permanent or temporary) of this
structure into earth is to be checked. in our case from the very beginning the
intention behind construction of PEB enabling work is to dismantle and
transport the same to other sites at the end of the project so the intention is
not for permanent attachment but only for the temporary attachment of the
structure and hence the same is a movable property. The same can be assessed
from the fact that in the past also for similar work done in many sites; we
have transported/moved the PEB material to other sites for reusing the same.
Further, as per the customer contract the infrastructure
developer (L&T in our case) is required to dismantle all the temporary
structures before leaving the project site after work completion so it is
settled well before the start of construction that the time span of the
structure is limited (generally for 4-5 years) and to be used temporarily. So
as is evident the intention is only for short period that’s why to better
manage the capital costs pre-fabricated material is preferred so that the same
can be reused at other sites.
2. Test of destructibility: the
PEB material can be removed from site office without damaging the same and the
after transporting the same to other sites it retains its original
functionality.
3. No interest or ownership of
land: further the land on which enabling structure is built neither belongs
to L&T nor there is any long term lease with customer. Hence it is evident
from the very beginning that the PEB structure to be built is only for short
duration of time and intention is never for the permanent attachment of the PEB
structure into the earth.
From above discussions, it is clear
that construction of shed from PEB material at project sites does not become
part of immovable property after attachment to the civil structure/foundation. construction
of enabling work (Closed and semi-closed Sheds) is construction of movable property
hence we can take the ITC of construction work (supply as well as erection
work) as the blockage under section 17(5) (c&d) comes into force only when
the structure is immovable so we can take the ITC of all the material and
services (supply of PEB material and cost of construction also) which are used
for constructing the “movable structure”.
Apart
from main PEB structure of Closed and semi-closed sheds, I have tried to test
the above ratios on other components of an enabling structure:
(B) ITC of Civil
Foundation, boundary work, sanitary works, flooring, Shuttering etc.: In
all these items, the structure/things are permanently attached to the land/foundation
(immovable structures) so it is not possible to remove the same without
damaging the structure and its reusability. In fact, the material used in these
works is sold as scrap and the same is never transported to other sites. Hence
the ITC related to these works should not be taken. In the act, the ITC of
civil foundation is allowed only in case of Plant and machinery like when we
build the same for placing genset. Here the intention is not to use the
benefits related to land but of machine (genset).
(C) ITC of electrical work of open
yard: The purpose behind development of open yard is the beneficial
enjoyment of the land. However, the electrification work of the open yard in
the form of poles/lights etc. does not enable/facilitate the beneficial use of
land. In fact, the main function of electrification work at open yard is to
provide security and traceability at night. Further, these poles can be removed
very easily and we also shift these electrical poles to other sites for reuse. So
this passes the tests enumerated above i.e. Thing to be enjoyed, permanent
attachment and mode & objective of annexation. Hence keeping this in view,
the ITC related to electrical work at open yard shall be taken.
(D) ITC of Fencing
and Gates: Purpose of fencing is to safeguard/security of material not
of beneficial enjoyment of land and it is not permanently attached/affixed or
fastened to earth as these can be removed fairly easily and can be reused at
other sites. So we shall take the ITC of the fencing and gates.
Hence as per above points, we
shall take the ITC of PEB material supply and construction work, open yard
electrical work and Fencing and gates. Except the items I have explained above I
have left other items related to construction of enabling works at project
sites but I do not think that apart from the above 3 cases the chances of other
items passing the movable test are very less and will be disputable.
I have done a rough calculation
for development of open yard and construction of 6 nos. closed sheds costing
around 8 cr and as per the calculation ITC of Rs. 60 lacs can be taken against
total GST impact of some 1.40 cr which is around 8% of the total cost of
construciton.
But why
disallowance of ITC related to Immovable property at first and possible
solution
It appears that the main
intention behind the blocking of ITC as per this section is to safeguard the state
revenue because when a permanent structure is sold the same is treated as sale
of immovable property and hence not taxable under GST as only movable goods are
liable for GST. So as there is no GST on sale so any ITC allowed earlier will
result in loss of revenue to the state. Although here,
in case if enabling work, neither infrastructure developer (L&T) is the
owner of the land nor there is any long term lease so there is no chance that
L&T can sell the structure as immovable property.
But if we can see the basic premise
of value added tax of ensuring seamless input tax credit then this should not
be an excuse to deny the ITC of legitimate inputs used for providing taxable output
service or sale of goods. Surprisingly the GST act
has made sure that for real estate transactions which are also immovable ITC is
allowed. Clause 5(b) of Schedule II of the CGST act provides that construction
of building etc. is a service (except where the entire consideration has been
received after issuance of completion certificate). So by declaring the same as
service the act has paved the way for the builders to avail the ITC related to
construction of building etc.
Similarly,
in case of construction of immovable property the focus should not be on denial
of ITC at first but on eliminating the subsequent loss of revenue in the form
of ITC availed of immovable business property which later on sold without
paying any GST. For ensuring the same In GST act, a special provision can be
inserted which provides for the reversal of proportionate ITC availed of
Immovable property which later is sold off. By this way, revenue loss will be
stopped but this will ensure the same level playing field for companies using
immovable properties for providing output supplies like Hotel, Logistics and retail
firms.
In fact, a similar clause is
already provided in the CGST act. Section 18(6) of CGST act provides that in the
case of sale of capital goods or plant and machinery, on which input tax credit
has been taken, the registered person shall pay an amount equal to the input
tax credit taken on the said capital goods or plant and machinery
proportionate to the depreciated value of said machinery or the sale price
whichever is higher. Similar provision can be created for the payment of GST
liability on sale of immovable property used for the purpose of providing
output supply. And since enabling work is also used by infrastructure firms for
the purpose of furtherance of business so full ITC should also be allowed.
Whether
enabling work is deferred revenue
expenditure not capital asset?
Further,
i also think that in the above case of construction of enabling work we can
even claim the ITC of entire amount incurred for the development of enabling
work. I am still working on this but let me share the basic premise for this.
Actually as per the GST act, the ITC is disallowed if the immovable property is
capitalized. Here, the main test is capitalization. But in case of enabling
work, in my view these are treated as assets not because they are capitalized
but because they are “deferred revenue expenditure”. Deferred revenue
expenditure is where we have made the full payment but those are not consumed immediately
or consumption extends beyond next 12 months. In other words, the benefit of
expenditure incurred extends beyond one accounting period like for example expenditure
on issuance of bonds, advertising and marketing spend on launching a new
product. These deferred expenditures are held as non-current assets on the
balance sheet.
So
normal capitalized assets are charged off via depreciation but deferred revenue
expenditure is written off in the following 3 to 5 years as per the period of
benefit. I think the expenditure on enabling work is in the nature of deferred
revenue expenditure and so we should get the ITC of the entire amount spent on
the construction/development. I’ll share more on this after doing much detailed
homework.
(Views are personal)
