Source: financialexpress.com<\/p>\n\n\n\n
The goods and services tax (GST) regime has been hailed as a panacea \nto many afflictions plaguing the erstwhile indirect taxation regime. One\n such affliction GST was meant to address and cure was ridding \nbusinesses of tax costs and ensuring seamless flow of tax credits.<\/p>\n\n\n\n
To\n recap, in the pre-GST regime, a business was not allowed to avail \ncredit of excise duty and service tax paid on the construction of an \nimmovable property. Credit of service tax was allowed to the extent an \nunder-construction property was sold upon payment of service tax. \nConsequently, commercial developments meant for leasing were not \neligible for tax credits pertaining to goods and services used for \nconstruction. This has been a major cash burner for commercial real \nestate meant for leasing in the past decade, as these non-creditable \ntaxes added to the cost of construction of malls, office spaces, etc.<\/p>\n\n\n\n
It\n was widely anticipated and lobbied that this restriction should be done\n away with under GST, at least to the extent of such property being \nleased upon payment of output tax. The logic being, where GST is paid on\n the output side, there should be no restriction for credits on the \ninput side.<\/p>\n\n\n\n
Against the backdrop of this issue, remaining \nseemingly unresolved since 2011 (from service tax era), a recent ruling \nof the Orissa High Court\u2014in a writ petition filed by Safari Retreats \nPrivate Limited\u2014is a shot in the arm for the sector. The issue of denial\n of GST credit to commercial developments for lease was taken up by a \ndeveloper of malls before the High Court in this case. The question \nbefore the High Court was two-fold: (1) Whether restriction of GST \ncredits for development or construction of a property meant for lease is\n liable to be struck down as unconstitutional, or (2) whether the \nlanguage of the restriction can be read down to infer a differential \ninterpretation that allows GST credit? Declining to strike down the law,\n the High Court has categorically read down the restriction to hold that\n the restriction on construction-related credits shall not be applied to\n malls developed for lease. The decision, amongst others, articulates a \nkey principle of parity in the taxation of commercial spaces meant for \nsale and lease, both of which suffer GST on the output side.<\/p>\n\n\n\n
Several questions now arise on the timing of this ruling, including its intent and ramifications.<\/p>\n\n\n\n
First,\n why now under GST this has been a legacy issue since the service tax \nera? While this issue has been under representation\/litigation in the \npast, this is a first-of-its-kind ruling on this issue and hence assumes\n significance in seeking to address a long-pending demand and concern of\n the sector.<\/p>\n\n\n\n
The second could be about the coverage of this ruling\n including its applicability to various types of commercial \ndevelopments. The subject matter of contention before the High Court was\n a mall that was being developed for being rented out (where a direct \nnexus of GST payment on lease rentals was identifiable). While the \nruling should, therefore, equally apply to other types of commercial \nproperties (such as office spaces, warehouses, hostels and the like), it\n leads one to a question of whether a similar nexus can be derived for \nhotels and such other properties where the immovable property is \nintegral to the service being offered; however, the type of revenue \nearned is not rental of the space per se. More difficult to justify may \nbe a case of construction of a factory that is used to manufacture goods\n for sale.<\/p>\n\n\n\n
Third, can this ruling be said to have a pan-India \nprecedentiary value given it seeks to interpret and read down a central \nGST law provision that applies across the country? Being a ruling of the\n High Court, it should have precedentiary value with hopefully other \ncourts following the same in the following weeks\/ months. Whether \nrealtors who have rushed to have similar matters heard in other \njurisdictional High Court(s) shall be equally successful, remains to be \nseen. While the possibility of the Revenue challenging the Orissa High \nCourt ruling before the Supreme Court is expected and seems imminent, \nthis decision throws up an opportunity to realtors in the commercial \nspace to re-evaluate their tax positions of the past, present and \nfuture, by leveraging on some of the principles laid down by the High \nCourt.<\/p>\n\n\n\n
The need of the hour is to see if this ruling can aid in \nany ongoing litigation on a similar issue under the pre-GST regime and \nfurther chalk out a plan to claim GST credits, at least for the \ngo-forward period, if not the past. Options such as writ, refund \napplication, representation, advance ruling, all present varying degrees\n of opportunity to commercial realtors. These opportunities to stake \nclaim to GST credits need to be carefully weighed in against the \ntime-frame expected for resolution of this issue before the Supreme \nCourt, the chances of an ultimate favourable outcome vis-\u00e0-vis the \ntime-frame for depreciation of these costs from an income tax \nstandpoint, as well as potential interest and penalty exposure (on the \ncredits availed), in the event of a negative outcome. Another factor is \npotential obligations that could arise from an anti-profiteering \nperspective where credits, hitherto assumed to be locked or lost, are \nunlocked as a consequence of this ruling.<\/p>\n\n\n\n
While these issues are \nbeing mulled over and actioned, this could well turn out to be a \nlandmark ruling that paves the way for realtors across the country to \nclaim construction-related input tax credits, resulting in lower cost of\n construction of leased spaces.<\/p>\n