Commercial real estate developers who rent out their properties find themselves caught in a credit eligibility predicament, with notifications of credit blockage under sections 17(5)C and 17(5)D being issued even as the matter is being litigated before the Supreme Court, according to stakeholders within the real estate industry.
When a developer constructs a commercial building and sells it before obtaining a certificate of occupancy, they may be eligible to claim credit, provided they settle the resulting GST obligations arising from the sales transaction. However, if the developer opts to lease the building, this avenue for input tax credit (ITC) becomes unavailable.
“This situation significantly impacts the overall business landscape by inflating construction costs, ultimately leading to higher rental rates. Despite numerous appeals to the government, developers are yet to receive any relief. Given India’s growing status as a preferred destination for office space and global capacity centers for multinational corporations, which often choose leasing over ownership, such a discrepancy has adverse implications for the economic attractiveness of operating in India,” emphasized Gaurav Karnik, national real estate leader at EY India.
According to a statement by the Confederation of Indian Industry (CII), construction expenses typically constitute a substantial portion, ranging from 32% to 38%, of the total project cost. Since GST is levied at an 18% rate on such services (which becomes a cost for the company), the industry faces a significant financial burden due to the specific ITC limitation.
“The central question before the court pertains to whether input tax credit can be denied when goods and services are used for constructing a building for the developer’s own purposes. These buildings are often utilized by companies offering various production services, including leasing, hotel services, and warehousing,” explained Abhishek A. Rastogi, founder of Rastogi Chambers, the legal entity representing the case before the Supreme Court and various high courts.
While both selling and leasing serve as distinct methods for monetizing property value, their tax treatments differ significantly, resulting in unequal tax burdens, as experts have pointed out.
“A developer selling an office or commercial asset may not attract global brands, as they tend to prefer leasing directly from developers. This is why many prominent developers have ventured into leasing commercial and office spaces. However, a major impediment to this development is the denial of ITC, which impacts the overall project cost. The government should consider addressing this issue,” urged Harsh V. Bansal, convener of the CII Delhi Sub-Committee on Real Estate, Urban Development, and Infrastructure, and co-founder of Grupo Unidad.
Builders assert that the credit represents their vested right, and any denial would disrupt the tax chain, contradicting the principles of the Goods and Services Tax (GST) system. Rastogi added, “Taxpayers can avail themselves of the credit within the legally prescribed timeframe. If show-cause notices have been issued for the recovery of unutilized input tax credit, it may become imperative for taxpayers to seek a stay of recovery through such notices.”
The CII has called for a comprehensive review of the GST regime applicable to the leasing segment, particularly addressing the restriction on ITC claims for goods and services used in the construction of immovable property, even when these assets are deployed for offering taxable services in commercial leasing.