The Delhi High Court on Monday issued a notice to the Centre and the Delhi government on the issue of ‘blocked credits’ under the Goods & Services Tax (GST) regime. Such a mechanism is affecting hotels and malls.
The GST Act has a provision, under Section 16, for input tax credit (ITC), which helps businesses deduct the tax paid on inputs at the time of paying tax on output, thus lowering the tax paid in cash. However, this Section is subject to certain restrictions as laid down under Section 17 of the Act. These restrictions are also referred to as ‘blocked credits’.
The related Section says: “Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.”
The petition was moved by a firm building a five-star hotel in the Capital. It has been procuring multiple goods and services, including works contract services, for use in the construction of the property.
Denial of credit
The petition mentioned that by virtue of provisions under the Act, the input tax credit available on the procurement of goods and services or both, including works contract services used for the construction of the immovable property, is denied to the petitioner.
The denial of credit disregards that the property so constructed by the petitioner would be used by it for furtherance of business, it said.
The petition specifically talks about two provisions related with ‘blocked credits’. Section 17(5)(c) ITC shall not be available in respect of the “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”.
Similarly, Section 17(5)(d) says ITC will not be available for “...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.”
It was prayed before the court to quash and declare both the provisions as violating the fundamental right of the petitioner and, therefore, violation of Article 14 of the Constitution (equality before law).
According to Abhishek A Rastogi, partner at Khaitan & Co, who is arguing the matter in the Delhi High Court, the arbitrariness with respect to Section 17(5) of the CGST Act and the respective State Acts arises as these provisions intend to deny credit for construction projects while the objectives of the GST are completely different and provide for credits to the receiver when the output is in the course or furtherance of business. The impugned provisions have been challenged on the grounds of arbitrariness and vagueness of the phrase ‘on his own account’.
“The distinction between B2B (business to business) and B2C (business to consumer) transactions, especially for cases when the output activity is charged to GST, needs to be looked into to avoid tax cascading effect,” he said.