‘Input Tax Credit Should Be Available for Construction of Plant and Machinery’

A recent tax ruling has said that plants and machinery are an exception to the rule and a tax credit should be available for their construction, providing much needed clarity to companies incurring new capital expenditure.

The ruling, by the Telangana Authority of Advance Ruling (AAR) on December 9, said that the input tax credit under Goods and Services tax (GST) is not available for the construction of immovable property except if it happens to be for plant and machinery.

In most cases, companies outsource this work and unavailability of tax credit leads to cost escalation.

Under the GST framework, the input tax credit is essentially a tax paid on raw materials (or input services). This can be used to reduce future GST liability.

The AAR ruled that the “input tax credit cannot be availed on work contract services for the construction of an immovable property except for the erection of plant and machinery”.

Tax experts say that one of the interpretations of the ruling could also mean that a tax credit may not be available in cases where companies change their interiors or undertake renovation.

This ruling fortifies the principle that no credit for input services would be available to the company on its own account for the construction of immovable property.

Thus, where a company is under taking interior renovation of an office or setting up a new office, input credit for the services of an architect, project management agency, and other services related to construction on its own account is likely to be challenged based on such rulings,” said Harpreet Singh, partner, KPMG.

“Plant and machinery will not include building or other civil structures and pipelines laid outside factory premises. Input tax credit cannot be availed on goods or services or both received by a taxpayer on his own account for construction of immovable property,” the ruling added.

“Having said the above, the positive from the ruling is that authorities have logically allowed the credit of the machine foundation, even if the foundation per se becomes immovable,” said Singh.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *