Leasing real estate faces tax credit issue in India

01 Sep 2023

Commercial real estate developers leasing their properties are receiving notices about blocked credit eligibility under sections 17 (5) C and 17 (5) D even as the case is being argued at the Supreme Court, say real estate industry stakeholders.

If a developer constructs a commercial building and sells it before obtaining an occupancy certificate, they may be eligible to claim credit, provided they pay the output GST on the sale transaction.

However, if the developer uses the building for leasing, such an Input Tax Credit (ITC) is not available for set-off. This situation has a significant impact on the overall business, as it increases the cost of construction, subsequently leading to higher rentals for tenants.

Gaurav Karnik, the national leader of real estate at EY India, stated, "This impacts the overall business as this increases the cost of construction, thereby increasing rentals. Multiple representations have been sent to the government, but developers have yet to get any relief. As India is becoming the preferred choice for office space and global capability centers for MNCs who typically prefer to lease property, such an anomaly tends to impact the economics of operating in India negatively."

A representation by the Confederation of Indian Industry (CII) highlighted that construction costs typically account for 32% to 38% of the total project cost. Given that GST is applicable at the rate of 18% on such services (which becomes the cost for the company), there is a significant cost that the industry bears due to the specific restriction on the availment of ITC.

Abhishek A. Rastogi, founder of Rastogi Chambers, who is arguing the matter before the Supreme Court and various high courts, explained, "The moot point before the court is whether input tax credit can be denied when goods and services are used for the construction of the building on own account. These buildings are used by the businesses for rendering output services such as leasing, hotel services, and warehouse services."

Both sale and leasing are different ways to monetize the value from the property; however, the tax treatment is different, as is the tax burden, which is against the principles of equality, experts said. This situation poses challenges for commercial real estate developers and tenants alike, affecting the cost structure and overall economics of operating in the Indian real estate market.

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