Input Tax Credit not available for Lease Rent paid during Pre-operative Period for Leasehold Land: GST AAR
The Authority for Advance Rulings ( AAR ) has held that the input tax credit will not be available to the builder for the lease rent paid during the pre-operative period for leasehold land on which the resort is being constructed on his own account to be used for furtherance of business, when the same is being capitalized and treated as capital expenditure, under the GST regime.
The Applicant, engaged in the hospitality and real estate business and is contemplating a new project on a leasehold land, sought for a ruling as to whether Input Tax Credit is available for lease rent paid during pre-operative period for the leasehold land on which the resort is being constructed to be used for furtherance of business, when the same is capitalized and treated as capital expenditure.
The Authority noted that when an immovable property like a building is sold the profit is computed after deducting from the sale proceeds the cost of the property, including the land.
“The cost of constructing the immovable asset, therefore, includes the lease rental paid for the right to use the land on which the asset is built. Being an integral part of the cost of the immovable property the lease rental paid for the service of the right to use the land is a supply for construction of the said property,” the Authority said.
The Authority noted that the property is, admittedly being constructed on the Applicant’s own account and treated as a fixed asset, including the lease rental paid.
“Whether the lease rental paid for the pre-operative period is capitalized under the head ‘Leasehold Land’ or ‘Building Block’ is of little significance in this context. In the light of the above discussion, it is held that the lease rental paid during the pre-operative period should be treated as part of the cost of goods and services received for the purpose of constructing an immovable property (other than plant and machinery) on the Applicant’s own account. The input tax credit is, therefore, not admissible on such lease rental in terms of section 17(5)(d) of the GST Act,” it said.
