Budget 2021: Real estate sector seeks input tax credit on development of leased commercial properties

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New Delhi: The government should allow commercial real estate developers to set off GST paid on inputs like cement from the tax liability on rental income to avoid double taxation and give a boost to the office market to help India maintain its advantage in various sectors like IT and startups, realty firms and consultants said on Sunday.

In its Budget recommendation for the 2021-22 fiscal year, industry body CII has demanded that Section 16 read with Section 17(5) of the CGST Act should be amended to enable the real estate players to avail ITC (input tax credit) on procurement of goods and services during the construction phase where the said immovable property is intended for commercial leasing or renting.

The denial of ITC, leads to blockage of funds for a real estate player, it said.

“In case of commercial leasing of properties and outlets at malls, the renting of such premises attracts 18 per cent which is available as credit to the client. Disallowance of credit during the construction phase leads to the increased cost of construction, working capital loss, increased financing costs impacting the entire supply chain,” CII said.

Tata Realty & Infrastructure Ltd MD & CEO Sanjay Dutt mentioned that as per current GST provisions, input GST credit during the construction phase (for commercial properties) is not available for set-off against output GST liability from earning of rental income.

“In other words, the GST charged on input services (like procurement of cement, steel, works contract services, etc) is required to be capitalised to the cost of construction. Since the input GST rates on this score are significantly high (in the range of 18% to 28% for cement, steel and other big-ticket items), the developers are losing/foregoing substantial cash flows on this score,” Dutt told PTI.

He demanded that input tax credit should be allowed in commercial real estate properties meant for leasing purposes.

“It would immensely help the commercial real estate developers in conserving significant cash flows and help developers to sustain themselves…if such input GST is permitted to be utilised to be off-set against the output GST liability,” Dutt said.

This will keep India’s competitive advantage in the IT & ITES sector and startups through commercial real estate, he added.

Dutt said this would help the Indian office market, which witnessed a decline in net leasing during the 2020 calendar year because of the COVID-19 pandemic.   Sahil Vachani, MD & CEO, Max Ventures & Industries, said: “Allowing input tax credit to developers, especially those who build to lease, can be a big impetus. As of now, developers have to pay GST on various goods and services while constructing the project, but unfortunately, they are not allowed to set-off the GST paid, against the GST collected on rentals.” If the government allows input tax credit, Vachani said it would not only attract more developers to build Grade A offices for leasing, but also help in rationalizing rents, which will eventually help India establish a competitive edge over other countries where real estate cost is higher.

Saurabh Shatdal, MD- Capital Markets, Cushman & Wakefield, said: “Build to lease is completely different than build to sell. Commercial real estate developers who are in the business of developing rent yielding assets should definitely be allowed to claim input credit set off against GST billed in rent because this rental income is business income and not income generated from the sale of a capital asset.” Vachani of Max Ventures and Industries Ltd said the demand and absorption of Grade A office space have witnessed a gradual increase in the last few years. In 2019, net office absorption was at an all-time high.

“Pandemic brought a short-term disruption but the future of office space looks bright,” he said while demanding that the government should think of supporting the real estate sector to boost the supply of Grade A office spaces.

Vivek Jalan, Partner, Tax Connect Advisory Services, said: “A paradoxical situation is created by denying Input Tax Credit when the output is in the course or furtherance of business. The situation is not in conformity with the objective of free flow of credits envisaged in the GST Law.” India’s office market was performing well before the outbreak of COVID-19 pandemic.

Net office space leasing fell 44 per cent year-on-year during 2020 to 25.82 million sq ft across seven major cities as corporates deferred their expansion plans and adopted ‘work from home’ policy for employees because of the COVID-19 pandemic, according to a report by JLL India.

The absorption of office space stood at 46.5 million sq ft in 2019 across seven cities — Delhi-NCR, Mumbai, Chennai, Kolkata, Hyderabad, Pune and Bengaluru.

However, industry experts expect demand to bounce back this year with a recovery in the country’s economic growth.