A developer purchasing cement, steel, bricks, sand, fittings and other construction material for a project faces a credit position that is more restrictive than the headline 18% rate on those goods suggests. Section 17(5)(c) blocks credit on works contract services for construction of an immovable property, other than plant and machinery, except where the service is an input service for further supply of works contract service. Section 17(5)(d) blocks credit on goods or services received for construction of an immovable property on the taxpayer’s own account. The developer constructing a building for sale or for its own letting is ordinarily constructing on its own account, and the credit on the construction inputs is therefore blocked.
The Goods Route and the Works Contract Route
The restriction operates through two routes. The first is the works contract route: where the developer engages a contractor for construction, the contractor’s service is a works contract, and the developer’s credit on that service is blocked under Section 17(5)(c). The second is the goods route: where the developer purchases cement, steel and other materials directly, the credit on those goods is blocked under Section 17(5)(d) because the goods are used for construction of an immovable property on the developer’s own account.
The distinction matters because a developer sometimes assumes that purchasing materials directly, rather than through a works contractor, avoids the block. It does not. The goods route is independently blocked where the construction is on the developer’s own account.
The Plant-and-Machinery Exception
The restriction in Section 17(5)(c) and (d) carves out plant and machinery. Where the construction results in a building that qualifies as “plant” under the functionality test, the credit position can differ. The Supreme Court has affirmed the validity of blocked credit on immovable property while allowing buildings to qualify as “plant” for ITC availment, subject to the functionality test. The exception is narrow and fact-specific; it does not convert ordinary commercial or residential construction into eligible plant.
The Rate-Structure Trade-Off
The developer’s ITC position is inseparable from the rate structure chosen for the project. For residential projects, the developer can choose between the old scheme (12% or 8% with ITC) and the new scheme (5% or 1% without ITC). Under the new scheme, the developer cannot claim ITC on construction inputs; under the old scheme, ITC is available subject to the conditions. For commercial construction, the 18%-on-two-thirds structure (effective 12%) is the relevant rate, and the ITC position is governed by the blocked-credit provisions rather than by a no-ITC scheme.
The choice is not merely a rate election; it determines whether the input tax on construction material is recoverable. The developer should model the project economics under both structures rather than assume that the lower headline rate is always better.
The Rental and Letting Nuance
Where the developer constructs a commercial property for letting out rather than for sale, the question arises whether the construction is on “own account” and whether the rental income is a fresh stream of GST revenue that should preserve the credit. Some judicial analysis has considered whether credit can be denied under Section 17(5)(d) where the immovable property is not used for own purposes and is used for rental income. The position is not settled, and the developer should obtain advice on the specific facts rather than assume that letting-out automatically preserves the credit.
Documentation and Reconciliation
The developer should maintain the project cost sheet, the material purchases, the works contract invoices, the capitalisation entries and the rate-structure election. The vendor master should record the GSTIN status of each supplier, because credit on unregistered supplier purchases is not available in any event. The reconciliation between the project cost and the GST returns should be maintained, because the blocked-credit analysis depends on the nature and use of each input.
What the Developer Should Control
The developer’s credit position depends on three variables: whether the construction is on own account; whether any component qualifies for the plant-and-machinery exception; and whether the rate structure chosen permits or blocks ITC. The developer that models these variables at the project-appraisal stage is better placed than one that discovers the blocked credit after the project is complete.
Call to Action: We advise developers and builders on construction-material ITC, Section 17(5) blocked credit, rate-structure elections and project documentation. For a project-specific review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.