Introduction
A tenant incurring repair expenses on a rented commercial premises faces a critical GST question: Can ITC be claimed on those repairs? The answer hinges on whether the repairs are capital in nature (creating an enduring benefit or immovable property) or revenue in nature (routine maintenance).
This guide explains the legal framework, the distinction between capital and revenue repairs, and the documentation required to protect ITC claims.
Legal Framework: Section 17(5)(d) of the CGST Act, 2017
Blocked Credit on Immovable Property
Section 17(5)(d) blocks ITC on goods or services received for construction of an immovable property, including renovation, repairs, additions, alterations, re-construction, or restoration, to the extent of capitalisation.
The Tenant's Position
A tenant does not own the premises. However, Section 17(5)(d) does not distinguish between owner and tenant. The test remains the same: does the repair result in immovable property, and is it capitalised?
Capital vs. Revenue Repairs
Capital Repairs (ITC Blocked)
- Structural Repairs: Repairs to the structure of the building.
- Civil Works: Repairs involving masonry, plumbing, or electrical embedded wiring.
- Capitalised Repairs: Any repair that is capitalised in the books of the tenant.
- Restoration Under Make-Good Clauses: Where a lease requires restoration of the premises to its original condition, the restoration costs are capitalised and ITC is blocked.
Revenue Repairs (ITC Available)
- Routine Maintenance: Painting, minor patchwork, and routine upkeep.
- Movable Repairs: Repairs to movable assets (furniture, equipment, ACs).
- Revenue Expenses: Repairs charged to the profit and loss account.
The Agartas AAAR Ruling
The Agartas AAAR ruling emphasized that ITC on renovation and repair expenses fails where the lease does not establish genuine business purpose, where rent is not linked to market realities, and where structural and non-structural works are mixed, with civil improvements charged to the lessee.
Documentation Required
- Lease Agreement: Clearly allocate repair responsibilities.
- Invoice Classification: Obtain invoices that clearly classify the nature of the repair.
- Capitalisation Policy: Apply a consistent policy for capitalising repairs.
- Photographic Evidence: Before-and-after photographs for significant repairs.
Best Practices
- Draft Clear Lease Terms: Define who bears the cost of different categories of repairs.
- Classify Repairs Correctly: Revenue repairs should be charged to P&L; capital repairs should be capitalised.
- Obtain Separate Invoices: For mixed repairs, obtain separate invoices for capital and revenue components.
- Maintain Records: Document the business purpose of every repair.
- Seek Professional Assistance: Repair ITC is a high-risk area.
Conclusion
ITC on repairs to rented commercial premises depends on whether the repair is capital or revenue in nature. Capital repairs, including restoration under make-good clauses, are blocked under Section 17(5)(d). Revenue repairs are eligible. Proper lease drafting and cost classification are essential.
Incurring repair expenses on rented premises? Anuj Desai & Associates provides expert guidance on ITC eligibility. Contact us today.
Contact us:
- Email: office@anujdesaiassociates.com
- Phone: 9619456656
- Website: https://anujdesaiassociates.com
- LinkedIn: linkedin.com/in/ca-anuj-desai-122547230