Input Tax Credit on Construction of a Building — A Comprehensive Thesis

Input Tax Credit (ITC) on construction-related activities remains one of the most debated and misunderstood areas of the GST law. Construction of immovable property has always been treated differently under indirect tax regimes due to its dual nature—partly as a supply of goods and partly as a supply of services. Under the GST regime, the availability of ITC on building construction is governed by specific restrictions, exceptions, and conditional provisions. Businesses engaged in construction, manufacturing, hospitality, infrastructure development, and leasing must understand these rules to avoid tax burdens and ensure compliance.

The GST framework restricts ITC on construction of buildings to prevent leakage of revenue and to maintain tax neutrality between the consumption of immovable property and movable goods. The logic behind the restriction is based on the principle that immovable property does not constitute a part of the taxable supply chain once it is completed. Once a building is constructed, it does not typically generate GST revenue unless sold under specific conditions. Therefore, ITC for construction of immovable property is disallowed except in select business-use scenarios that contribute to taxable output supplies.

Under the GST law, construction includes:

• New construction of a building
• Additions, alterations, and extensions
• Reconstruction, renovation, or repairs to the extent capitalised
• Structural modifications that result in immovable property

The law focuses on the nature of the asset—if the output is an immovable property that becomes capitalised in the books of accounts, ITC is restricted.

One of the core provisions disallowing ITC on buildings is the “blocked credit rule,” which states that ITC is not allowed for goods or services used in:

• Construction of immovable property
• Works contract services for construction of immovable property
• Capitalisation of renovation or repair work

This restriction applies even if the entity uses the building for business purposes. The blocked credit rule operates broadly, capturing most construction activities unless specifically exempted.

Works contract services for constructing buildings are generally ineligible for ITC. This includes services like civil construction, architectural work, interior finishing, plumbing, electrical work, and site preparation. The rationale is that works contract services directly contribute to constructing immovable property. However, there are notable exceptions, especially when such contracts contribute to the creation of an asset used for making taxable outward supplies.

6.1 Construction Used for Further Supply of Works Contract Services

If a business receives works contract services and uses them to further supply similar works contract services—such as a contractor constructing commercial buildings for clients—the ITC is allowed. This is a major exception for real estate developers and contractors engaged in onward supply of construction services.

6.2 Plant and Machinery Installed in a Building

ITC is allowed on goods and services used to install plant and machinery in a building. Plant and machinery includes production equipment, lifts and escalators, pipelines, storage tanks and industrial machines. However, items like building foundations, civil structures, or land-related installations do not qualify.

6.3 Buildings Used for Taxable Leasing or Renting

If a business constructs a building purely for leasing or renting out and the rental income is subject to GST, ITC becomes admissible. This exception is critical for commercial real estate developers, mall and property leasing companies, co-working space providers and hospitality units leasing spaces.

6.4 Construction for Commercial Complexes Sold Before Completion

If a developer sells units of a building before completion, the sale is treated as a taxable supply under GST. In such cases, ITC on construction is allowed proportionately because the outward supply is taxable.

Renovation, repair, or refurbishment expenses attract ITC only if they are not capitalised. If capitalised as part of the building, they fall under the blocked credit category.

Examples where ITC is allowed

• Painting expenses treated as revenue
• Routine maintenance contracts
• Repair of electrical systems not capitalised

Examples where ITC is disallowed

• Structural modifications capitalised as building
• Major renovation treated as improvement to immovable property

ITC is strictly disallowed for construction of residential buildings intended for sale. Residential real estate, after the implementation of new GST rates, does not allow ITC even if the output supply of construction service is taxable. The intent is to reduce prices for homebuyers and avoid cascading effects.

Mixed-use buildings (commercial + residential) require careful allocation of ITC:

• ITC attributable to commercial portions is allowed.
• ITC attributable to residential portions is disallowed.

Developers must use ratio-based allocation depending on carpet area, value, or other prescribed criteria.

One of the most important determinants of ITC eligibility is capitalisation. If an expenditure is capitalised as part of the building, ITC is blocked. If treated as revenue (expense), ITC may be allowed. Businesses often consult accounting standards to determine whether an expense must be capitalised or can be expensed.

ITC is not allowed on land, land development rights, TDR, or FSI because land is outside the scope of GST. Transactions relating to land inherently block any associated credit.

To claim eligible ITC, businesses must maintain:

• Invoices for goods and services
• Agreements with contractors
• Building layout and cost segregation statements
• Proof of receipt of goods/services
• Capitalisation schedules
• Internal allocation for mixed-use properties

Accurate documentation is crucial to defend ITC claims during GST audits.

Input Tax Credit on construction of buildings under GST is governed by a blend of general prohibitions, specific exceptions, and accounting-based distinctions. While the law appears restrictive, significant legitimate opportunities for ITC exist—especially for businesses engaged in leasing, commercial construction, or providing works contract services.

By understanding the exact provisions, maintaining clear documentation, and applying strategic cost segregation, businesses can optimise ITC claims and reduce unnecessary tax burdens. For companies in construction-driven sectors, mastering these rules has a direct impact on profitability, compliance, and long-term financial planning.