AAR ruling making office refurbishing costs eligible for tax credit may lead to litigations

A ruling by Authority for Advance Rulings (AAR) that costs incurred for refurbishment of offices can be available towards input tax credit is set to create some confusion around availability of tax credit under the goods and services tax (GST) framework.

“Input tax credit is admissible on new locker cabinets and generators,” the Gujarat AAR ruled recently.

Tax credit can be used to set off future tax liabilities.

As of now, only the cost that contributes towards the output of a company — raw materials, input services, machinery, etc. — are eligible for input tax credit.

The new ruling comes at a time when several companies across the country have moved their offices, and have incurred expenditure on renovation, repair, temporary fittings, etc. amid the Covid-19 pandemic. These firms can now take this ruling to claim tax credits, tax experts said.

However, credit of goods and services used for repair and renovation of offices has always been subject matter of litigation over the years mainly because it is difficult to determine what qualifies as immovable and what as plant and machinery, they said.

“Lot of dealers are availing input credit of new modular furniture, fixtures, fittings, cables, generators, etc. with the plea that same can be easily moved/ installed at multiple places, without being damaged and hence do not result in an immovable property,” said Harpreet Singh, partner, indirect tax, at KPMG in India.

“Ideally such dealers would wish to claim credit for the entire expenditure (of moving offices) as the same is being done in the course of business,” he said. “However, one needs to take cognizance of such rulings and the provision which restricts credit of goods or services used for construction on immovable property.”

A similar tax ruling in a recent case had put a question mark on the repair funds of housing societies. Several housing societies that create a ‘sinking fund’ or future repair fund are set to face additional taxes in the form of GST on this amount following an AAR advance ruling.

GST at 18% is applicable on repair and maintenance funds and sinking funds collected by residents’ welfare association (RWA) or housing society if the total value of charges exceeds the threshold limit of Rs 7,500 per month per member, Maharashtra AAR had said. In most cases, housing societies collect money from residents for future contingencies.