To avoid double taxation, the government is requested to allow commercial real estate developers to use inputs such as cement paid by rental income tax to boost the business market to help India retain its benefits in various industries such as IT, startups, real estate and consultants.

In its Proposal on Budget 2021- 22, the CII industry body requested that, in the construction process where the buildings were destined for commercial lease or rental, the provisions of Section 16 should be amended in accordance with Section 17(5) of the CGST Act to permit real property owners to avail of the Input Tax Credit (IPTC) for the provision of goods and services. It stated that the rejection of ITC would result in the blocking of funds for real estate.

If the properties and outlets are leased on a commercial basis in malls, the rental of these premises is 18 percent available to the customer as credit. During the phase of construction, the disallowance of credit leads to increased building expense, loss of working capital, increased cost of finance affecting the entire supply chain.

Input Tax Credit for Leased Commercial Property Development

Tata Realty & Infrastructure Ltd MD & CEO Sanjay Dutt stated that in accordance with GST rules, the input GST credit is not available for set-off against output GST liability due to the income from the rental input during the construction phase (for commercial properties).

In other terms, it is appropriate to capitalise the GST charged for inputs (such as cement procurement, steel, building contract service, etc.) at the cost of construction. As the input prices for cement, stainless steel or other high-tech products are significantly high (from 18% to 28 percent), the developers lose considerable cash flow.

He recommended that the input tax credit be provided for leasing of commercial real estate. The commercial real estate developers would be immensely helped to preserve large cash flows and to help developers sustain themselves if such GST input is used to offset GST liability output. He added that this will sustain India's competitive edge in IT & ITES and start-ups by commercial real estate. This would benefit the Indian office markets, which witnessed a decline in net leasing in 2020 as a result of the COVID-19 pandemic.

Sahil Vachani, Max Ventures & Industries, MD & CEO,  mentioned enabling developers, and particularly those building to lease the input credit, can be a major boost. Since now to that developers have to pay the GST for different goods and services while constructing up the projects.

If the state allows input tax credit it would not only encourage more developers to build leasing Grade A offices, but will also help rationalise rentals, which will help India eventually to establish a competitive advantage over countries where real estate expenses are more expensive.

As the unexpected pandemic caused a short-term disruption, but the future of office space looks promising, the government considered supporting the real estate sector in order to improve the availability of Grade A office spaces. In 2019 office space absorption in 7 cities - Delhi NCR, Mumbai, Chennai, Kolkata, Hyderabad, Pune and Bengaluru amounted to 46.5 million sqft.

However, industry experts hope that the demand will bounce back this year, as economic growth in the country strengthens.

By: Shailaja K