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AAR Allows Credit For Leasing Of Immovable Property


Kamarajar Port had entered into a lease agreement with Chennai Port Trust for allotment of a closed space—construction building—to be used as corporate office for business purpose for thirty years.

Kamarajar, after having paid the upfront lease premium for thirty years including 18% GST, sought tax credit on the lease paid.

This was rejected by the state jurisdictional authority leading Kamarajar to approach the advance ruling before the Chennai North Commissionerate State. It stated that the contract is a simple lease contract of building and does not construe to any construction activity and hence tax credit should not be blocked.

The AAR agreed with this reasoning.

It pointed out that the upfront premium paid is not related to any construction activity of such covered space but against the rental value for the period of rent calculated for the period of lease and collected upfront.

And so, input tax credit should be allowed on this upfront payment of rent, it said.

Input tax credit is a mechanism under GST where the portion of the tax paid can be set off against future tax liability.

If there is a lease of immovable property akin to the transaction in the instant ruling, entities have been taking credits, says Prashant Agarwal, tax partner at PwC India. The challenge, he adds, lies for developers who construct such properties for further lease.

Leasing of immovable property is different from services in relation to construction of immovable property. As such there should not be any challenge in taking credits, he said.





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