The Government should allow commercial real estate developers to set off GST paid on inputs like cement from the tax liability on rental income to avoid double taxation and give a boost to the office market to help India maintain its advantage in various sectors like IT and startups, realty firms and consultants said on Sunday.

In its Budget recommendation for the 2021-22 fiscal year, industry body CII has demanded that Section 16 read with Section 17(5) of the CGST Act should be amended to enable the real estate players to avail ITC (input tax credit) on procurement of goods and services during the construction phase where the said immovable property is intended for commercial leasing or renting.

The denial of ITC, leads to blockage of funds for a real estate player, it said.

"In case of commercial leasing of properties and outlets at malls, the renting of such premises attracts 18 per cent which is available as credit to the client. Disallowance of credit during the construction phase leads to the increased cost of construction, working capital loss, increased financing costs impacting the entire supply chain," CII said.

Tata Realty & Infrastructure Ltd MD & CEO Sanjay Dutt mentioned that as per current GST provisions, input GST credit during the construction phase (for commercial properties) is not available for set-off against output GST liability from earning of rental income.

"In other words, the GST charged on input services (like procurement of cement, steel, works contract services, etc) is required to be capitalised to the cost of construction. Since the input GST rates on this score are significantly high (in the range of 18% to 28% for cement, steel and other big-ticket items), the developers are losing/foregoing substantial cash flows on this score," Dutt told PTI. He demanded that input tax credit should be allowed in commercial real estate properties meant for leasing purposes.

"It would immensely help the commercial real estate developers in conserving significant cash flows and help developers to sustain themselves...If such input GST is permitted to be utilised to be off-set against the output GST liability," Dutt said.

This will keep India's competitive advantage in the IT & ITES sector and startups through commercial real estate, he added.

Dutt said this would help the Indian office market, which witnessed a decline in net leasing during the 2020 calendar year because of the Covid-19 pandemic.  

Sahil Vachani, MD & CEO, Max Ventures & Industries, said: "Allowing input tax credit to developers, especially those who build to lease, can be a big impetus. As of now, developers have to pay GST on various goods and services while constructing the project, but unfortunately, they are not allowed to set-off the GST paid, against the GST collected on rentals."

If the government allows input tax credit, Vachani said it would not only attract more developers to build Grade A offices for leasing, but also help in rationalizing rents, which will eventually help India establish a competitive edge over other countries where real estate cost is higher.