GST ITC Not Available on Lease Rental for Land Used for Factory Construction: AAR

The applicant, M/s Agratas Energy Storage Solutions is a newly established company that manufactures battery cells for motor vehicles. The applicant has signed a lease agreement with the Gujarat Government for 50 years starting 26 June 2024 and ending on 25 June 2074. The Gujarat Government has given leasehold rights to the applicant for industrial use to a net plot area of 321 acres. The land is used by the applicant for industrial construction, repair or demolition for the concerned purpose. The applicant has agreed to pay an annual lease rental at the rate of 6% of the total Market price to the Gujarat Government, with an increase of 10% of the lease rent every five years.

The applicant filed an application before the Gujarat Authority for Advance Ruling (AAR) to get the advance ruling for the following questions:

“(1) Whether the Applicant would be eligible to avail the ITC of the GST charged on the lease rental, where the factory building would be constructed on lease land?

(2) Without prejudice to the above, whether the ITC of GST charged on the lease rental paid would be available in the following periods:

(i) For the period prior to initiation of the construction of the factory building

(ii) For the period after construction of the factory building

(3) Without prejudice to the above, whether ITC of GST paid on lease rental would be available when the repairs, maintenance and renovation activities are undertaken on the factory building?

(4) Without prejudice to the above, whether ITC of GST paid on lease rental would be available with respect to the area of the land on which no immovable property is constructed i.e. vacant portion of the land?”

As per the Gujarat AAR:

• The applicant is not eligible to claim the ITC of GST charged on lease rental, where the factory building would be constructed on leased land.
• The Applicant is neither eligible to claim ITC on GST charged on lease rental paid for the period before the start of the construction nor for the period after the construction of the factory building.
• ITC against GST paid on lease rental paid on the land for construction of immovable property is blocked under Section 17(5)(d), and construction includes repairs, reconstruction, renovation, addition or alteration so the ITC of GST paid on lease rental is not available for these.
• The ITC of GST paid on lease rental would not be available for the area of land on which an immovable property is not constructed.