Industry bodies have approached the authorities for revisions in the rules of GST, especially those that focus on ITC restrictions that raise business costs and impact competitiveness. The demand is to permit companies to avail ITC on GST paid for construction work and materials such as cement and steel, used to build critical infrastructure like data centres and warehouses.
At present, ITC on some construction-related expenses for immovable property, including works contract services and goods used for construction, is prohibited u/s 17(5) of the Central GST Act. Industry representatives claim that this restriction raises the cost of setting up facilities. For example, a data centre operator might pay GST on construction materials like cement and steel but cannot completely offset this tax against the GST collected from its services. As a result, the tax becomes an embedded cost.
Impact on Operational Costs
Industry bodies are advocating for analysing Section 17(5)(b), which restricts ITC on various expenses made during regular business functions. It comprises of food and beverages, outdoor catering, health services, motor vehicle leasing, and life and health insurance. These expenses in employee-intensive sectors, such as global capability centres (GCCs), can represent a significant portion of overall spending.
Permitting input tax credit (ITC) on these operational expenses would lower total tax costs, thereby enhancing the competitiveness of Indian operations and supporting the government’s goal of improving the ease of doing business. The industry has suggested that Section 17(5)(b) be amended to facilitate this change.
Global Competitiveness and Investment Appeal
Allowing credit on construction costs for facilities like warehouses and data centres shall avert tax from getting stuck as a cost within the supply chain. The same reduction in the cost of business operations leads to more attractive investment in India, particularly for capital-intensive sectors such as data centres, logistics, and warehousing.
The authorisation of this credit shall align tax structure of India with global value-added tax (VAT) norms, where the credit on construction costs is generally allowable within the VAT system. This reform has the potential to align India’s indirect tax system with international best practices.
