GST Input Credit on a Mixed-Use Building and the Reverse Charge on Rent
Nova Analytics Pvt Ltd operates from a leased floor in Pune and owns a four-storey building in Chennai. The Chennai building is used 60% for its own office and 40% let to an unrelated tenant at INR 4 lakh per month. In the year, Nova incurred INR 36 lakh on construction of a new lift in the Chennai building, INR 9 lakh on interior fit-out of the leased Pune floor, and pays rent of INR 12 lakh per month to an individual landlord for the Pune premises. Nova claims full input tax credit on all three and does not discharge reverse charge on the Pune rent, arguing the landlord is unregistered. Its accountant notes that the Chennai rent is exempt because letting of residential property is exempt, but the tenant uses it for offices.
1. Assess Nova's input tax credit claims on the lift, the fit-out, and the Pune rent, and state the correct treatment.
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Each item turns on a different rule.
- Lift in the Chennai building. Construction of an immovable structure is a blocked credit, and a lift affixed to the building is part of the structure. The credit of INR 36 lakh is not available, irrespective of the 60:40 use split. If the building were used partly for taxable outward supply, the credit is still blocked because the exclusion is by nature of the expenditure, not by use.
- Fit-out of the leased Pune floor. Interior fit-out that does not create an immovable property (movable partitions, furniture, cabling) is not blocked, and the Pune floor is used wholly for the taxable business, so the INR 9 lakh credit is admissible. If the fit-out is a structural alteration to the leased premises, it becomes a blocked credit. The auditor should inspect the invoices to classify each item.
- Pune rent. Rent paid to an individual landlord is subject to reverse charge for the recipient, and registration status of the landlord is irrelevant to the obligation. Nova must pay GST on INR 12 lakh per month under reverse charge and can use that credit, since the premises are used for taxable business. Failure to discharge reverse charge is a default attracting interest and penalty.
- Chennai rent. Letting to an unrelated tenant for commercial use is a taxable supply, not an exempt residential letting. Nova must charge GST on the INR 4 lakh monthly rent and cannot treat it as exempt.
2. What is the credit position on the Chennai building given the 60:40 split, and how should the auditor quantify the exposure?
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The 60:40 split means the Chennai building serves both a taxable use (the 40% letting) and a use that is not a taxable outward supply (the 60% own office, which is neither taxable nor exempt but is an internal use).
- Common credits. Credits on common inputs, such as repairs and maintenance on the building, must be apportioned. The standard method is to take the credit attributable to the taxable letting and reverse the rest, or to apply the proportionate formula under the rules.
- Blocked credits stay blocked. The lift is excluded before apportionment, so the split does not rescue any part of the INR 36 lakh.
- Quantification. For the year, the auditor should compute: (a) INR 36 lakh lift credit reversed in full; (b) GST on INR 12 lakh monthly Pune rent under reverse charge, plus interest for the default period; (c) GST on INR 4 lakh monthly Chennai rent that should have been charged; (d) apportioned reversal on common building credits. The exposure is the sum of (a), (b), (c), and (d), plus interest, and the auditor should consider whether a penalty for suppression applies or whether a voluntary payment under the amnesty route is preferable.