The Bombay High Court has issued notices to the Centre and the Maharashtra government over a petition that seeks to declare as unconstitutional, a provision in the GST laws which empowers the authorities to block input tax credit (ITC) on works contract services in the real estate.

The petitioner, which is engaged in the business of renting and leasing out movable and immovable properties, challenged the section 17(5)(c) of the Central GST (CGST) Act and the same section in the Maharashtra GST Act. The section prohibits input tax credit to the works contract service for construction of an immovable property other than the plant and machinery except where it is an input service for further supply of works contract.

Works contract is essentially a contract of service which may also involve supply of goods in the execution of the contract.

The petitioner entered into a master rental agreement with a company to provide it furnished premises on lease. The petitioner procured works contract services to make the premises.

By virtue of the section cited above, ITC on works contract services used by the petitioner stands denied.

Äbhishek Rastogi, a counsel for the petitioner and partner Khaitan & Co., argued that the section fails to recognise that these services are used by the petitioner in furtherance of its business.

The petitioner argued that since the leasing services provided by it are taxable, blockage of ITC resulted in breaking of the credit chain which goes against the ethos of the GST principles. GST was envisaged to do away with the cascading effect of taxes, it said.

"The objective of the GST system is to remove the cascading effect of tax on tax and ensure the flow of credits. As a corollary, any blocked credit will have to pass several tests of reasonability, public interest and above all constitutionality," Rastogi said.