Tax credit allowed on lease premium

An Authority for Advance Ruling (AAR) judgement saying tax credit should be allowed on goods and services tax (GST) paid on upfront lease premium could give a breather to companies and even corporate individuals. Tax authorities have been disallowing the tax credit up until now.

The AAR ruling means that many tenants would now be able to challenge the taxman’s stance, experts said.

“Generally, tax authorities are disallowing input credit on upfront lease premium on the ground that same is in relation to immovable property, hence restricted, or where tenants undertake some renovation or construction work before they use the property, the credit is denied on the logic of input service of lease being used for construction,” said Harpreet Singh, partner at KPMG India.

Input tax credit is a mechanism under GST where part of the tax paid can be set off against future tax liability. Tamil Nadu AAR in a ruling on July 27 had said, “The upfront premium made is the lease rentals as per the allotment order/letter of Chennai Port Trusts and it is nothing but lease rentals paid for the services of ‘renting of immovable property’ for business purposes. The upfront premium paid is not related to construction activity of such covered space but against the rental value for the period of rent calculated for the period of lease and collected upfront.”