GST Input Tax Credit on Major Repairs, Architectural Upgradation & Capitalization in Hotels, PGs & Hostels

A Comprehensive Taxpayer’s Guidance Note with Planning Insights

Introduction

Hotels, PGs, and hostels are capital-intensive businesses where buildings, interiors, and ambience directly drive revenue. The question of GST Input Tax Credit (ITC) on building-related expenses — particularly major repairs, renovations, architectural design, and furnishing — is complex because:

• GST law restricts ITC on works contract services relating to immovable property (Sec. 17(5)(c)/(d), CGST Act).

• Thin-line distinctions exist between repairs vs. capital improvements, and plant & machinery vs. immovable property.

• Parallelly, Income-tax Act treatment (capitalization vs. revenue) interacts with GST to affect overall tax planning.

This note critically analyses all scenarios with minute detailing, covering both legal restrictions and planning opportunities.

Statutory Framework

2.1 Relevant Sections under CGST Act

• Section 16(1): ITC allowed for goods/services used in course or furtherance of business.

• Section 17(5)(c): ITC blocked for works contract services relating to construction of immovable property (except where used for further supply of works contract).

• Section 17(5)(d): ITC blocked for goods/services used for construction of immovable property on own account, even if for business use.

• Explanation to Sec. 17(5): “Construction” includes reconstruction, renovation, additions or repairs to extent they are capitalized.

2.2 Meaning of “Plant & Machinery” (Explanation to Sec. 17)

• Includes apparatus, equipment, machinery fixed to earth by foundation/support.

• Excludes land, building, civil structures, telecommunication towers, pipelines outside factory.

Thus, if expenditure is treated as plant & machinery, ITC survives; if treated as immovable property, ITC blocked.

Key Analytical Distinctions

1 Routine Repairs vs. Capitalized Renovation

• Routine repairs/maintenance (e.g., plumbing, painting, AC servicing): ITC allowed (not capitalized, revenue expense).

• Capitalized renovations (e.g., building extension, floor redesign, major structural change): ITC blocked.

2 Architectural & Interior Design Services

• Scenario A – Designing new hotel/PG/hostel building: Architectural fees linked to construction, hence ITC blocked (capitalized with building).

• Scenario B – Designing refurbishments without structural alteration (e.g., interior redesign of lobby, furniture design, theme upgradation): If not capitalized as “building,” ITC may be claimed. Careful accounting treatment is key.

3 Furniture, Fixtures & Fit-outs

• Movable furniture/equipment (beds, modular furniture, chandeliers, electronics): ITC available (plant & machinery).

• Fixed immovable fit-outs (false ceiling, fixed wardrobes, wall panelling): If capitalized as “building,” ITC denied. Planning can classify certain modular fixtures as movable to safeguard ITC.

4 PGs and Hostels vs. Hotels

• Same restrictions apply since all are “commercial accommodation services.”

• Whether run as lodging business (with GST output) or on lease basis affects ITC:

  • If property is leased out (rental income), ITC on construction is blocked (immovable property).

  • If operated as hotel/hostel business (taxable outward supply), ITC on furniture, equipment, routine repairs survives.

Taxpayer’s Perspective – Planning Matrix

Expense Category	Capitalized?	ITC Availability	Planning Insight
Routine repairs (painting, plumbing, AC servicing, flooring polishing)	No	✅ Allowed	Book as repairs (P&L) not capitalized.
Major renovation (civil work, extensions, structural changes)	Yes	❌ Blocked	Unavoidable blockage – consider lease structuring or vendor ITC optimization.
Architectural design for new construction	Yes	❌ Blocked	Becomes part of “construction cost” – no ITC.
Architectural/interior fees for refurbishment (theme, décor, layout changes)	Depends	⚖️ Allowed if expensed; Blocked if capitalized with building	Tax planning: expense off P&L if justified as revenue.
Movable furniture & equipment (beds, sofas, TV, AC units, kitchen equipment)	Capitalized (Plant & Machinery)	✅ Allowed	Safest category for ITC.
Fixed immovable interiors (false ceiling, permanent woodwork)	Yes	❌ Blocked	Avoid capitalization with building, classify modular if possible.
Landscaping, façade improvement, parking expansion	Yes	❌ Blocked	Treated as building.
Leasehold improvements (tenant constructing fit-outs)	Yes	❌ Generally blocked	Some tribunals allowed ITC if business necessity; litigation risk.
Repairs in leased premises (done by lessee, not capitalized)	No	✅ Allowed	Book as repair/maintenance.

Thin-Line Distinctions & Judicial Support

• Hotel Upgradation (structural) → ITC blocked.

• Hotel Refurbishment (cosmetic/interior) → ITC possible if not capitalized.

• Movables vs. Immovables: Modular furniture ITC allowed (Delhi Tribunal in Safari Retreats indirectly supports business-use logic, though reversed in higher courts).

• Architectural Fees: If linked to capital construction, blocked; if linked to operational refurbishments, allowable.

• Leasehold improvements: Mixed rulings – advisable to treat as “business repairs” wherever not increasing asset’s life permanently.

Income-Tax vs. GST Interplay

• Income-tax:

  • Capitalized repairs → Depreciation benefit (10% building, 15% furniture, 40% plant & machinery).

  • Revenue repairs → 100% deduction in year.

• GST:

  • Capitalization of building-related → ITC denied.

  • Revenue expensing or plant/machinery → ITC allowed.

Tax planning tip: Sometimes better to expense off (P&L) small refurbishments than capitalize — yields both GST ITC and Income-tax deduction.

Practical Taxpayer Strategies

1. Classification Planning:

   • Keep detailed invoices (segregating furniture, equipment, movable interiors).

   • Avoid lump-sum architectural/furnishing contracts — split into movables vs civil works.

2. Expense Booking Policy:

   • Minor refurbishments → expense in P&L.

   • Only structural works → capitalize.

3. Vendor Contract Structuring:

   • Insist vendors separately mention goods vs services, movable vs immovable, furniture vs civil work.

4. Parallel IT Planning:

   • Where GST ITC blocked, ensure capitalization for depreciation under Income-tax.

   • Where ITC available, book as expense if possible for dual benefit.

5. Advance Ruling Risks:

   • Seek advance ruling in borderline cases (e.g., leasehold improvements, modular interiors).

Conclusion

For hotels, PGs, and hostels, GST ITC on building repairs and upgradations hinges on accounting treatment and nature of asset:

• Routine repairs & movable furniture → ITC available.

• Capitalized building renovations & architectural fees linked to construction → ITC blocked.

• Interior/architectural refurbishments & modular fixtures → ITC possible if carefully structured.

Taxpayers should maintain segregated accounts, vendor contracts, and capitalization policies aligned with GST law to safeguard maximum ITC while ensuring parallel Income-tax efficiency.