In a significant development, the GST Council is set to revisit the recent Supreme Court ruling in the Safari Retreats case, which granted input tax credit (ITC) claims on construction costs for rental properties. The ruling, potentially costing the exchequer ₹10,000 crore, could be reversed through a retrospective amendment to the Central Goods and Services Tax (CGST) Act. This article explores the case, its implications, and the likely changes ahead.

Setting the Context: The GST and Real Estate Landscape

The Goods and Services Tax (GST) regime aims to ensure a seamless flow of credit across the supply chain, preventing the cascading effect of taxes. However, several provisions under the GST law have led to confusion and litigation, especially around Input Tax Credit (ITC). The recent Supreme Court judgment in the Safari Retreats case highlighted a crucial issue related to construction costs for rental properties and the eligibility of ITC on these expenses. The decision has significant implications for real estate companies, especially those involved in constructing commercial properties for rental purposes.

The Safari Retreats Case: The Key Facts

Safari Retreats, a company engaged in constructing shopping malls for leasing, faced a significant GST issue. The company accumulated an input tax credit (ITC) of ₹34 crores on the goods and services used to build its malls. The goods and services included essential construction materials like cement, steel, and consultancy services. These expenses were subject to GST under the CGST Act, and the company sought to utilize the ITC against the rental income it received from letting out these properties.

However, the GST department denied the claim, citing the restrictions under Section 17(5)(d) of the CGST Act. The section disallows ITC on goods and services used in the construction of immovable property, except where those goods or services are used for making further supplies. Safari Retreats challenged this denial in the Orissa High Court, arguing that the construction of the mall should qualify for ITC claims, as it was a necessary part of its taxable business.

The High Court ruled in favor of Safari Retreats, declaring that if the company had to pay GST on the rental income, it should be entitled to ITC on the construction of the property. The court criticized the narrow interpretation of Section 17(5)(d), which the department had applied, stating that this approach would undermine the very objective of the GST Act—allowing for the seamless flow of credit.

The Supreme Court’s Judgment: Key Findings

The GST department appealed the Orissa High Court’s decision to the Supreme Court, and in October 2023, the apex court delivered its judgment. The Supreme Court ruled that input tax credit should be allowed in specific cases where construction costs were related to the building of commercial properties intended for rental. The court set forth a crucial distinction: “plant and machinery” could, under certain conditions, include immovable property like commercial buildings, provided they met a “functionality test.”

In essence, the court stated that immovable property could qualify as “plant” under Section 17(5)(d) if it was constructed to serve the taxpayer’s special technical requirements. This decision allowed Safari Retreats to claim ITC on the construction costs of its malls.

New Development: GST Council’s Response and Likely Retrospective Amendment

Following the Supreme Court’s judgment, there was growing concern within the government about the potential financial implications. Estimates suggested that the ruling could lead to a ₹10,000 crore loss for the exchequer, as it was effective retrospectively from July 1, 2017. In response, the GST Law Committee, in its recent meeting, proposed to amend Section 17(5)(d) of the CGST Act retrospectively, effectively reversing the Supreme Court’s judgment.

The Law Committee argued that the Supreme Court’s interpretation of “plant” could lead to widespread confusion and litigation. By allowing immovable property to qualify as “plant” on a case-by-case basis, the decision could open the floodgates for numerous claims, complicating the tax administration process and leading to increased legal disputes.

Implications of the Proposed Amendment

The retrospective amendment, if passed, would nullify the Safari Retreats ruling and close the door on similar ITC claims for construction costs of rental properties. Real estate companies and other taxpayers who had hoped to benefit from the judgment would be affected, as they would no longer be able to claim ITC on construction-related expenses for immovable properties, even if they were used for taxable business purposes.

From a policy standpoint, this move raises several concerns. On the one hand, the amendment seeks to clarify the law and prevent a surge in litigation. On the other hand, it undermines the principle of allowing businesses to recover taxes paid on their inputs, a cornerstone of the GST regime. Many experts believe that the GST Council should instead consider making the ITC provisions more liberal and comprehensive, addressing the underlying issues of the current law.

Additionally, this development could set a precedent for future amendments in GST law that may restrict ITC claims for certain types of construction, potentially leading to further challenges for businesses engaged in the construction of commercial properties.

Conclusion: The Road Ahead

The Safari Retreats case has highlighted the complexities of the GST law, especially in relation to ITC claims for construction costs. While the Supreme Court’s judgment offered a degree of clarity and relief to businesses, the proposed retrospective amendment by the GST Council could undo these benefits. The outcome of this case, combined with the retrospective changes to the law, could have far-reaching consequences for the real estate sector and the overall GST framework.

As the legal battle continues, businesses, especially those involved in the construction and leasing of commercial properties, will need to keep a close eye on the developments. The ultimate resolution of the Safari Retreats case will depend on the Orissa High Court’s review and the final decision on the retrospective amendment. Until then, companies may find themselves in a state of uncertainty, with the possibility of ongoing legal challenges over the eligibility of ITC on construction-related expenses.

The government’s decision to amend the law retrospectively may provide short-term clarity, but it risks undermining the broader goal of simplifying GST and making it more business-friendly. Only time will tell whether this amendment will be the final word on the matter, or if further revisions will be needed to address the concerns of businesses and taxpayers.