The general understanding has been that ITC on goods and services used by Real Estate Developers for the construction of immovable property is only allowed if the property is intended for sale or transfer
The Supreme Court has pronounced the landmark Safari Retreats judgment today (October 3, 2024) on denial of Goods and Services Tax Input Tax Credit (GST ITC) on Construction of Immovable Property.
Supreme Court rejects Constitutional Validity of Blocking of GST Input Tax Credit in Safari Retreats Case, allows Revenue Appeal The Constitutional (101st Amendment) Act of 2016, as explained in its Statement of Objectives, Goods and Services Tax (GST) aimed to eliminate the cascading effect of taxes by ensuring a seamless flow of tax credit across the supply chain, effectively preventing “taxation on tax”. In essence, GST is charged only on the value addition at each stage of the supply chain, from production or importation through to the retail level.
This system includes the facility of Input Tax Credit (ITC), allowing taxes paid on inputs (goods/services) to be offset against the GST payable on outputs. Any restrictions on the availability of ITC would undermine the core objective of GST by causing a cascading effect. Furthermore, no tax should stick to goods or services meant for export to keep Indian exports competitive. Buildings, factories, and shops are as integral to business operations as machinery, raw materials, and services. In the Dai Ichi Karkaria case (1999), the Supreme Court held that Cenvat credit, once deemed eligible, could only be denied if it was claimed illegally or irregularly. Similarly, in the Jawahar Mills case (2001), the court observed that principles from Income Tax law (a more developed area) could serve as a precedent for Central Excise. Items like a theatre (Anand Theatre), sanitary fittings (Taj Mahal Hotel), and buildings for power generation (KPC) have been classified as “plant” in Income Tax law.
Typically, ITC is allowed for taxes paid on business-related procurements, but certain credits, known as “blocked credits,” are explicitly restricted. One such restriction pertains to ITC on goods or services used for the construction of immovable property, as outlined in Section 17(5)(d) of the CGST Act, 2017, which states:
“(d) Goods or services or both received by a taxable person for the construction of an immovable property (other than plant or machinery) on his own account, including when such goods or services are used in the course or furtherance of business.”
The general understanding has been that ITC on goods and services used for the construction of immovable property is only allowed if the property is intended for sale or transfer. If the property is retained and rented out, ITC is not available, even though GST is applicable on the lease rentals. This provision was recently challenged in the Orissa High Court in the case Safari Retreats Pvt Ltd v. Chief Commissioner of CGST, where the court delivered a notable verdict.
In the Safari Retreats Case, The petitioner, primarily engaged in constructing shopping malls for leasing, purchased various materials and services (e.g., cement, steel, architectural services) and paid GST on these procurements. The petitioner sought to claim ITC on these inputs and use it to pay the GST on the lease rentals. However, the revenue authorities directed the petitioner to pay GST on the lease rentals without availing ITC, citing the restriction under Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 and warning of penalties for claiming ITC. The petitioner contended that Section 17(5)(d) of the CGST Act, 2017, should be interpreted in a manner that benefits the taxpayer, particularly in continuous transactions like leasing malls, where GST is paid on both inputs and rental income. The denial of ITC contradicts the objective of GST, which seeks to avoid the cascading effect of taxes, it was argued.
While ITC denial may be valid in cases where immovable property is sold post-completion certificate (breaking the tax chain), this is not applicable when the property is constructed for leasing. Denying ITC in such cases is arbitrary and discriminatory, violating Article 14 of the Constitution. Such denial results in double taxation—on both the inputs used in construction and the rentals generated, violating the fundamental right to carry on business under Article 19(1)(g) of the Constitution of India. The revenue argued that leasing a shopping mall does not qualify as construction “on one’s own account,” thus invoking the restriction under Section 17(5)(d). They further maintained that ITC is not a vested right and can be restricted under legislative provisions, such as Section 16(1) of the CGST Act, which grants the government authority to impose conditions on ITC claims. The Odisha High Court ruled in favour of the petitioner, stating that the Central Goods and Services Tax Act aims to create a uniform tax system, and a narrow interpretation of ITC restrictions would defeat this purpose. Section 17(5)(d) should be read down to allow ITC when GST is paid on rental income, as denying it would lead to an unjust burden on taxpayers.
It was observed by the High Court that, “While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST, but still he has to pay huge amount of GST, to which he is not liable.”
Therefore, taxpayers paying GST on lease rentals were held entitled to claim ITC on inputs used in the construction of such properties by the High Court of Orissa, which is now in challenge before the Supreme Court with the judgement pending for pronouncement tomorrow by the Apex Court Bench of Justices Abhay S Oka and Sanjay Karol.
