[BREAKING] GST ITC available on Building Construction if Necessary for “Renting Out”: Supreme Court in Safari Retreats Case [Read Order]

The Supreme Court, on Thursday, October 3, ruled that if the construction of a building is necessary for providing services such as renting or leasing, it may qualify as an exception under the "plant" provision in Section 17(5)(d) of the Central Goods and Services Tax ( CGST ) Act. This section typically disallows Input Tax Credit ( ITC ) on construction materials used for immovable property (except for plant or machinery).

A bench consisting of Justices Abhay Oka and Sanjay Karol emphasized that the functionality test is crucial for determining whether a building qualifies as a plant. The Court also clarified that it is unnecessary to reinterpret Section 17(5)(d) to exclude properties built for rental purposes from its scope.

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The Court explained that if a building is required for conducting activities such as leasing or renting, as covered under clauses 2 and 5 of Schedule 2 of the CGST Act, it could be considered a "plant." The applicability of the "plant" exemption must be determined by applying a functionality test on a case-by-case basis.

The bench also dismissed the challenge to Section 17(5)(d) of the CGST Act, 2017. It remanded the case to the High Court to assess whether, based on the facts, the construction in question qualifies for the plant exemption, thus allowing input tax credit as per Section 17(5)(d).

The detailed judgement is still awaited.

Previously, the Orissa High Court, in a 2019 ruling, held that builders developing properties for rental purposes could not be denied ITC under Section 17(5)(d) of the CGST Act. The provision generally restricts ITC for goods and services used in the construction of immovable property, except for plant and machinery, even when used for business purposes.

The Backstory

The petitioners, M/s. Safari Retreats Pvt. Ltd. and another, built a shopping mall in Bhubaneswar to lease out to tenants. They incurred costs for purchasing construction materials such as cement, steel, and architectural services, paying GST on these inputs. They sought to claim ITC amounting to ₹34.4 crore against their GST liability arising from rental income.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

However, tax authorities had denied the claim, citing Section 17(5)(d) of the CGST and Odisha GST Acts, which prohibits ITC for goods used in the construction of immovable property on one's own account.

The case centered on whether the petitioners were entitled to claim ITC for goods and services used to build a mall that was intended for rental purposes. The Orissa High Court had noted that denying ITC in such cases would lead to double taxation, as GST was paid on both the inputs for construction and the rental income.

Moreover, the court noted that denying ITC would violate Article 14 of the Constitution, as it unfairly treated developers of rental properties differently from those selling properties, creating an imbalance in the business environment. The judgment highlighted that this denial of ITC would make newer properties less competitive compared to older ones, adversely affecting the real estate market.

Read More: [BREAKING] Supreme Court rejects Constitutional Validity of Blocking of GST Input Tax Credit in Safari Retreats Case, allows Revenue Appeal

The High Court also held that Section 17(5)(d) should be interpreted in alignment with the GST law’s purpose of avoiding the cascading effect of taxes. It was held that the section was intended to apply to properties built for sale, not for rental purposes. Applying the provision in cases of rental properties, the court observed, would undermine the principle of tax neutrality.

To Read the full text of the Order CLICK HERE

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