ITC on Construction of Immovable Property: Section 17(5) of GST Act Explained

The Goods and Services Tax (GST) regime in India was introduced to unify indirect taxation and facilitate seamless credit flow across the supply chain. However, Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017 carves out specific exceptions to Input Tax Credit (ITC), particularly in relation to the construction of immovable property.

This provision has emerged as a critical point of interpretation and litigation, especially for businesses engaged in real estate development, infrastructure, and commercial leasing.

Input Tax Credit (ITC)

Input Tax Credit (ITC) is a fundamental feature of the GST system that allows businesses to reduce their tax liability. It ensures that tax is paid only on the value addition at each stage of the supply chain, avoiding the cascading effect of taxes.

ITC allows a registered taxpayer to deduct the tax paid on inputs (goods or services) from the tax payable on outputs. For example, if a company pays GST on cement and steel used in construction, it can offset this against GST collected on rental income or the sale of property, provided ITC is allowed.

In simple terms, if you buy inputs for your business and pay GST on them, you can deduct that amount from the GST you collect on your sales.

The provisions of section 17(5)(c) and section 17(5)(d) relate to blocking of ITC in relation to goods or services or both used for the construction of an immovable property. The provisions of both the said sub-sections are to be read along with the explanations given after section 17(5)(d) and section 17(6) of the CGST Act.Blocking of ITC is applicable under section 17(5)(c) and 17(5)(d) only when

The following conditions are satisfied: -

(i) The property being constructed should have been capitalized in the

books of account;

(ii) The property being constructed should be an immovable property;

(iii) It should have been used for the construction of property other than plant

and machinery.

Section 16 of the CGST Act lays down the eligibility for ITC. However, Section 17(5) overrides this by listing specific scenarios where ITC is blocked, even if the goods or services are used in the course or furtherance of business.

1. Example: A company purchases machinery worth ₹10 lakh and pays ₹1.8 lakh as GST. It uses this machinery to manufacture goods and collects ₹3 lakh GST on sales. The company can claim ₹1.8 lakh as ITC and pay only ₹1.2 lakh in net GST.
2. Example: A restaurant buys kitchen equipment and furniture, paying ₹50,000 GST. It collects ₹1 lakh GST from customers. It can claim ₹50,000 as ITC and remit only ₹50,000 to the government.

Section 17(5): The Restrictive Clauses

Section 17(5) overrides general ITC eligibility and lists specific scenarios where ITC is disallowed.

The relevant clauses under Section 17(5) are:

• Clause (c): ITC is not available on works contract services when supplied for construction of immovable property (other than plant and machinery), except where it is an input service for further supply of works contract services.
• Clause (d): ITC is not available on goods or services received by a taxable person for the construction of immovable property (other than plant and machinery) on their own account, even if used in the course or furtherance of business.

These clauses are designed to prevent misuse of ITC in sectors where the end product is an immovable asset, which traditionally falls outside the purview of GST.

For example -1. A company constructs its own corporate office building and pays GST on cement, steel, architectural services, and interior design. The ITC is not allowed under Section 17(5)(d) because the building is immovable property constructed on the company’s own account, even if used for business operations.

2.A hospitality firm builds a hotel and pays GST on construction materials, contractor services, and furnishings. The hotel will be used to provide taxable services (room rentals, food, etc.), but ITC is not allowed under Section 17(5)(d) because the hotel is immovable property constructed on own account even though it generates taxable income.

Immovable Property

The CGST Act does not define “immovable property,” but courts and statutes like the General Clauses Act interpret it to include:

1. Land and buildings
2. Structures permanently attached to the earth
3. Fixtures that cannot be moved without damage

This broad definition has led to disputes over whether certain installations—like lifts, air conditioning systems, or electrical fittings are movable or immovable.

Exception: Plant and Machinery

Section 17(5) provides a crucial exception for plant and machinery, defined as:“Apparatus, equipment, and machinery fixed to earth by foundation or structural support used for making outward supply of goods or services.”

So it excludes: buildings and civil structures, telecommunication towers, and Pipelines laid outside factory premises.

Judicial Interpretation: Safari Retreats Case

In Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST, the company constructed a shopping mall and leased out units. It argued that since rental income was taxable, ITC on construction should be allowed.

The Supreme Court upheld the restriction under Section 17(5)(d), stating:

• The provision is constitutionally valid
• ITC is blocked even if the property is used for taxable outward supply
• The legislature has the right to define the scope of ITC

This judgment reinforced the principle that ITC is a statutory benefit, not a vested right.

Section 17(5) of the CGST Act reflects a deliberate policy choice to restrict ITC on passive assets like buildings and civil structures, even if they generate taxable income. Understanding the nuances of Section 17(5) is essential for businesses in construction, leasing, and infrastructure sectors to avoid costly litigation and optimize tax efficiency under GST.

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