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The Supreme Court has granted the real estate sector the right to claim input tax credits (ITC) on construction costs for commercial buildings used for rental purposes. The court ruled that if constructing a building is essential for providing services like leasing or renting, it qualifies as "plant and machinery" under Section 17(5)(d) of the CGST Act, making it eligible for ITC. This decision, praised by tax experts, clarifies the GST law on ITC eligibility, reducing financial burdens on developers and encouraging investment in commercial real estate, particularly in sectors like warehousing, hospitality, and real estate.
The Supreme Court has provided substantial relief to the real estate sector by permitting the industry to claim input tax credits (ITC) on construction costs associated with commercial buildings intended for rental purposes. The court ruled that if constructing a building is necessary for offering services like leasing or renting, it qualifies as "plant and machinery" under Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, making it eligible for ITC. This provision had formerly prohibited the claiming of ITC on construction materials employed for immovable properties, except in the context of plant or machinery. Advertisement
Justice Abhay Oka, leading the bench, upheld the constitutional validity of Sections 17(5)(c) and (d). He stressed that any building essential for services such as renting or leasing, as outlined in Schedule 2 of the CGST Act, qualifies as a "plant." The court instructed that authorities must apply a functionality test in each case to determine whether a building qualifies as a plant for tax purposes. The Supreme Court clarified that the classification of structures such as malls, warehouses, and other buildings (excluding hotels and cinemas) as plants under Section 17(5)(d) hinges on specific factual circumstances.
The court highlighted the importance of evaluating both the nature of the business and the building's role within that framework. As a result, the court sent the case back to the High Court to determine if shopping malls qualify as "plants" under this provision. Businesses can use ITC to offset the GST paid on goods and services used in their operations against the GST owed on sales, provided they meet specific conditions. The court ruled that businesses must receive ITC if leased or rented buildings function like a "plant" in a factory by generating economic value.
This ruling follows the 2019 Odisha High Court decision, which permitted Safari Retreats to claim ITC on goods and services used in constructing rental properties, except for plant and machinery. The revenue department later challenged this ruling in the Supreme Court. Tax experts praised the ruling, stating that it clarifies the interpretation of ITC eligibility under GST law. ITC eligibility now depends on factors such as the building's functionality, purpose, the business's nature, and the role the structure plays in service provision.
Experts noted that while the ruling applies retrospectively from the inception of GST, the deadline for claiming ITC for the period up to 2022-23 has already passed. However, they pointed out that industry participants can still claim ITC for the fiscal year 2023-24 until 30 November.
The Supreme Court's ruling significantly eases the financial burden on the real estate sector by allowing ITC claims on construction costs for rental properties, fostering investment and potentially reducing rental costs. This landmark decision clarifies ITC eligibility under GST law, promoting compliance and benefiting various industries such as real estate, warehousing, and hospitality.
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