The Supreme Court recently made a landmark ruling that opens up possibilities for businesses engaged in the supply of services through constructed buildings—such as malls, warehouses, or commercial complexes—to claim input tax credit (ITC) under the Goods and Services Tax (GST) Act. This ruling could potentially reshape the tax landscape for sectors such as real estate and infrastructure.
The Central Issue: When Can Buildings Qualify for Input Tax Credit?
Section 17(5)(d) of the GST Act explicitly bars taxpayers from availing ITC on goods and services used in the construction of immovable property. However, the Supreme Court has now clarified that if a building is integral to the supply of services—such as renting or leasing—it may be classified as a “plant” for the purpose of claiming ITC. The court emphasized that each case should be reviewed on its own merits, taking into account the specific business operations and the role the building plays.
Functionality Test: Key to Classification
The court laid down the “functionality test” to determine whether a building qualifies as a plant under the GST Act. This test essentially examines whether the immovable property in question is essential to the business’s supply of services. For instance, a shopping mall constructed for rental purposes or a warehouse used for storage services may pass this test and thus qualify for ITC.
While this ruling provides substantial relief to taxpayers, especially those involved in commercial real estate and infrastructure, the court also upheld the constitutional validity of Section 17(5)(d). The section will continue to restrict ITC claims for purely immovable property not integral to the supply of services.
Implications for Businesses: A Mixed Bag
For businesses that incur high construction costs as part of their service supply—especially those in real estate and infrastructure—the ruling is a potential game changer. Companies involved in renting or leasing their constructed properties now have a legal avenue to claim ITC, significantly reducing their tax burden.
However, this isn’t a blanket approval. Each case must be judged individually, and businesses will need to demonstrate the integral role of the building in their service supply chain. As Sudipta Bhattacharjee, Partner at Khaitan & Co., pointed out, companies should carefully review their tax credit positions in light of this judgment.
Safari Retreats Case: A Turning Point
The Supreme Court’s decision follows the Safari Retreats Pvt. Ltd. case, where the High Court of Odisha in 2019 held that denying ITC on materials and services used for constructing a commercial mall—used for renting out—was arbitrary and contrary to the core purpose of GST. The court had earlier noted that GST was designed to avoid the cascading effect of multiple taxes, and not allowing ITC in this context would lead to increased costs for the end consumer.
Safari Retreats had argued that input tax credits should be allowed for the costs incurred in constructing a mall, as the property was used for renting, which is a taxable supply under GST. The court agreed, ruling that denying such a credit would violate the core principles of GST.
What This Means for the Future
This ruling is a significant step forward in clarifying the ambiguity around the availability of ITC in relation to immovable property under the GST regime. It also opens the door for more legal challenges and a deeper examination of how businesses can claim ITC when construction is integral to their service supply.
Taxpayers who operate in sectors where construction forms a major part of their capital expenditure are advised to consult with tax professionals to understand the specific implications of this ruling. As the court suggested, businesses will need to provide concrete evidence showing the critical role of the constructed property in their service supply chain.
Conclusion: Moving Towards Clarity
The Supreme Court’s decision provides much-needed clarity for taxpayers in industries like commercial real estate and infrastructure. While the ruling doesn’t entirely eliminate the restrictions on ITC for immovable property, it does offer a clear path for companies where the building plays a functional role in their business. This decision is expected to generate more legal discourse, but for now, it provides a welcome relief to those grappling with high input costs tied to construction.
By recognizing that certain buildings can be classified as plants for the purpose of ITC, the court has made a crucial distinction that will impact businesses for years to come.