SC allows real estate to claim input tax credits on construction costs
Real Estate

SC allows real estate to claim input tax credits on construction costs

The Supreme Court has provided significant relief to the real estate sector by allowing input tax credits (ITC) on construction costs for commercial buildings intended for renting purposes. The ruling states that if a building’s construction is crucial for providing services like leasing or renting, it may qualify as plant and machinery under Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, making it eligible for ITC. This section previously prohibited claiming ITC for construction materials used for immovable property, excluding plant or machinery.

While upholding the constitutional validity of Sections 17(5)(c) and (d), the bench, led by Justice Abhay Oka, emphasised that a functionality test must be applied on a case-by-case basis to determine if a building qualifies as a plant. However, it noted that whether structures like malls, warehouses, or other commercial buildings (excluding hotels and cinema theaters) can be classified as plant depends on the specific business activities and the building’s role in generating economic value.

The court partially remanded the case to the High Court for further examination to determine if a shopping mall can be classified as a “plant” under the CGST Act. In its ruling, the apex court stated that buildings provided on rent, if functioning similarly to a plant in a factory by generating economic value, should be eligible for ITC.

The case originated from a 2019 Odisha High Court ruling that allowed Safari Retreats to claim ITC on works contracts and other goods used in constructing immovable properties for renting out. The revenue authorities had challenged the decision, leading to the present Supreme Court verdict.

Tax experts welcomed the judgment, stating it brings clarity to ITC eligibility on immovable properties. Abhishek A. Rastogi, founder of Rastogi Chambers, said that eligibility would now depend on factors like the building's functionality, its role in business, and its necessity in providing services. Senior counsel Tarun Gulati termed it a watershed moment for GST law, noting the positive impact on industries like airports, ports, warehousing, hotels, and real estate, where ITC was denied due to the immovable nature of structures.

Saurabh Agarwal, Tax Partner, EY, noted that the SC’s recognition of malls as “plant and machinery” in specific cases introduces a more flexible interpretation, opening up opportunities for businesses in real estate and commercial leasing to explore ITC eligibility on construction inputs. Agarwal also suggested that the GST Council should issue clarifications allowing real estate firms to claim ITC on rental income.

Although the ruling applies retrospectively from GST’s inception, the time limit for claiming ITC for periods up to 2022-23 has already passed. However, the industry can still claim ITC for FY 2023-24 until November 30, 2024. The judgment is expected to reduce rental costs, as ITC would no longer be a financial burden for developers. (ET)

The Supreme Court has provided significant relief to the real estate sector by allowing input tax credits (ITC) on construction costs for commercial buildings intended for renting purposes. The ruling states that if a building’s construction is crucial for providing services like leasing or renting, it may qualify as plant and machinery under Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, making it eligible for ITC. This section previously prohibited claiming ITC for construction materials used for immovable property, excluding plant or machinery. While upholding the constitutional validity of Sections 17(5)(c) and (d), the bench, led by Justice Abhay Oka, emphasised that a functionality test must be applied on a case-by-case basis to determine if a building qualifies as a plant. However, it noted that whether structures like malls, warehouses, or other commercial buildings (excluding hotels and cinema theaters) can be classified as plant depends on the specific business activities and the building’s role in generating economic value. The court partially remanded the case to the High Court for further examination to determine if a shopping mall can be classified as a “plant” under the CGST Act. In its ruling, the apex court stated that buildings provided on rent, if functioning similarly to a plant in a factory by generating economic value, should be eligible for ITC. The case originated from a 2019 Odisha High Court ruling that allowed Safari Retreats to claim ITC on works contracts and other goods used in constructing immovable properties for renting out. The revenue authorities had challenged the decision, leading to the present Supreme Court verdict. Tax experts welcomed the judgment, stating it brings clarity to ITC eligibility on immovable properties. Abhishek A. Rastogi, founder of Rastogi Chambers, said that eligibility would now depend on factors like the building's functionality, its role in business, and its necessity in providing services. Senior counsel Tarun Gulati termed it a watershed moment for GST law, noting the positive impact on industries like airports, ports, warehousing, hotels, and real estate, where ITC was denied due to the immovable nature of structures. Saurabh Agarwal, Tax Partner, EY, noted that the SC’s recognition of malls as “plant and machinery” in specific cases introduces a more flexible interpretation, opening up opportunities for businesses in real estate and commercial leasing to explore ITC eligibility on construction inputs. Agarwal also suggested that the GST Council should issue clarifications allowing real estate firms to claim ITC on rental income. Although the ruling applies retrospectively from GST’s inception, the time limit for claiming ITC for periods up to 2022-23 has already passed. However, the industry can still claim ITC for FY 2023-24 until November 30, 2024. The judgment is expected to reduce rental costs, as ITC would no longer be a financial burden for developers. (ET)

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