Supreme Court Rules GST Input Tax Credit On Construction Costs Can Be Claimed If Necessary For Renting Out Services

Supreme Court Rules GST Input Tax Credit On Construction Costs Can Be Claimed If Necessary For Renting Out Services

The Supreme Court has delivered a significant judgment regarding the interpretation of Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, which typically restricts Input Tax Credit (ITC) for goods and services used in the construction of immovable property. The Court held that if a building's construction is essential for supplying services, such as renting or leasing, it could qualify as plant and thereby fall under an exception to the restriction outlined in Section 17(5)(d). This decision means that the functionality of the building must be examined to determine if it serves as a vital part of a business’s operations, allowing for ITC claims.

The ruling was made by a bench comprising Justices Abhay Oka and Sanjay Karol, who emphasized that the functionality test would be critical in assessing whether a building qualifies as a plant. This test involves determining if the construction is necessary for carrying out activities like renting or leasing, which are addressed under clauses 2 and 5 of Schedule 2 of the CGST Act. If the building plays such a central role in the business’s service provision, it could be considered a plant and, thus, exempt from the restrictions imposed by Section 17(5)(d).

In its judgment, the Supreme Court also clarified that there was no need to modify or limit the application of Section 17(5)(d) to exclude buildings constructed for rental purposes. Instead, the Court remitted the case back to the High Court to make factual determinations about whether the specific case in question meets the criteria for the plant exemption under the CGST Act.

The ruling follows a key decision by the Orissa High Court in 2019, where the court addressed a similar issue. In that case, M/s. Safari Retreats Pvt. Ltd. had constructed a shopping mall in Bhubaneswar with the intention of letting it out to tenants and sought to claim ITC for the GST paid on the materials and services used in the mall's construction. The tax authorities, however, denied the ITC claim, citing Section 17(5)(d), which limits such credits for immovable property construction. The Orissa High Court sided with the petitioners, ruling that denying ITC would lead to double taxation since GST had been paid on both the construction materials and the rental income generated from the property. The court reasoned that the purpose of the GST regime was to eliminate the cascading effect of taxes and that interpreting Section 17(5)(d) to apply to properties constructed for rental purposes would contradict the law's intention.

The Orissa High Court concluded that the restriction on ITC in Section 17(5)(d) was intended for cases where the property was constructed for sale, not for rent. The denial of ITC, the court argued, would create unfair competition between newly constructed rental properties and older buildings, disadvantaging developers who faced a double tax burden. The court ultimately read down Section 17(5)(d) and ruled that it did not apply to properties built for letting out, allowing the petitioners to claim ITC on the GST paid for the mall’s construction.

The Supreme Court’s recent ruling leaves the door open for similar claims, but the functionality test must be applied on a case-by-case basis to determine whether the building in question qualifies as a plant under the CGST Act. The Court’s decision to reject the broader challenge to the constitutional validity of Section 17(5)(d) ensures that the statute remains intact, but with a clarified application in cases involving the leasing or renting of constructed properties.