Safari Retreats case on GST Council table, SC verdict may be reversed

The SC judgment on the expression "plant or machinery" appears to defeat the intention of the GST Council, the law committee observed

In what could be a blow to real estate companies, the Goods and Services Tax (GST) Council in its meeting on Saturday is likely to take up the proposal to retrospectively amend the Central Goods and Services Tax (CGST) Act, thereby reversing the recent Supreme Court judgment in the Safari Retreats case. The top court had, in October, allowed input tax credit (ITC) claims on construction costs for rental properties.

 

The SC judgment, according to experts, could have an adverse impact on the exchequer, to the tune of at least Rs 10,000 crore, as the ruling was effective retroactively from July 1, 2017. The SC concluded that the terms “plant and machinery” and “plant or machinery” used in the CGST Act are distinct and set forth guiding principles for defining “plant.” The court ruled that input tax credit eligibility must be assessed on a case-by-case basis, considering factors such as the taxpayer’s business nature and the operational role of the building. 

 

The case relates to eligibility of input tax credit for commercial properties meant for renting or leasing. 

 

The petitioner, Safari Retreats, which is into constructing shopping malls and renting them out, had collected income tax credit on goods and services used during the construction of malls but authorities denied the claim citing restrictions under Section 17(5)(d) of the CGST Act, 2017. Subsequently, the SC allowed input tax credit claims in the case.

 

A government official privy to the matter said the Law Committee of the GST Council considered the SC judgment and has recommended necessary amendments of the Section 17(5)(d) of CGST Act retrospectively from July 1, 2017 to clear ambiguity and also to prevent future litigations on the matter. The committee observed that the SC judgment regarding the expression “plant or machinery” appears to defeat the intention of the GST Council as well as the legislature.

 

“The Law Committee observed that determining whether an immovable property falls under the expression plant under the CGST Act or not based on the functionality test as per facts of each case may create a lot of confusion and chaos and may result in multitude of litigations,’’ the official said. This may not be desirable from the perspective of smooth tax administration and ease of doing business, he explained. ‘’It may also re-open the past cases related to availing ITC benefits in respect of goods or services used for construction of immovable property, further adding to confusion and litigation,” the official said.

 

Pratik Jain, tax partner at PwC, said from a policy standpoint, input tax credit on construction-related expenses should ideally be allowed, especially where the asset created is used directly in providing services subject to GST. “As we look at simplifying GST laws, the GST Council should revisit the entire input credit provisions and make it more liberal," Jain noted.

 

Abhishek A Rastogi, founder Rastogi Chambers, who argued before the Supreme Court for several petitioners, said any retroactive amendment will make undue hardship for the taxpayers and will certainly lead to tax cascading, which is against the principles of GST. “It is hoped that any such amendments are pragmatic and do not defeat the decision of the Supreme Court”, he added. 

The case file 

> In 2019, Safari Retreats filed a writ petition in the Odisha High Court, seeking input tax credit (ITC) eligibility for works contract services and other goods used in constructing immovable property, excluding plant and machinery

> The Odisha High Court ruled in favour of ITC availability

> The government filed a special leave petition in the Supreme Court, arguing that GST rules prohibit ITC on immovable property

> In October 2024, the apex court allowed ITC benefits for construction costs of commercial buildings intended for leasing