Supreme Court Upholds Input Tax Credit for Leased Properties: Implications for GST Taxpayers
The Supreme Court of India’s recent dismissal of the government’s review petition in the Safari Retreats case has reaffirmed the eligibility of input tax credit (ITC) under the Goods and Services Tax (GST) for immovable properties used in business, particularly for leasing purposes. This landmark decision provides significant relief to industries such as real estate and hospitality, which have long grappled with the complexities surrounding ITC claims on construction costs.
Facts and Issues of the Case
Safari Retreats Private Limited, a commercial real estate developer, constructed a shopping mall intended for leasing to various tenants. The company sought to claim ITC on the GST paid for goods and services used in constructing the mall. However, the tax authorities denied this claim, citing Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017, which restricts ITC on goods or services used for the construction of immovable property on one’s own account, even if used in the course or furtherance of business
Safari Retreats challenged this denial, arguing that the constructed property was not for its own use but was intended for leasing, which constitutes a taxable supply under GST. The company contended that denying ITC in such cases leads to a cascading effect of taxes, contrary to the fundamental objective of the GST regime.
Observations by the Court and Tribunal
In its October 2024 judgment, the Supreme Court held that if the construction of a building is essential for supplying services such as renting or leasing, the building could be considered as “plant” under GST provisions, making it eligible for ITC. The Court emphasized the “functionality test,” which assesses whether the constructed property is integral to the business operations of supplying taxable services
The Court noted that the term “plant or machinery” in Section 17(5)(d) should not be narrowly interpreted. It clarified that buildings used for providing taxable services could fall within the ambit of “plant,” thereby qualifying for ITC. However, the Court upheld the constitutional validity of the restrictions under Section 17(5)(d), stating that they serve a legitimate purpose within the GST framework.
Subsequently, the government filed a review petition seeking to overturn this decision. On May 20, 2025, the Supreme Court dismissed the review petition, stating that there was “no error apparent on the record” in its earlier judgment. This dismissal reaffirmed the Court’s stance on the eligibility of ITC for properties constructed for leasing purposes.
Applicable Law
The crux of the legal debate centers around Section 17(5)(d) of the CGST Act, 2017, which restricts ITC on goods or services used for the construction of immovable property on one’s own account. The government’s position was that this provision bars ITC claims for construction costs, regardless of the property’s intended use.
However, the Supreme Court’s interpretation introduced the “functionality test,” allowing ITC if the constructed property is used for providing taxable services, such as leasing. This interpretation aligns with the GST’s objective of eliminating the cascading effect of taxes.
In response to the Court’s decision, the government introduced a retrospective amendment to Section 17(5)(d) through the Finance Act, 2025, replacing the phrase “plant or machinery” with “plant and machinery,” effective from July 1, 2017. This amendment aimed to restrict ITC claims on construction costs for leased properties, effectively nullifying the Supreme Court’s interpretation.
Conclusion and Implications for Taxpayers
The Supreme Court’s dismissal of the review petition in the Safari Retreats case provides clarity and relief to businesses involved in constructing properties for leasing. By affirming the eligibility of ITC in such scenarios, the Court has reinforced the principle that GST should not lead to tax cascading.
However, the retrospective amendment introduced by the government poses new challenges. Tax experts express concerns that this legislative change undermines judicial authority and introduces uncertainty for taxpayers. Businesses must now navigate the complexities arising from this amendment and consider its implications on their ITC claims.
In light of these developments, taxpayers engaged in constructing properties for leasing should carefully assess their ITC positions and monitor ongoing legal interpretations of the retrospective amendment. Seeking professional advice and maintaining thorough documentation will be crucial in substantiating ITC claims and ensuring compliance with the evolving GST landscape.
Note: This article is for informational purposes only and does not constitute legal advice. Taxpayers should consult with qualified professionals for guidance specific to their circumstances.
