A recent retrospective amendment, effective from July 1, 2017, has barred commercial real estate companies from claiming Input Tax Credit (ITC) on construction costs for their rental buildings. This move is expected to have significant financial implications for the commercial leasing and hospitality sectors.
ITC allows businesses to offset the GST paid on raw materials and services against their tax liability, reducing their overall tax burden. However, the new amendment restricts ITC eligibility for goods and services used to construct immovable property for "one's account," including buildings, warehouses, and civil structures.
Industry experts highlight the significant impact of this change. Rohit Jain, deputy managing partner at Economic Laws Practice, emphasized that the amendment could deter investments in commercial real estate, as stability and predictability are critical for industry growth. The amendment effectively overturned a Supreme Court judgment in the Safari Retreats case, which had ruled that a building could be considered a plant and, therefore, eligible for ITC.
A crucial modification in the GST Act has been replacing "plant or machinery" with "plant and machinery," aligning with the GST Council's recommendation. Tax experts argue that this alteration changes the interpretation of ITC eligibility, potentially affecting numerous commercial projects across India.
Sudipta Bhattacharjee, indirect tax partner at Khaitan & Co, noted that while this amendment dampens the commercial real estate sector’s outlook, legal arguments based on the Supreme Court’s interpretation of “construction by the taxpayer on his own account” remain valid. Businesses in the sector may continue to rely on this interpretation to claim ITC.
Legal experts also suggest that there is scope for businesses to challenge the amendment, citing past Supreme Court rulings that protect vested rights from retrospective revocation. As the industry awaits further developments, the commercial real estate sector is expected to closely monitor potential legal challenges and their impact on future investments.