India’s Supreme Court Enables ITC Claims on Commercial Building Construction

India’s apex law institution, the Supreme Court, has allowed companies in the country to claim input tax credits (ITC) on construction costs for commercial buildings intended for rental purposes.

This judgment is a significant development for businesses in the real estate and leasing sectors, offering much-needed clarity on ITC eligibility and opening up opportunities for substantial tax relief.

On October 1, 2024, the Supreme Court of India stated that if constructing a building is necessary 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. This provision previously restricted input tax credit or ITC claims on materials used in immovable property construction, except for plant and machinery.

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The latest ruling on the matter by the top court addressed three key issues, including whether the term “plant and machinery” in Section 17(5) is distinct from “plant or machinery” in Section 17(5)(d), and the constitutional validity of the provisions in Sections 17(5)(c) and 17(5)(d). 

A bench led by Justice Abhay Oka upheld the constitutional validity of Sections 17(5)(c) and (d) and ruled that buildings essential for offering services such as renting, as mentioned in clauses 2 and 5 of Schedule 2 of the CGST Act, could be categorized as “plant.” A functionality test will need to be applied on a case-by-case basis to determine whether the building qualifies as a plant for tax purposes.

However, the Supreme court noted that deciding whether structures like malls, warehouses, or other commercial buildings (excluding hotels or cinemas) qualify as “plant” under Section 17(5)(d) would depend on the specifics of each case. 

India’s tax experts welcome the clarity on ITC for immovable property

ITC, in context of property or immovable property, refers to the Goods and Services Tax (GST) paid on goods and services used for business purposes, which can later be deducted from the GST owed on sales. The Supreme Court ruled that if a rented building functions similarly to a “plant” in a factory by producing economic value, ITC should not be denied.

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Tax experts in India have welcomed the Supreme Court’s judgment, saying it provides much-needed clarity on the applicability of ITC for immovable property. While some have emphasized upon the importance of assessing the functionality and purpose of buildings to determine ITC eligibility, other tax experts have highlighted the flexibility introduced in categorizing malls and similar properties as “plant and machinery.” This ruling could significantly impact industries such as real estate, airports, ports, and warehousing, where ITC claims were previously denied.

The court’s acceptance of the taxpayer’s argument under Section 17(5)(d) is expected to ease the financial burden on developers, potentially encouraging more investment in commercial real estate. The ruling could also lead to a reduction in rental costs as ITC becomes less of a financial strain on the industry.

Tax experts noted that the ruling applies retrospectively to the inception of GST. However, the deadline for claiming ITC for the period up to FY 2022-23 has passed, though claims for FY 2023-24 can still be made until November 30 of the ongoing year. It’s crucial for real estate companies to carefully review their ITC eligibility, especially if they derive income from both works contracts and rental services.

What is Section 17 of the CGST Act, 2017? 

Under Chapter 5, namely Input Tax Credit, of the CGST Act, 2017, Section 17 mainly focuses on when ITC can and cannot be claimed by businesses under the Goods and Services Tax (GST) law. Blocked credits and ineligible ITC are pivotal concepts under GST in India. For businesses, claiming ITC can significantly reduce tax liabilities.

Sub-section 5 of Section 17 specifies cases where ITC is blocked. Clauses mentioned under Section 17(5) are as follows:

1. (a) motor vehicles for transportation of persons
   (aa) vessels and aircraft
   (ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa)
2. food, catering, vehicle renting, club, and travel
3. works contract services when supplied for construction of an immovable property (other than plant and machinery)
4. goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account
5. goods or services or both on which tax has been paid under section 10 (composition scheme)
6. goods or services or both received by a non-resident taxable person except on goods imported by him
7. goods or services or both used for personal consumption
8. goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples
9. any tax paid in accordance with the provisions of sections 74, 129 and 130.

What is input tax credit?

Input tax credit or ITC in India refers to the mechanism under the GST system that allows businesses to reduce the tax they pay on inputs from the tax they collect on their sales. ITC lets businesses offset the tax paid on purchases (inputs) against the tax payable on their sales (output).

1. Eligibility: A registered taxpayer can claim ITC if they have purchased goods or services used in the course of business. ITC can be claimed only on goods and services that are used for taxable supplies (not exempt or for personal use).
2. Conditions for claiming ITC: The taxpayer must have valid invoices for the purchases. The supplier must have paid the GST to the central government. ITC can only be claimed after the goods/services have been received and the tax has been reflected in the tax credit ledger of the recipient.
3. Blocked credits: Certain goods and services, like personal purchases, motor vehicles, and construction services, are restricted from ITC claims under Section 17(5) of the CGST Act.

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