Supreme Court allows claiming input tax credit on construction expenses

Exception for commercial buildings meant for renting, leasing purposes

In a development that may encourage increased investment in commercial real estate, the Supreme Court on Thursday gave the industry relief by permitting input tax credit (ITC) on construction expenses for buildings meant to be leased.

“If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST (Central Goods and Services Tax) Act, the building could be held to be a plant,” said Justice Abhay S Oka and Justice Sanjay Karol.

This ruling is expected to ease the financial strain of rent on tenants occupying commercial space. Real estate companies stand to gain because buildings can now be categorised as plant and machinery. Additionally, this advantage is not limited to commercial real estate. Various industries will be able to claim ITC on rentals for commercial properties. The ruling suggests ITC will be available retroactively.

“This decision could have ramifications for hotels, infrastructure and logistics including warehousing. While the Supreme Court has upheld the constitutional validity of restrictions relating to input tax credit on construction-related procurement, it has been held that whether building constitutes ‘plant or machinery’ needs to be examined on a case-to-case basis,” said Pratik Jain, partner, PWC India.

“It means where it falls in this category, credit would be allowed. It will be interesting to see if the government considers amending the GST laws after this decision,” added Jain. Saurabh Agarwal, tax partner, EY India, said: “The real estate industry should evaluate the implications of this ruling on ITC eligibility. It would be prudent for the GST Council to issue clarification allowing real estate players to claim ITC on rental income.”

Tax experts pointed out the question was whether this ruling would apply to factory buildings, jetty, storage tanks, etc.

Background of the case

In the case of Safari Retreats, a mall owner approached Orissa HC, stating that when a mall was being built for providing commercial rental services for shop spaces, there should be no restriction on taking input credit/set-off for the GST incurred on construction. The Orissa HC upheld this argument, and the GST authorities appealed to the SC. Several such matters reached the SC, leading to the formation of a large batch of matters on this legal point. Some of these newer matters challenged the constitutional validity of restriction on input GST credit.

“The biggest positive is that the court has held there is no blanket restriction on input credit/set-off of the GST cost incurred on the construction of civil structures/immoveable property, especially when the said structure itself is integral to providing the output services in question,” said Sudipta Bhattacharjee, partner at Khaitan & Co.

Outcomes of the judgment
 

- Ruling is anticipated to ease the financial strain of rent on tenants occupying commercial spaces

- The advantage is not limited to commercial real estate; various industries will also be able to claim ITC on rentals for commercial properties

- Tax experts pointed out  the question was whether this ruling would also apply to factory buildings, jetties, storage tanks, etc