Ficci, Assocham demand input tax credit for real estate under CGST

Industry bodies Ficci and Assocham have demanded that real estate developers should be allowed to claim Input Tax Credit (ITC) under the Central Goods and Services Act (CGST) on commercial assets constructed for leasing purposes.

The associations have written letters to the finance ministry and have urged the latter to permit availing of the ITC where the immovable property is constructed for the provision of leasing services.

They have argued that the potential revenue impact would not be high by allowing ITC and instead, this would help maintain the credit chain, besides spurring growth in the real estate sector and the overall economy.

The representations come in the backdrop of a recent Budget proposal relating to a retrospective amendment to the CGST law, which experts feel will override the Supreme Court ruling related to the ITC claim on leased assets.

Market consultants are of the view that this move is likely to adversely impact real estate companies seeking input tax credit on the construction and leasing of commercial assets like office complexes, shopping malls and warehousing parks.

In its representation, Ficci has requested the ministry to issue clarification permitting the availing of ITC to the extent where the immovable property is constructed for the provision of leasing services under Schedule II of the CGST Act.

This clarification would be in line with the Supreme Court decision in the case of Safari Retreats Private Ltd and would be equitable to the leasing industry suitably acknowledging the continuity in the credit chain for construction undertaken for the purpose of leasing, the industry body said.

In this year's Budget, the finance ministry said that "clause (d) of sub-section (5) of section 17 is being amended to substitute the words 'plant or machinery' with words 'plant and machinery'."  Section 17 (5) provides an exhaustive list of where input tax credit will not be applicable. The amendment will be effective retrospectively from July 1, 2017, notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority, it added.

The Budget proposal came in the backdrop of a Supreme Court order in the case of Safari Retreats Pvt Ltd. The apex court held that if the construction of a building is essential for supplying services like leasing/renting out, it could fall under the 'plant' category on which ITC can be claimed under Section 17(5)(d) CGST).

Earlier, experts had said that this proposed legislative change effectively overrides the Supreme Court's ruling in the Safari Retreats case, where the Court had permitted businesses to claim ITC on properties classified as 'plant' under the functionality test.

In the representation, Ficci said that the potential revenue impact can also be determined based on the existing commercial space that is being built up in India on an annual basis.

The commercial leasing sector on an average adds about 55-60 million square feet of built-up area on an annual basis.

Given the prevalent construction cost in India, assuming a modest amount of Rs 2,500 to 2,800 per square feet as construction cost before taxes, the GST revenue arising on account of construction would be Rs 2,500-3,000 crore on an annual basis on a go-forward basis, the association estimated.

For the past periods, not all developers have opted to avail the credit. Many developers have opted to capitalise the GST component with the cost of the building and have claimed depreciation benefits.

Hence, by allowing ITC for past periods, the potential revenue impact for the past period would also be less than Rs 900-1,100 crore per annum, the association said.

Ficci has recommended that a specific clarification be issued to clarify that where goods and services (including works contract services) are used for construction of premise by a person for the purpose of leasing, the same would not qualify as construction on their own account.

Vivek Jalan, Partner, Tax Connect Advisory, said "it is the demand of trade and industry that the ITC of input and services used for construction of warehouses and building for the purpose of leasing out at least should be allowed and for 'own use' may be blocked.

"It needs to be seen whether the government would concede to the same as a lot of exchequer's revenue might be at stake," he added.

Jalan said the Union Budget has proposed to negate the judgement of the Supreme Court's Order in Safari Retreats case by amending the law with retrospective effect.

"The same would see the light of day on being enacted and notified going forward. Please note that for the proposed amendment to be implemented would take 4-5 months as even after the enactment of The Finance Act 2025, it would have to be ratified by more than 50 per cent of the state legislatures," he said.