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The Supreme Court's decision to allow input tax credits (ITC) on construction costs for commercial buildings intended for leasing has significant implications for the Indian real estate sector. This ruling, announced on October 3, 2023, is expected to stimulate investment in commercial real estate and alleviate the financial burden of rents on tenants. The court's judgment addresses a long-standing debate regarding the eligibility of ITC for commercial properties, previously considered immovable property.
The case originated from a writ petition filed by Safari Retreats in the Odisha High Court, seeking ITC on works contract services and other goods and services used in the construction of its property. The Odisha High Court's interpretation of Section 17(5)(a) of the GST Act, which allows ITC on immovable property, led to the central government's appeal in the Supreme Court. The Supreme Court, in its detailed judgment, addressed three key questions related to the interpretation of the term 'plant and machinery' in the context of ITC eligibility. It clarified that the phrase 'plant and machinery' in the explanation to Section 17(5) is different from the phrase 'plant or machinery' in Section 17(5)(d), emphasizing the need for a case-by-case assessment of eligibility based on factors such as the nature of the taxpayer's business, the role of the building in delivering output services, and the functionality test.
The Court's ruling upholds the constitutional validity of Sections 17(5)(c) and (d) but provides a more nuanced approach to determining ITC eligibility. This approach is expected to guide future determinations on the subject, particularly in the context of construction and immovable property where the interpretation of what constitutes a 'plant' or an essential business input has been contentious. The judgment, according to experts, significantly narrows the circumstances under which ITC can be denied, providing greater clarity and fairness for businesses.
While the Supreme Court's decision is a positive development for the real estate sector, there are still some ambiguities that require clarification. For instance, the industry seeks clarity from the government on whether similar ITC relief should be extended to other sectors, including ports, airports, factories, warehousing, and data centers. The ruling, while retrospective, has implications for both developers and tenants, with the potential to lower rental costs and incentivize investment in commercial real estate. The real estate industry is now expected to carefully analyze the implications of this ruling and seek further guidance from the GST Council to ensure smooth implementation of the ITC provisions.
This landmark decision has far-reaching consequences for the Indian real estate sector and other industries. The Supreme Court's judgment injects clarity and certainty into the complex realm of ITC eligibility, addressing a long-standing debate and paving the way for a more robust and equitable tax regime for commercial property development and leasing. The outcome is expected to stimulate investment, foster growth in the sector, and benefit both developers and tenants.
However, the industry must remain vigilant and continue to engage with the government to address any remaining ambiguities and ensure the smooth and consistent implementation of the new ITC provisions. This includes seeking clarity on the application of these provisions to other sectors and providing adequate guidance for businesses to navigate the complexities of ITC eligibility.
Source: Supreme Court allows ITC benefit on commercial property construction & leasing