GST-ITC on Construction of Buildings for Renting: Apex Court Judgement in Safari Retreats Case

Summary

The Honorable Apex Court's judgment on Input Tax Credit (ITC) for the construction of immovable property under GST clarifies key points. It rules that ITC is generally blocked for goods and services used in construction, except for properties used for renting or leasing (such as malls and warehouses), provided they pass the functionality test. The court also affirmed the constitutionality of Section 17(5) of GST, stating that the disallowance does not violate constitutional provisions. This judgment is crucial for businesses involved in real estate and construction, offering clarity on when ITC can be claimed.

Takeaways

• 😀 The Supreme Court's judgment in the Safari Retreats case clarifies whether input tax credit (ITC) can be claimed for goods and services used in the construction of immovable property under GST.
• 😀 According to Section 17(5)(d) of the GST Act, ITC for goods or services used in the construction of immovable property is **not allowed**, except under two specific conditions.
• 😀 The first exception to ITC blockage applies when the goods or services are used for the construction of immovable property other than **plant and machinery**.
• 😀 The second exception applies when the immovable property is **not used for personal purposes** but rather for renting, leasing, or letting out.
• 😀 The Court clarified the definition of **plant and machinery** for the purpose of blocking ITC and emphasized that it is not the same as the definition provided in Section 17 of the GST Act.
• 😀 In case of properties like malls or warehouses, a **functionality test** determines if the building can be classified as **plant** and qualify for ITC. If the building has specific technical specifications meant for renting or leasing, it can be considered plant.
• 😀 For buildings used for renting or leasing, ITC can be claimed if the **functionality test** is satisfied, even if the building is classified as immovable property.
• 😀 A building that is **used for personal purposes** or for conducting business does **not** qualify for ITC, as it is considered used for **own account**.
• 😀 The Court ruled that the blocking of ITC for works contracts related to construction of immovable property is **not unconstitutional (ultra vires)**, citing previous judgments such as VKC Footsteps.
• 😀 Businesses involved in the construction of **malls**, **warehouses**, or similar properties for **renting or leasing** are eligible for ITC, provided they pass the **functionality test** outlined in the judgment.

Q & A

What was the key issue addressed in the judgment delivered by the Honorable Apex Court in the case of Safari Retreats?

The key issue was whether goods or services used for the construction of immovable property are eligible for input tax credit (ITC) under GST.

What does Section 17(5)(d) of the GST Act say about input tax credit for goods or services used in the construction of immovable property?

Section 17(5)(d) generally disallows input tax credit for goods or services used in the construction of immovable property, with two exceptions.

What are the two exceptions where input tax credit can be claimed for goods or services used in construction of immovable property?

The two exceptions are: 1) Goods or services used for the construction of immovable property other than plant or machinery. 2) Goods or services used for immovable property that is not for 'own use'.

How does the court define 'plant or machinery' in the context of the GST Act?

The court distinguished 'plant or machinery' from immovable property, clarifying that buildings constructed for specific commercial purposes, such as malls or warehouses, may qualify as plant if they meet a 'functionality test.'

What is the 'functionality test' mentioned in the judgment?

The functionality test assesses whether the building has been constructed with technical specifications that enable it to serve commercial purposes like leasing or renting out, such as malls or warehouses.

Can a building used for renting or leasing be considered 'for own use' under GST?

No, a building used for renting, leasing, or letting out is not considered 'for own use' and thus can qualify for input tax credit.

What did the court say about buildings used for personal purposes?

Buildings used for personal purposes, or for business/profession but not for renting or leasing out, cannot qualify for input tax credit, as they are considered 'for own use'.

Was Section 17(5)(d) of the GST Act challenged on constitutional grounds?

Yes, the court addressed whether Section 17(5)(d) is ultravires the Constitution, and ruled that it is not, as it applies consistently to immovable property as a distinct class.

What does the court's ruling imply for works contracts and construction of immovable properties like malls or warehouses?

The court's ruling implies that input tax credit eligibility for works contracts or the construction of immovable properties must be assessed on a case-by-case basis, using the functionality test to determine if ITC can be claimed.

What does the court's judgment mean for businesses involved in constructing commercial properties?

Businesses involved in constructing commercial properties, such as malls or warehouses, will need to assess whether their construction meets the functionality test to determine if they can claim input tax credit for the goods and services used in construction.