Supreme Court clarifies GST input tax credit can be claimed on construction for rental services
The Supreme Court of India ruled that if a building’s construction is essential for providing services like leasing or renting, it could fall under the ‘plant’ exception to Section 17(5)(d) of the CGST Act. This section typically prohibits claiming Input Tax Credit (ITC) for construction materials used in the construction of immovable property, except for plant and machinery.
The Court clarified, “If the construction of a building is essential for the activity of supplying services like renting or leasing, as outlined in clauses 2 and 5 of Schedule 2 of the CGST Act, the building may be considered a plant. A functionality test must be applied to determine if the building qualifies as a plant.”
A bench comprising Justices Abhay Oka and Sanjay Karol noted that the functionality test must be applied on a case-by-case basis to determine whether a building qualifies as a plant for tax purposes.
“The Orissa High Court’s ruling in the Safari Retreats case marks a significant development regarding input tax credit for immovable properties. Despite Section 17(5)(d) of the CGST Act restricting credits for construction of immovable properties, the Court allowed input tax credit for inputs used in constructing a mall. This decision emphasises the functional use of these structures across various industries—malls, ports, airports, hotels, and multiplexes—where their absence would hinder business operations,” Gyanendra Tripathi, Partner & Leader (West), Indirect Tax at BDO India, said.
