SC allows claiming ITC on construction expenses

In a development that may encourage increased investment in commercial real estate, the Supreme Court 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.

 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, but the GST authorities appealed to the SC.

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/immov able property, especially when the said structure itself is integral to providing the output services in question, noted by experts.