Amit Jaiswal, CFO of Royal Orchid Hotels, remarked, “Right now, there is no effect on hotels. But if the same ground is taken by hotels, then we are also entitled to GST input if the building is considered to be ‘plant.’ This will give a big boost to hotels, as it is a capital-intensive business.”Nitin Khanna, CFO of Chalet Hotels, added, “While the Supreme Court’s verdict is not explicitly clear on whether input tax credit for the construction of malls and commercial buildings will be granted, the final paragraph suggests that the decision depends on the functionality test for each individual case.”Key highlights of the supreme court’s verdictOn October 3, 2024, the Supreme Court of India delivered a pivotal ruling in the Safari Retreats case, addressing critical aspects of ITC as outlined in Section 17(5) of the CGST Act. According to experts, this judgment has the potential to reshape the landscape for businesses engaged in constructing immovable properties, particularly in the retail and hospitality sectors.Core issue: Understanding ITC restrictionsSection 17(5)(d) of the CGST Act imposes restrictions on claiming ITC for goods and services used in constructing immovable properties. Traditionally, ITC has only been allowed when the property is intended for sale, not for leasing, despite GST being applicable on rental income. Safari Retreats Pvt Ltd, which constructs shopping malls for leasing, challenged this restriction, leading to a pivotal ruling by the Orissa High Court that allowed ITC on construction inputs.Supreme Court’s clarification on ITC and “plant” classificationThe Supreme Court upheld the constitutional validity of clauses (c) and (d) of Section 17(5), confirming that the challenge to these provisions was not established. The Court clarified that the terms “plant or machinery” in Section 17(5)(d) should not be equated with “plant and machinery” as defined elsewhere in the Act. It emphasized that whether a building—such as a mall or warehouse—can be classified as a “plant” depends on its essential role in the business of the registered entity.Functionality test: A crucial criterionCrucially, the Court introduced a functionality test, stating that if a building is constructed for providing services like renting or leasing, it could qualify as “plant” under the ITC provisions. This test must be applied on a case-by-case basis, allowing for a nuanced evaluation of each property’s purpose and contribution to the business.Implications for the real estate and hospitality sectorsAccording to CFOs and tax experts, this ruling signifies a monumental shift in how ITC claims on immovable property construction will be treated, potentially unlocking significant tax benefits for businesses involved in property leasing. The Court’s distinction between “plant” and “machinery” could pave the way for various industries, especially those generating income through rental properties, to reclaim substantial portions of their construction costs.Strategic reassessments for businessesExperts believe the judgment clarifies the applicability of ITC and invites businesses to reassess their construction strategies in light of the new guidance. It encourages developers and property owners to consider the essential functions of their buildings in their overall business operations, fostering a more favorable environment for investment in the real estate sector.Expert analysis: Insights on the rulingParag Mehta, partner at N.A. Shah Associates LLP: In a very welcome judgment, the Honourable Supreme Court held that if the purpose of construction of a building is renting or leasing out, it can be classified as ‘plant’ under GST, and Input Tax Credit on the construction expenses can be claimed.Abhishek Jain, indirect tax head & partner at KPMG: This ruling, while upholding the constitutional validity of input tax credit restrictions on the construction of immovable property, opens the door to interpretations of what nature of immovable property, based on the functionality test, could qualify as ‘plant.’ If held in the affirmative, this could greatly benefit relevant industries.Sandeep Sehgal, partner-tax at AKM Global: The Supreme Court’s verdict in the Safari Retreats case has provided much-needed clarity on the interpretation of Section 17(5)(d) of the CGST Act, particularly regarding input tax credit on buildings like malls or warehouses. While upholding the constitutionality of Sections 17(5)(c) and (d), the Court emphasized the need for a functionality test to determine whether a building qualifies as ‘plant’ for ITC eligibility, especially for those used in taxable business activities such as renting or leasing.The decision reinforces the necessity of a case-specific evaluation of the building’s essential role in business operations and could bring relief to developers and service providers in the leasing and rental sectors while ensuring precise GST compliance and continuity of GST credit flow.Experts demand more clarity moving forwardExperts emphasise the necessity for further clarification regarding the applicability of the functionality test. Given that the Supreme Court has remanded the matter to the High Court for specific determinations, stakeholders are eager for guidance on how this test will be practically applied in various contexts.Parag Mehta stated, “It is too early to rejoice, as the judgment has been sent back to the High Court to determine whether the building can be classified under the definition of ‘plant.’ All affected parties will need to evaluate their ITC claims to ensure proper compliance.”Irrespective of the judgement, if the CBIC/GST Council takes it up and gives a proper clarification for the same, it will ensure closure of matter and avoid another ground of litigation at High Court levels, he said.Sandeep Sehgal emphasised the need for precise guidance on the functionality test, stating, “Without clear directives from the CBIC or GST Council, businesses may face uncertainty in their approach to ITC claims. Clear interpretations will be crucial to facilitate smoother compliance and avoid potential litigation.”
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