The government has proposed a retrospective amendment to the Central Goods and Services Tax (CGST) law, redefining "plant or machinery," a move that experts say will significantly impact real estate firms claiming input tax credit (ITC) on the construction and leasing of commercial properties.
The amendment, introduced in Union Budget 2025, seeks to override the Supreme Court's ruling in the Safari Retreats case, which had provided relief to the real estate sector by allowing ITC on construction costs for properties intended for leasing or renting.
In October 2024, the Supreme Court ruled in favour of real estate developers in the Safari Retreats case, holding that ITC on construction costs should be available if the property was used for taxable supplies, such as commercial leasing. The Court interpreted such buildings as "plant" under Section 17(5)(d) of the CGST Act, allowing developers to claim ITC and lowering construction costs for rental businesses.
However, the budget has proposed an amendment to Section 17(5)(d) of the CGST Act, replacing "plant or machinery" with "plant and machinery". The revision ensures that ITC remains restricted for the construction of immovable properties, even when used for taxable activities such as renting.
The amendment is retrospective from July 1, 2017, effectively nullifying the Supreme Court's interpretation in Safari Retreats and preventing developers from claiming ITC on past transactions.
Experts warn that the amendment will raise project costs for businesses engaged in commercial leasing, as they will no longer be able to offset construction expenses against GST liabilities. The retrospective nature of the amendment could also trigger litigation from businesses that have already claimed ITC based on the Safari Retreats ruling.
Rajat Mohan, senior partner at AMRG & Associates, called the retrospective amendment a "concerning trend" of overriding judicial decisions, undermining legal certainty.
"This landmark relief for the real estate sector has now been reversed retrospectively from July 1, 2017, effectively nullifying years of litigation. Similar challenges exist for insurance, online gaming, and e-commerce sectors, where businesses invest heavily in legal battles only to see laws rewritten to negate verdicts," Mohan said.
"Such moves erode business trust, discourage legal recourse and undermine the principles of fair taxation. For a GST regime built on simplicity, transparency and reduced litigation, this is a step backward," he added.
Harpreet Singh, partner at Deloitte India, warned of a negative impact on the real estate leasing sector, where input tax on construction constitutes a substantial portion of overall costs.
Krishan Arora, partner at Grant Thornton Bharat, said the amendment "effectively overrides" the Supreme Court’s ruling in Safari Retreats, forcing industries to reassess their tax positions.
“The retrospective nature of this amendment might lead to substantial financial and compliance repercussions, potentially triggering disputes over past periods,” Arora said.
The finance ministry has also filed a review petition before the Supreme Court seeking reconsideration of the Safari Retreats judgment, further complicating the legal landscape.
Analysts say the Supreme Court’s response to the finance ministry’s petition will be pivotal in determining the amendment’s impact on ongoing and future litigations.
"Despite repeated taxpayer appeals, this change reinforces policymakers’ strict stance on denying GST credit for construction activities," Singh of Deloitte added.
Industry stakeholders remain cautious as businesses reassess tax strategies in light of the evolving GST framework.