Source: Supreme Court 

Why in News? 

Recently, the Supreme Court in the matter of Chief Commissioner of Central Goods and Service Tax and Ors. v. M/S Safari Retreats Private Limited and Ors. has outlined the governing principles of interpretation in context of Central Goods and Services Tax (CGST) Act, 2017 

What was the Background of the Chief Commissioner of Central Goods and Service Tax and Ors. v. M/S Safari Retreats Private Limited and Ors.  Case? 

• In the present case, the first respondent is a builder who constructs premises and lets out the same. 
• The same applies to CGST based on the rent received by the first respondent since it amounts to the supply of service under the CGST Act. 
• The respondent therefore tried availing the Input tax Credit (ITC) for which he approached the concerned authorities where it was advised to deposit Goods and Service Tax (GST) on rent without deducting ITC because of the exception carved out by Section 17(5)(d) of CGST. 
• The respondent filed a writ petition before the Orissa High Court seeking a declaration that Section 17(5)(d) of the CGST Act and the corresponding provisions of the Orissa Goods and Services Act, 2017 (OGSA) do not apply to the construction of immovable property intended for letting out on rent. 
• It was also submitted in the petition that Section 17(5)(d) of CGST Act is in violation of Article 14 and Article 19(1)(g) of the Constitution of India. 
• The High Court held that the very object of Section 17 of CGST Act is to benefit the assesses. 
• The High Court further held that The High Court held that if the assesses is required to pay GST on the rental income from the mall, it is entitled to ITC on the GST paid on the construction of the mall. 
• Aggrieved by the decision of the High Court the present appeal was filed before the Supreme Court challenging the constitutional validity of the disputed section of CGST Act. 

What were the Court’s Observations? 

• The Supreme Court in this case made the following observations by applying principles of interpretation of Tax law as: 
  • It is the legislature’s Responsibility to interpret the statute: 
    • It was emphasized by the Supreme Court that the text of the tax statute must be read as it is given without any modifications based on the intent of the legislature. 
    • If the applicability of that statute leads to an absurd result it would be the responsibility of the legislature to interpret the same and not of the court. 
  • Strict Construction approach for interpretation: 
    • If a tax statute has two interpretations, then the one benefiting the taxpayer must be applied. 
    • Tax law must not be interpreted based on the principles of equity and the language of the tax law must be the sole basis for interpretation. 
  • No use of presumptions 
    • While interpretating the tax law no presumptions and assumptions must be applied the sole basis must be the words expressly provided in the statute. 
    • The taxpayer must not be held liable when there is a loophole in the statute to expressly provide for certain laws. 
  • Terms to be understood in the Commercial sense during trade and usage  
    • Where words are not expressly defined, they must not be interpreted based on the definitions provided in other statutes. 
  • Tax provisions where the words are expressly given 
    • Where the literal interpretation of the words results in injustice, such law can be interpreted as to prevent the injustice. 
• The Supreme Court applied the above-mentioned principles of interpretation on Section 17(5)(d) of CGST to interpret applicability of word “plant” on building and held that it requires interpretation on case-to-case basis and remit the case to High court to determine whether the building plays an essential role in supplying services such as renting. 
• The Supreme Court ordered the High Court to apply a test of functionality and essentiality to determine the present petition. 
• However, the Supreme Court rejected the petition challenging the constitution validity of Section 17(5) (d) of CGST Act. 

What is CGST Act?

• CGST Act, 2017 is a key component of the GST regime, which was implemented to streamline the country's indirect tax system.  
• The CGST Act governs the levy and collection of GST on intra-state supply of goods and services by the central government, replacing many previous central indirect taxes such as central excise duty and service tax.  
• It provides the framework for registration of taxpayers, valuation of goods and services, input tax credit mechanism, and various compliance requirements under the GST system.  
• The CGST Act works in coincidence with the State Goods and Services Tax (SGST) Act and the Integrated Goods and Services Tax (IGST) Act to create a unified national market for goods and services.  

What Is Input Taxable Credit?

• Definition:
  • Input Tax Credit is the credit that a business can claim for GST paid on purchase of goods or services used during business.  
• Purpose:  
  • It aims to eliminate the cascading effect of taxes (tax on tax) in the supply chain by allowing businesses to reduce their tax liability.  
• Mechanism:  
  •  When a business pays GST on its inputs (purchases), it can use this amount to offset the GST it owes on its outputs (sales).  
• Eligibility:  
  • To claim ITC, the input goods or services must be used for business purposes and the business must have valid tax invoices from registered suppliers.  
• Benefits:   
  • ITC helps reduce the overall tax burden on businesses and end consumers, promoting a more efficient and competitive market.  
• Restrictions:   
  • There are certain restrictions on claiming ITC, such as for goods used for personal consumption or for specific items as per the GST law.  

What is Section 17 of CGST?  

• Partial Business Use:   
  • When goods or services are used partly for business and partly for other purposes, input tax credit (ITC) is restricted to the portion used for business purposes.  
• Taxable and Exempt Supplies:   
  • For goods or services used partly for taxable supplies (including zero-rated) and partly for exempt supplies, ITC is restricted to the portion attributable to taxable supplies.  
• Exempt Supply Definition:   
  • Includes supplies taxable under reverse charge, securities transactions, land sale, and building sale (subject to exceptions).  
  • Excludes activities specified in Schedule III (except paragraph 5).  
• Banking and Financial Institutions:   
  • Have the option to either comply with subsection (2) or avail 50% of eligible ITC monthly.  
  • The 50% restriction doesn't apply to tax paid on supplies between registered persons with the same PAN.  
• Blocked Credits (ITC not available):   
  • Motor vehicles (with exceptions for specific business uses).   
  • Vessels and aircraft (with exceptions for specific business uses).   
  • General insurance, servicing, repair, and maintenance of motor vehicles, vessels, or aircraft (with exceptions).   
  • Food and beverages, outdoor catering, beauty treatment, health services, cosmetic surgery (with exceptions).   
  • Membership of clubs, health and fitness centers.  
  • Travel benefits to employees (with exceptions).   
  • Works contract services for immovable property construction (except for further supply of such services).  
  • Goods/services for constructing immovable property on own account.  
  •  Goods/services on which tax is paid under composition scheme (Section 10).  
  • Goods/services received by a non-resident taxable person (except imported goods).  
  • Goods/services used for personal consumption.   
  • Goods lost, stolen, destroyed, written off, or disposed of as gifts.   
  • Any tax paid under sections 74, 129, and 130.  
• Government Authority:   
  • The government may prescribe the manner of credit attribution under subsections (1) and (2).  
• Definition of "Plant and Machinery":   
  • Includes apparatus, equipment, and machinery fixed to earth, including foundations and structural supports.  
  • Excludes land, buildings, civil structures, telecommunication towers, and pipelines outside factory premises.  

What is Section 17(5)(d) of CGST?  

• Section 17(5)(d) of the CGST Act states Input tax credit shall not be available in respect of the following:  
• "(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business."  
  • General Rule: This provision blocks input tax credit for goods or services used in the construction of immovable property.  
  • Exception: The blockage doesn't apply to "plant or machinery".  
  • Scope: It applies even when the construction is used for business purposes.  
  • "On his own account": This phrase suggests the provision applies when the taxable person is constructing for themselves, not when providing construction services to others.  
  • Definition of "Construction": The explanation to this clause defines construction to include re-construction, renovation, additions or alterations or repairs, to the extent of capitalization.  
  • "Plant and Machinery" Definition: As per the explanation to Section 17, this term means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both. It includes such foundation and structural supports but excludes land, building or any other civil structures, telecommunication towers, and pipelines laid outside the factory premises.