Source: The Hindu 

Introduction 

In a landmark decision that significantly impacts India's real estate and taxation landscape, the Supreme Court has established definitive criteria for claiming Input Tax Credits (ITC) under the GST framework. The ruling describes the eligibility of real estate companies to claim ITC on construction costs for commercial structures intended for renting or leasing purposes. By introducing a dual test of "functionality" and "essentiality," the court has created a more structured approach to determining tax credit eligibility, potentially affecting numerous businesses in the real estate sector and beyond. 

What is the Background and Court observation of case Chief Commissioner of Central Goods and Service Tax and Ors v. M/S Safari Retreats Private Limited and Ors. ? 

Background: 

• The case concerns M/s. Safari Retreats Pvt. Ltd. and another, who constructed a shopping mall in Bhubaneswar for the purpose of letting it out to tenants. 
• The petitioners incurred expenses in purchasing goods and services for the mall's construction, including cement, steel, lifts, air-conditioning systems, and architectural services. 
• Goods and Services Tax (GST) was paid on these purchases under the Central Goods and Services Tax (CGST) Act and the Odisha Goods and Services Tax (OGST) Act. 
• The petitioners sought to claim Input Tax Credit (ITC) of Rs. 34,40,18,028 for the GST paid on these purchases to offset their GST liability arising from rental income earned by letting out the mall. 
• The tax authorities denied the petitioners this ITC, citing Section 17(5)(d) of the CGST and OGST Acts. 
• Section 17(5)(d) restricts ITC for goods and services used in the construction of immovable property on the taxpayer's own account, except for plant and machinery. 
• The primary legal issue before the court was whether the petitioners were entitled to claim ITC on the GST paid for goods and services used in constructing a shopping mall intended for rental purposes, under the provisions of Section 17(5)(d) of the CGST Act and its Odisha equivalent. 
• The case raises questions about the interpretation and application of Section 17(5)(d) in the context of properties constructed for letting out rather than for sale. 
• The matter also involves considerations of potential double taxation and the fundamental principles of the GST regime, particularly regarding the avoidance of cascading effects in taxation. 

Court Observation: 

• The Court noted that the CGST Act aims to eliminate the cascading effect of various indirect taxes by allowing input tax credit on inputs, services, and capital goods. 
• The Court observed that denying ITC in this case would lead to double taxation, as GST was paid on both the inputs used for the construction of the mall and the rental income derived from it. 
• The Court held that the functionality test must be applied to determine whether a building can be classified as a "plant" within the meaning of Section 17(5)(d) of the CGST Act. 
• The Court stated that if the construction of a building was essential for carrying out the activity of supplying services such as renting or leasing, the building could potentially be considered a plant. 
• The Court emphasized that the question of whether a mall, warehouse, or any building other than a hotel or cinema theatre can be classified as a plant is a factual question that must be determined on a case-by-case basis. 
• The Court concluded that it is not necessary to read down Section 17(5)(d) of the CGST Act so that it does not apply to cases where immovable property is constructed for the purpose of letting out on rent. 

What is CGST Act ? 

• The Central Goods and Services Tax (CGST) Act, 2017 is a key component of India's Goods and Services Tax (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. 

Conclusion

This Supreme Court ruling represents a pivotal moment in Indian tax jurisprudence, bringing both clarity and complexity to the GST regime. By mandating that procurement of goods or services must be "directly essential" to business operations and "functionally integral" to performance or output, the court has established a more rigorous standard for ITC claims. This decision will likely have far-reaching implications for real estate companies, potentially affecting their financial planning and operational strategies. Additionally, it may require businesses to reassess their tax planning approaches and ensure their commercial property developments align with these new guidelines. While the ruling aims to prevent misuse of tax credits, it also places a greater burden on companies to justify their ITC claims within the framework of these newly defined parameters.