In a significant ruling on October 3, 2024, the Supreme Court clarified the eligibility for Input Tax Credit (ITC) on immovable property under the Central Goods and Services Tax (CGST) Act, 2017. This decision impacts businesses, especially in the real estate and leasing sectors, by potentially allowing ITC on construction costs for commercial properties under specific conditions.

Supreme Court’s Ruling on ITC for Immovable Property: A Game-Changer

Background: Safari Retreats Case

The issue first arose in the Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST case, where the Orissa High Court ruled in favor of the taxpayer, allowing ITC on goods and services used for constructing a mall that was leased out for commercial purposes. The ruling aimed to avoid the cascading effect of taxes and was later challenged by Revenue Authorities in the Supreme Court.

Supreme Court’s Key Observations

1. Wider Definition of ‘Plant and Machinery’: The Court ruled that buildings used for business purposes, like leasing or renting, could qualify as “plant and machinery” under Section 17(5)(d) of the CGST Act. This allows businesses to claim ITC on construction costs, provided the building is essential for business operations.
2. Case-by-Case Determination: The eligibility of a building to qualify as “plant” will be assessed based on its function in the business. For example, a mall or warehouse could qualify, depending on how essential it is to the business’s revenue.
3. Functionality and Essentiality Tests:
   • Functionality Test: Determines if the building plays a direct role in business operations, similar to machinery.
   • Essentiality Test: Evaluates whether the goods and services used in construction are directly necessary for the business.

ITC for Immovable Property – Conclusion

The Supreme Court’s decision expands the scope for ITC claims on commercial properties, providing much-needed relief to businesses in real estate and leasing. However, the determination of whether a building qualifies as “plant” will require a detailed, case-specific analysis, based on the building’s role in business operations.

Pitchers Global helps you with ideas on the Supreme Court’s ruling on immovable property.