SC Grants ITC Claim on Construction Costs of Commercial Buildings

                
In a development that may encourage 
increased investment in commercial real 
estate, the Supreme Court on Thursday gave 
the industry relief by permitting input tax credit 
(ITC) on 
construction expenses for buildings meant to 
be leased.
“If the construction of a building was essential 
for carrying out the activity of supplying 
services, such as renting or giving on lease or 
other transactions in respect of the building or 
a 
part thereof, which are covered by clauses (2) 
and (5) of Schedule II of the CGST (Central 
Goods and Services Tax) Act, the building 
could be held to be a plant,” said Justice Abhay 
S 
Oka and Justice Sanjay Karol.
This ruling is expected to ease the financial 
strain of rent on tenants occupying 
commercial space. Real estate companies 
stand to gain because buildings can now be 
categorised as 
plant and machinery. Additionally, this 
advantage is not limited to commercial real 
estate. Various industries will be able to claim 
ITC on rentals for commercial properties. The 
ruling 
suggests ITC will be available retroactively.
“This decision could have ramifications for 
hotels, infrastructure and logistics including 
warehousing. While the Supreme Court has 
upheld the constitutional validity of restrictions 
relating to input tax credit on construction-
related procurement, it has been held that 
whether building constitutes ‘plant or 
machinery’ needs to be examined on a case-to-
case basis,” 
said Pratik Jain, partner, PWC India.
“It means where it falls in this category, credit 
would be allowed. It will be interesting to see if 
the government considers amending the GST 
laws after this decision,” added Jain. 
Saurabh Agarwal, tax partner, EY India, said: 
“The real estate industry should evaluate the 
implications of this ruling on ITC eligibility. It 
would be prudent for the GST Council to issue 
clarification allowing real estate players to 
claim ITC on rental income.”
Tax experts pointed out the question was 
whether this ruling would apply to factory 
buildings, jetty, storage tanks, etc.
Background of the case
In the case of Safari Retreats, a mall owner 
approached Orissa HC, stating that when a 
mall was being built for providing commercial 
rental services for shop spaces, there should 
be 
no restriction on taking input credit/set-off for 
the GST incurred on construction. The Orissa 
HC upheld this argument, and the GST 
authorities appealed to the SC. Several such 
matters reached the SC, leading to the 
formation of a large batch of matters on this 
legal point. Some of these newer matters 
challenged the constitutional validity of 
restriction on 
input GST credit.
“The biggest positive is that the court has held 
there is no blanket restriction on input 
credit/set-off of the GST cost incurred on the 
construction of civil structures/immoveable 
property, 
especially when the said structure itself is 
integral to providing the output services in 
question,” said Sudipta Bhattacharjee, partner 
at Khaitan & Co.


Source : Economic Times