Real estate and infrastructure players may have to review their stance on availing input tax credit (ITC) following the Goods and Services Tax (GST) Council's decision to reconsider the GST law to cap ITC on construction services. It should also be seen whether the retroactive decision will be challenged in court.
The decision was taken by the GST Council in its 55th meeting held in Jaisalmer on December 21 in the backdrop of the Supreme Court judgment in the Safari Retreats case. In fact, this judgment overrules the Supreme Court judgment in October, which applied the “functioning test” to determine the availability of tax credit and held that the definition of 'plant or machinery' should be seen as distinct from 'plant and machinery'. accept The verdict is expected to provide relief not only to real estate traders but also to companies engaged in construction of infrastructure projects.
Executive Director-Indirect Taxes, Nangia Anderson, Sivakumar Ramjee noted that the Supreme Court decision in the Safari Retreats case is whether immovable properties, especially commercial properties like shopping malls intended to be leased or rented out, are eligible for ITC. “According to Section 17(5), real estate companies are not allowed to claim input tax credit (ITC) on GST paid on inputs and input services used in construction of property for their own use, even if the property is rented out. d) CGST Act,” he said. said
As per the GST Council's decision, the retrospective amendment will be made with effect from July 1, 2017 to correct a “drafting error” in the law.
“The Council has recommended amendment of Section 17(5)(d) of the CGST Act, 2017, to align the provisions of Section 17(5)(d) of the CGST Act, 2017 with the intent of the said Section. With effect from 01.07.2017 'plant and machinery', the phrase may be 'plant or machinery'. “Shall be interpreted as per the Explanation at the end of Section 17 of the CGST Act, 2017,” an official statement issued after the meeting.
Shivakumar noted that the GST Council's proposal to revise Section 17(5) (d) to include 'plants and machinery' may not be correct as the term 'plant' and 'machinery' are slightly different. “According to the functionality test laid down by the Supreme Court, the shopping mall can be considered a 'plant' based on several rulings on direct taxation in the context of depreciation. The government should not dismiss it as a drafting error,” he stressed.
Experts believe that the amendment will have a significant impact on all these players, several of whom have filed ITC claims in such cases.
Saloni Roy, partner, Deloitte India, noted that the amendment would require the Supreme Court's ruling to be overruled, and the industry would need to review their position in light of recent jurisprudence. “Safari Retreats' decision was lauded for the broad interpretation in favor of plant and machinery by introducing the functionality test. “The Supreme Court ruling on safari withdrawal based on industry euphoria is short-lived,” she said.
Gyanendra Tripathi, indirect tax partner and leader (west), BDO India, said the decision was not welcomed by the industry at large. “After the decision, many companies have claimed ITC in respect of construction of some immovable property (which qualifies as plant) in the past and in many cases did not avail it. Now all such ITCs should be reversed,” he said.
It will be interesting to see if such a retroactive amendment is challenged in court especially to overturn an SC judgment and the fate of such a challenge.