The construction industry is in a tough spot following the GST Council’s decision to overturn the Supreme Court ruling on the Safari Retreats case

Real estate and infrastructure players will have to review their stances on claiming Input Tax Credit (ITC) following the decision taken by the Goods and Services Tax (GST) Council to retrospectively amend the GST Act to restrict ITC in construction services. It should also be known whether the retrospective decision will be challenged in the courts.

The decision was taken by the GST Council at its 55th meeting in Jaisalmer on December 21 in the backdrop of the Supreme Court ruling in the Safari Retreats case. In effect, the decision overturns the Supreme Court’s October ruling in which it applied a “functionality test” to determine the availability of the tax credit while recognizing that the definition of “plant or machinery” must be viewed as different from “plant and machinery.” This ruling was expected to give relief not only to real estate developers but also to companies involved in building infrastructure projects.

Sivakumar Ramji, Executive Director, Indirect Taxes, Nangia Andersen, pointed out that the Supreme Court judgment in the Safari Retreats case addresses whether immovable property, especially commercial properties such as malls meant for rental or rental, qualify for ITC. “Real estate companies were not permitted to claim Input Tax Credit (ITC) on GST paid for inputs and input services used in construction of properties for their own use, even if those properties are rented out, as per Section 17(5)(d) of the CGST Act.

As per the GST Council decision, the amendment will be implemented retrospectively from July 1, 2017 to amend a “wording error” in the law.

“To harmonize the provisions of Section 17(5)(d) of the CGST Act, 2017 with the purpose of the said section, the Board recommended that Section 17(5)(d) of the CGST Act, 2017 be amended, replacing the phrase “plant or machinery” with “plant or machinery.” ” with retrospective effect from 01.07.2017, so that the said phrase may be construed as per the explanation given at the end of Section 17 of the CGST Act of 2017,” an official statement said after the meeting.

Sivakumar pointed out that the GST Council’s proposal to amend Section 17(5)(d) retrospectively to include the phrase ‘plant and machinery’ may not be correct as the term ‘plant’ and the term ‘machinery’ are slightly different. “As per the functional performance test laid down by the Supreme Court, a shopping mall can be considered as a ‘factory’ based on several rulings on direct taxes in the context of consumption. The government should not ignore it and termed it as a drafting error,” he asserted.

Experts also believe that the amendment will have a major impact on all these players, as many of them have demanded ITC in such cases.

The amendment essentially seeks to overturn the Supreme Court ruling, which will require the industry to review its position taken on the basis of recent jurisprudence, noted Saloni Roy, partner, Deloitte India. “The Safari Retreats decision has been welcomed given the broader interpretation beneficial to plant and machinery by introducing a functional performance test. “The basis for the industry’s joy is that the High Court’s decision on safari resorts was short-lived,” she said.

The decision will not be welcomed by the industry at large, said Gyanendra Tripathi, Partner and Leader (West), Indirect Taxes, BDO India. “After the decision was issued, many companies made claims to the ITC regarding the construction of some immovable property (qualifying as factory) during the last period and in many cases did not use it. Now all this international trade must be rolled back,” he said.

It will be interesting to see whether this retroactive amendment, specifically to overturn the Supreme Court ruling, will be challenged in court and see what happens to that challenge.