Real estate and infra players will have to review their positions on claiming input tax credit (ITC) following the decision by the Goods and Services Tax (GST) Council to retrospectively amend the GST law to restrict ITC on construction services. It is also to be seen whether the retrospective decision is challenged in courts.
The decision was taken by the GST Council in 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 nullifies the Supreme Court judgement in October where it applied the “functionality test” to determine availability of tax credit while conceding that the definition of ‘plant or machinery’ has to be seen as distinct from ‘plant and machinery’. The ruling was expected to give relief to not only real estate developers but also companies working to construct infrastructure projects.
Sivakumar Ramjee, Executive Director–Indirect Tax, Nangia Andersen, noted that the Supreme Court ruling in Safari Retreats case addresses whether immovable property, especially commercial properties like shopping malls intended for leasing or renting, is eligible for the ITC. “Real estate firms were not allowed to claim the Input Tax Credit (ITC) on the GST paid for inputs and input services used in constructing properties for their own use, even if those properties were rented out, according to Section 17(5)(d) of the CGST Act,” he said.
As per the GST Council’s decision, the retrospective amendment would be carried out with effect from July 1, 2017 to amend a “drafting error” in the law.
“To align the provisions of section 17(5)(d) of CGST Act, 2017 with the intent of the said section, the Council has recommended amending section 17(5)(d) of CGST Act, 2017, to replace the phrase ‘plant or machinery’ with ‘plant and machinery’, retrospectively, with effect from 01.07.2017, so that the said phrase may be interpreted as per the Explanation at the end of section 17 of CGST Act, 2017,” said an official release after the meeting.
Sivakumar noted that the proposal of GST council to retrospectively amend Section 17(5) (d) to include the phrase as ‘plant and machinery’ may not be correct as the term ‘plant’ and the term ‘machinery’ are slightly different. “As per the functionality test laid out by Supreme Court, shopping mall could be considered as a ‘plant’ based on several rulings on the direct taxes in the context of depreciation. The government shouldn’t brush it aside by calling it as a drafting error,” he underlined.
Experts also believe that the amendment will have a significant impact on all these players, several of whom had claimed ITC in such cases.
Saloni Roy, Partner, Deloitte India noted that the amendment essentially seeks to overturn the judgment of the Supreme Court, which will require industry to review their position taken basis the recent jurisprudence. “Safari Retreats decision was hailed due to the beneficial broader interpretation of plant and machinery by introducing the functionality test. Industry cheer basis the Supreme Court decision in safari retreats is short lived,” she said.
Gyanendra Tripathi, Partner and Leader (West), Indirect Tax, BDO India said the decision would not be welcomed by the industry at large. “Post the decision, many companies had claimed the ITC relating to the construction of some immovable properties (qualifying as a plant) for the past period and did not utilise it in many cases. Now all such ITC would need to be reversed,” he said.
It would be interesting to see if such a retrospective amendment, specifically to overrule an SC judgment is challenged in the Court and the fate of such challenge.