Budget 2025: Retrospective Amendment to Section 17(5)(d) of the CGST Act

The Budget 2025 has proposed a retrospective amendment to Section 17(5)(d) of the CGST Act, 2017, overturning the Supreme Court’s landmark Safari Retreats judgment favoring the availability of Input Tax Credit (ITC) on construction expenses relating to immovable property that would be given for renting or leasing.

Background

ITC is a core principle of GST, ensuring tax neutrality by allowing businesses to offset input tax paid against output liabilities. Section 17(5)(d) of CGST Act restricts ITC on goods and services used for constructing immovable property.

"(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business." (current provisions)

The Supreme Court in the matter of Safari Retreats Pvt. Ltd. & Others [CIVIL APPEAL NO. 2948 OF 2023] had interpreted “Plant or Machinery” in a manner that allowed ITC for commercial properties used for taxable activities such as renting or leasing.

"The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. 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 Act, the building could be held to be a plant. Then, it is taken out of the exception carved out by clause (d) of Section 17(5) to sub-section (1) of Section 16. Functionality test will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what we have held earlier, it will have to be decided whether the construction of an immovable property is a “plant” for the purposes of clause (d) of Section 17(5)."

Proposal in Budget 2025

In section 17 of the Central Goods and Services Tax Act, in sub-section (5), in clause (d),––

(i) for the words “plant or machinery”, the words “plant and machinery” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of July, 2017;

(ii) the Explanation shall be numbered as Explanation 1 thereof, and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:––

‘Explanation 2.––For the purposes of clause (d), it is hereby clarified that notwithstanding anything to the contrary contained in any judgment, decree or order of any court, tribunal, or other authority, any reference to “plant or machinery” shall be construed and shall always be deemed to have been construed as a reference to “plant and machinery”.’.

Thus the revised provisions would be as follows;

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

........

(d)?goods or services or both received by a taxable person for construction of an immovable property (other than plant or and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation 1. —For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;?

Explanation 2. — For the purposes of clause (d), it is hereby clarified that notwithstanding anything to the contrary contained in any judgment, decree or order of any court, tribunal, or other authority, any reference to "plant or machinery" shall be construed and shall always be deemed to have been construed as a reference to "plant and machinery"

Implications of Proposed Amendments

1. Reversal of Supreme Court Ruling: The amendment overrides the Supreme Court's judgment in Safari Retreats Pvt. Ltd., which had interpreted 'Plant or Machinery' to allow ITC on building construction if used for renting or leasing purposes under Schedule II of the CGST Act.
2. Disallowance of ITC on Building Construction: By clarifying that 'Plant or Machinery' should always be read as 'Plant and Machinery', the amendment restricts ITC on goods and services used for constructing land and buildings, reinforcing that such structures are immovable property.
3. Retrospective Effect: Effective from July 1, 2017, this change may create compliance burdens, backdated tax liabilities, and potential disputes for businesses that had claimed ITC based on the earlier judicial interpretation.

Conclusion

The retrospective amendment to Section 17(5)(d) of the CGST Act reverses an important judgment by the Apex Court. The business enterprises, especially in construction and leasing, must carefully assess the implications on ITC claims and prepare for potential compliance challenges that may arise because of this amendment.