NEW DELHI: The government on Saturday proposed a retrospective amendment to the CGST law concerning ‘plant or machinery’, a move that is likely to adversely impact real estate companies seeking input tax credit on the construction and leasing of commercial assets, said experts.
Against the backdrop of a Supreme Court ruling related to input tax credit, the government has mooted substituting the word ‘plant or machinery’ with ‘plant and machinery’ under a section of the Central Goods and Services Tax (CGST) Act.
The government has proposed retrospective amendment in Section 17 (5), which provides an exhaustive list where input tax credit will not be applicable.
In its Budget document, the finance ministry said that “clause (d) of sub-section (5) of section 17 is being amended to substitute the words ‘plant or machinery’ with words ‘plant and machinery’.”
The amendment will be effective retrospectively from July 1, 2017, notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority, it added.
The move comes in the backdrop of a Supreme Court order in the case of Safari Retreats Pvt Ltd. The apex court held that if the construction of a building is essential for supplying services like leasing/renting out, it could fall under the ‘plant’ category on which ITC (input tax credit) can be claimed under Section 17(5)(d) CGST)
Commenting on the proposed amendment in the CGST Act, Deloitte India Partner Harpreet Singh said, “This retrospective amendment to substitute the words “plant or machinery” with words “plant and machinery” under the input tax credit provisions of the GST laws may have a negative impact on the industry specially companies in real estate leasing business, as input tax in construction is a substantial part of the overall cost.”
Krishan Arora, Partner and India Investment Advisory Services Leader, Grant Thornton Bharat, said this legislative change effectively overrides the Supreme Court’s ruling in the landmark Safari Retreats case, where the Court had permitted businesses to claim ITC on properties classified as ‘plant’ under the functionality test.
“From taxpayers’ perspective, this amendment has far-reaching implications as industries that have structured their ITC claims based on the Safari Retreats ruling or the prevailing interpretation of existing provisions now need to urgently reassess their tax positions,” he said.
The retrospective nature of this amendment might lead to substantial financial and compliance repercussions, potentially triggering disputes over past periods, Arora said.
“Additionally, the Finance Ministry’s review petition in the Safari Retreats case before the Supreme Court adds another layer of complexity. The Court’s stance on this amendment will be pivotal in determining its impact on ongoing and future litigations. Businesses must remain vigilant, proactively evaluate their tax strategies, and anticipate potential legal challenges as the GST framework continues to evolve,” he said.
Singh of Deloitte said the retrospective amendment nullifies the impact of the Supreme Court’s decision in the Safari Retreat case last year, which allowed GST credit on construction activities for leasing and warehousing businesses based on the functionality test.
“Despite repeated taxpayer appeals, this change reinforces policymakers’ strict stance on denying GST credit for construction activities,” Singh added.
