The question of whether input tax credit (ITC) can be claimed on the construction of commercial buildings has been a contentious issue under the Goods and Services Tax (GST) regime. At the heart of this debate lies the interpretation of Section 17(5)(d) of the CGST Act, which restricts ITC on immovable property construction except when it involves “plant and machinery.” Recent landmark rulings by the Supreme Court, particularly in the Safari Retreats case, have challenged conventional understandings by adopting a functional test to classify buildings as “plant” eligible for ITC. However, the government’s retrospective legislative amendment in the Finance Act 2025 seeks to curtail this judicial interpretation, creating a complex legal and practical landscape for taxpayers.
1. Statutory Provision and Background
Section 17(5)(d) of the CGST Act, 2017
“Input tax credit shall not be available in respect of goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery), including when such goods or services are used in the course or furtherance of business.”
Key interpretative points:
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ITC on inputs used for immovable property construction is blocked, except for inputs used in “plant and machinery.”
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The phrase “plant and machinery” appears to restrict credit strictly to assets qualifying as both “plant” and “machinery,” excluding buildings or immovable assets.
2. Judicial Interpretation: Functional and Economic Substance Test
Odisha High Court — Safari Retreats (2019)
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The Court held that if the construction of a building is essential for carrying out the activity of supplying taxable services such as leasing or renting out, the building can be considered a “plant.”
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Emphasized a functional test: the building’s role in generating economic output and taxable supply determines its classification as a plant.
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Thus, ITC on inputs used in constructing such a building was allowed despite the statutory prohibition on immovable property.
Supreme Court Judgment (October 3, 2024) — Division Bench (Justices Abhay S. Oka and Sanjay Karol)
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Affirmed the Odisha High Court’s ruling, explicitly stating:
“If the construction of a building is essential for the activity of supplying services like renting or leasing, as per clauses 2 and 5 of Schedule II of the CGST Act, the building may be treated as a ‘plant’ for ITC purposes.”
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Held that the “functional character” of the building determines its status, not just the literal definition.
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Rejected the challenge on constitutional validity of Section 17(5)(d), but carved out the exception for buildings serving as “plant.”
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Dismissed the government’s review petition in 2025, stating:
“There is no error apparent on the record; hence, the review petition is dismissed.”
3. Legislative Amendment: Finance Act 2025 — Retrospective Overruling
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In reaction to the Supreme Court judgment, the government amended Section 17(5)(d) retrospectively (effective from July 1, 2017) via Finance Act 2025, substituting “plant or machinery” with “plant and machinery.”
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The rationale was to restrict ITC eligibility strictly to assets that are both plant and machinery simultaneously, thereby excluding buildings even if they function as “plants” under the Court’s functional test.
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This amendment reflects the government's claim of a “drafting error” and intent to block ITC on immovable property construction.
4. Critical Legal Analysis: Conflict between Judiciary and Legislature
| Aspect | Supreme Court Position | Government / Amendment Position | Critical Observations |
|---|---|---|---|
| Interpretation of “plant and machinery” vs “plant or machinery” | Functional test allows buildings to qualify as “plant” alone, enabling ITC. | Restricts ITC to assets qualifying as both “plant and machinery.” | The amendment contradicts the judicial approach emphasizing economic reality and functional utility. |
| Retrospective amendment | Courts skeptical about retrospective override impacting settled rights. | Amendment seeks to nullify Supreme Court’s ruling retrospectively. | Creates legal uncertainty and challenges tax certainty principles. |
| Tax neutrality principle | ITC should flow when output service is taxable, ensuring no cascading tax. | Restricting ITC disrupts input-output tax chain. | Judicial ruling better aligns with GST’s fundamental tax neutrality concept. |
| Scope of Section 17(5)(d) | Exception to blocked credit for “plant” extends beyond physical machinery. | Amendment narrows scope strictly, ignoring functional role. | Legislative intent appears inconsistent with commercial realities and jurisprudence. |
5. Practical Advisory and Tax Planning Guidance
Who is Eligible to Claim ITC?
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Taxpayers engaged in providing taxable services involving leasing or renting of commercial buildings.
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Inputs used in construction of such buildings can qualify as “plant” under the functional test, allowing ITC claim despite the immovable property restriction.
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ITC eligibility depends on demonstrating the building’s essential role in taxable output supply.
Compliance and Documentation Best Practices
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Maintain robust documentation linking input services/materials directly to the construction of buildings leased or rented out for taxable services.
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Prepare a detailed functional analysis report substantiating the building’s classification as “plant.”
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Keep track of GST paid on all inputs and clearly segregate ITC claimed on building construction vs. other immovable assets.
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Ensure timely and accurate reporting in GST returns, reflecting rental income and ITC claims coherently.
Caution Points & Risk Mitigation
| Trigger Event | Risk | Recommended Action |
|---|---|---|
| Application of retrospective amendment | Potential ITC disallowance, penalties, interest demands | Seek legal opinions; consider Advance Ruling applications where available |
| Changes in rental services GST applicability (exemptions) | Loss of ITC eligibility if output becomes exempt | Regularly monitor GST law and notifications related to rental services |
| Audit or investigation by GST authorities | Scrutiny of ITC claims on building construction | Maintain clear evidence of building’s function and taxable use |
| Ambiguous classification of “plant and machinery” | Disallowance due to misinterpretation | Consult expert valuation and functional classification reports |
6. Conclusion
The Supreme Court’s Safari Retreats judgment is a watershed ruling endorsing a pragmatic, functional interpretation of “plant” under Section 17(5)(d), allowing ITC on commercial buildings constructed for taxable leasing or renting activities. This aligns with GST’s core principle of tax neutrality and avoids undue cascading taxes.
However, the government’s retrospective legislative amendment via Finance Act 2025 narrows the ambit significantly, creating a judicial-legislative conflict and ensuing uncertainty.
Taxpayers must adopt a risk-managed approach—documenting functional use rigorously, monitoring statutory developments, and engaging proactively with authorities to safeguard legitimate ITC claims while mitigating audit risks.
