ITC Removal Hits Commercial Real Estate

A retrospective amendment, which comes into effect from July 1, 2017, debars entities, such as commercial real estate companies from claiming ITC on construction costs for their rental buildings.

The availability of Input Tax Credit (ITC) for taxes paid on goods and services, including raw materials and services used in business operations, is pivotal in reducing the overall GST liability for taxpayers. However, a significant retrospective amendment to the Goods and Services Tax (GST) laws has raised concerns, particularly among commercial real estate companies.

Under the proposed changes, entities involved in constructing immovable property, such as commercial buildings, warehouses, and other structures for their own use, will no longer be eligible to claim ITC for the goods and services involved in the construction process. This adjustment is especially impactful for sectors like hospitality and commercial leasing.

This retrospective change also challenges a recent Supreme Court decision in the Safari Retreats case. In this case, the court determined that a building qualifies as a "plant" under the GST Act, allowing ITC to be claimed for construction costs. The court differed between the phrases "plant" and "machinery" under the GST Act, enabling tax credits for buildings classified as machinery or plant. However, the revised budget provision changes the term "plant or machinery" with "plant and machinery" following a GST council decision.

Vimal Nadar, Head of Research at Colliers India states, “Budget 2025 has brought in this expected revision into effect by reviewing the definition of plant & machinery thereby disallowing commercial real estate companies who are into construction of buildings for rental purposes retrospectively. The extent of impact due to this amendment will depend upon, if these companies have been claiming input tax credit since 2017 and remained under dispute or if these companies calculated their tax liability without considering ITC until the court order in 2024 and then began considering ITC in their calculation. This change brings in clarity in the interpretation of ‘plant and machinery’ and the covenants related to claiming of ITC.”