Exception for Commercial Buildings Used for Renting or Leasing
In a significant ruling expected to boost investment in commercial real estate, the Supreme Court of India has permitted input tax credit (ITC) on construction expenses for buildings intended to be leased or rented out. This decision brings much-needed relief to the commercial real estate sector.
Key Judgment on ITC for Commercial Properties
The ruling states that if the construction of a building is necessary for supplying services like renting, leasing, or similar transactions covered under clauses (2) and (5) of Schedule II of the Central Goods and Services Tax (CGST) Act, the building can be classified as a “plant.” The judgment, delivered by Justice Abhay S. Oka and Justice Sanjay Karol, highlights that buildings essential for providing these services could now be categorized as plant and machinery.
Impact on Commercial Real Estate and Other Sectors
This judgment is expected to:
- Alleviate financial burdens for tenants of commercial properties by allowing ITC on rental properties.
- Benefit real estate companies by enabling them to classify buildings as plant and machinery, allowing them to claim ITC.
- Extend ITC eligibility to other industries, including hospitality, infrastructure, logistics, and warehousing.
The ruling will likely have a retrospective effect, offering potential tax relief to various sectors beyond commercial real estate.
Insights from Tax Experts
Pratik Jain, Partner at PWC India, remarked that while the Supreme Court upheld restrictions on ITC related to construction procurement, the ruling opens the door to case-by-case examination of whether a building qualifies as plant or machinery. He anticipates potential changes to GST laws following this decision.
Saurabh Agarwal, Tax Partner at EY India, advised the real estate sector to assess the impact of this ruling on ITC eligibility, and suggested that the GST Council should issue clarifications for real estate players to claim ITC on rental income.
Broader Implications and Questions Raised
Tax experts raised pertinent questions about the applicability of this ruling to other constructions such as factory buildings, jetties, and storage tanks. The potential extension of ITC benefits to these categories will be closely monitored.
Background of the Case: Safari Retreats vs. GST Authorities
The legal dispute originated from the case of Safari Retreats, where a mall owner in Odisha approached the High Court, arguing that when a mall is constructed for leasing commercial spaces, there should be no restriction on claiming ITC for GST paid on construction expenses. The Orissa High Court ruled in favor of Safari Retreats, prompting GST authorities to appeal the decision in the Supreme Court. The apex court’s ruling resolves several related matters, affirming that there is no blanket restriction on ITC for construction expenses, especially when the construction is integral to providing output services.
Key Outcomes of the Supreme Court Judgment:
- Expected to reduce rental costs for tenants in commercial spaces.
- ITC benefits may extend to other industries that lease commercial properties.
- The ruling raises the question of whether it applies to factory buildings, storage facilities, and similar structures.
