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The eligibility of input tax credit (ITC) on immovable property under the GST regime has remained a contentious issue since its introduction. Questions have been raised particularly when such immovable property is used for generating taxable outward supplies. The ambiguity stems from inconsistent terminology, specifically the use of ‘plant and machinery’ versus ‘plant or machinery’ in Sections 17(5)(c) and 17(5)(d) of the CGST Act, which has led to divergent interpretations.
Even if we delve under the erstwhile tax regime, credit for commercial or industrial construction services and works contracts related to immovable property was similarly restricted, key premise being an immovable property primarily functions as a ‘passive asset’ that does not directly yield output tax revenue. This rationale was carried forward in the GST framework, with Section 17(5) explicitly restricting ITC in case of immovable property.
The taxpayers challenged the restrictive ITC denial provisions before various high courts (HC) and Orissa HC in case of Safari Retreats adopted a progressive stance by reading down the provisions. The HC held denying ITC on the construction of buildings like malls, which are not used for self-consumption but instead generate GST revenue through leasing or renting undermines the core GST objective of eliminating tax cascading.
The Supreme court, in its landmark ruling, upheld the constitutional validity of the blocked credit provisions. It distinguished between the expressions ‘plant and machinery’ and ‘plant or machinery’ to emphasise that buildings which satisfy the ‘functionality test’ would qualify as ‘plant’ and be eligible for credit.
Recognizing the ongoing ambiguity, the GST Council, in its 55th council meeting, has proposed a retrospective amendment in Section 17(5)(d) replacing "plant or machinery" with "plant and machinery". This move aimed to address the drafting inconsistency in the GST law.
The SC's ruling, though significant and welcoming for the industry at large, had not addressed the broader implications of the functionality test under other relevant provisions of the GST Act, leading to potential areas of ambiguity which warranted a retrospective amendment in the law anyway. For instance:
While the SC upheld the validity of restrictive ITC provisions, it reinforced the legislature’s prerogative to limit ITC in specific contexts, prioritizing revenue protection. This aligns with the longstanding policy intent, evident even under pre-GST tax regimes, to restrict ITC for immovable properties.
The SC rightly emphasized that tax policy decisions such as defining taxable items, setting rates, and determining exclusions are the legislature's domain and not the judiciary. It refrained from extending ITC eligibility for immovable property used for taxable supplies, underscoring that the exclusion for works contracts is exhaustive and consistent with legislative intent.
This reinforces that the ITC debate is less about legal interpretation and more about policy considerations. Advocacy with policymakers, rather than prolonged litigation, may offer a more effective resolution. Taxpayers and stakeholders must present compelling cases to align ITC eligibility with the anti-cascading framework of GST.
While this move by GST council aims to resolve all the ambiguities, the retrospective amendment to Section 17(5)(d) may also open the door for a potential challenge before the SC on the grounds of fairness and legislative overreach. While legislative bodies are empowered to amend laws retrospectively, the extent and impact of such amendments must align with principles of fairness and proportionality to avoid causing undue hardship. It is trite of law that retrospective amendments must meet the test of reasonableness and should not unduly prejudice taxpayers, especially when they alter tax obligations for past transactions. Whether such a challenge would succeed would depend on the specifics of the case and the court’s assessment of whether the amendment was justified in light of the broader objectives of the GST framework.
In the past, Parliament has on several occasions nullified SC rulings through retrospective amendments to align the law with policy objectives. One notable instance is in case of Eicher Motors, where the SC ruled that unutilized Modvat credit lying in the accounts of manufacturers represented a vested right and could not be taken away without express legal authority. To counter this, the government retrospectively amended the Central Excise Act, effectively nullifying the judgment and restricting credit entitlement. Similarly, in the Canon India case, the SC held that officers of the Directorate of Revenue Intelligence (DRI) did not have jurisdiction to issue customs notices under Section 28 of the Customs Act. To override this, the government retrospectively amended the Customs Act in 2022, validating notices issued by the DRI and safeguarding potential revenue. While these actions underscore the legislature’s prerogative to address policy concerns, they often ignite debates over fairness, predictability, and legal certainty for taxpayers.
However, there had been cases where the SC itself upheld the constitutional validity of the retrospective amendment which nullified its prior decisions provided the amendments are within the legislature competence and do not violate the fundamental right. J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Union of India is a classic example where the SC upheld a retrospective amendment to the Central Excise Act that sought to nullify the effect of earlier judicial pronouncements regarding the classification of goods for excise duty purposes. It will be intriguing to observe how developments unfold, particularly in relation to Safari Retreats case.
The issue of ITC eligibility on immovable property under GST reflects the delicate balance between legislative intent, judicial interpretation, and taxpayer expectations. The SC rulings have underscored the legislature’s authority to shape tax policy, but they also highlight the need for clarity and consistency in drafting tax laws.
Resolving these issues requires a collaborative approach and proactive advocacy. Only by addressing these challenges can the GST framework truly achieve its foundational promise of a seamless, non-cascading tax system.
This article first appeared in Taxmann on 06 January 2025.
