Introduction The Union Budget 2025 has brought significant amendments to the Goods and Services Tax (GST) framework, particularly addressing the Supreme Court’s ruling in the Safari Retreats case. The decision had initially provided relief to the real estate sector by allowing Input Tax Credit (ITC) on construction costs for properties intended for leasing or renting. However, the latest budget has effectively nullified this benefit through a retrospective amendment to the Central Goods and Services Tax (CGST) Act, 2017.
The Safari Retreats Verdict and Its Implications In October 2024, the Supreme Court delivered a landmark ruling in the Safari Retreats case, holding that ITC on construction costs should be available if the immovable property is used for taxable supplies, such as commercial leasing. The Court interpreted such buildings as ‘plant’ under Section 17(5)(d) of the CGST Act, thereby enabling real estate developers to claim ITC and reducing the overall cost of construction for rental businesses.
Government’s Response in Budget 2025 To counteract this ruling, the government has proposed an amendment to Section 17(5)(d) of the CGST Act, replacing the phrase “plant or machinery” with “plant and machinery.” This subtle yet impactful change clarifies that ITC will remain restricted on the construction of immovable properties, even if they are used for taxable supplies like renting. The amendment is retrospective, effective from July 1, 2017, rendering the Supreme Court’s interpretation in Safari Retreats invalid.
Implications for the Real Estate Sector
1. Increased Costs for Developers: The amendment prevents developers from claiming ITC on construction-related expenses, leading to higher project costs.
2. Impact on Leasing Business: Businesses engaged in commercial leasing will now face higher tax burdens as they can no longer offset construction costs against GST liabilities.
3. Legal Uncertainty: The retrospective nature of the amendment may invite litigation from affected businesses that have already claimed ITC based on the Supreme Court’s ruling.
4. Review Petition in Supreme Court: The Finance Ministry has also filed a review petition, seeking reconsideration of the Safari Retreats judgment, aiming to align judicial interpretation with the legislative framework.
Conclusion The Budget 2025 has taken a decisive stance to restrict ITC on real estate construction costs, reversing the relief provided by the Supreme Court in the Safari Retreats case. This move significantly impacts commercial real estate developers and leasing businesses, increasing operational costs and potentially leading to higher rents for tenants. Stakeholders must reassess their financial planning in light of these legislative changes and stay updated on any legal developments surrounding the review petition.
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