GST ITC on Construction of Immovable Properties: Key Changes

Always puzzled and novice when comes to the GST ITC (Input Tax Credit) on goods or service or both used for construction of immovable properties when such properties are used in in the course or furtherance of business.

Recent developments including a judgment by the Honorable Supreme Court of India (On 03^rd October, 2024) and recommendation from the 55^th GST Council Meeting (Jaisalmer, Rajasthan, 21^st December 2024) have brought some clarity in this matter. However, these changes have also led to concern about cascading effect of taxes and the burden of “tax on tax”.

In the current scenario, amendment to the law and judicial precedents have divided the interpretation of Section 17(5)(d) of Central Goods and Services Tax (CGST) Act, 2017, into two distinct eras: Pre 55^th GST Council Meeting and Post 55^th GST council meeting.

Pre 55^th GST Council Meeting Era

Section 17(5)(d) of The CGST Act, 2017, states:

“Goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.”

As per the above provisions, taxpayers were burdened with the task of proving that the immovable property constructed qualifies as either plant or machinery. However, the expression “plant or machinery” used in Section 17(5)(d) was not clearly defined under GST law, leading to ambiguity and varied interpretations.

Definition of plant 

The term “plant” is not defined in the CGST Act or the General Clauses Act, 1897. It is also not defined in any of the State GST enactments. Reliance was placed on a decision of the Honorable Supreme Court of India, for instance:

• In the case of Indcon Structurals (P) Ltd. v. Commissioner of Central Excise, Chennai, that the words and expressions in taxing statute unless defined in the statute itself, have to be understood in the sense that the person dealing with them understands them as per the trade understanding, commercial and technical practice and usage.
• In the case of CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad the court ruled that the word “plant” means land, building, machinery, apparatus and fixtures employed in carrying on trade and other industrial business.

Functionality Test:

To determine whether an immovable property qualifies as a plant the functionality or essentiality tests must be applied. Ultimately, a plant is an apparatus used by a businessman for carrying on his business. It does not include his stock in trade, but it does include all goods and property, whether movable or immovable. For example:

• A building or a warehouse must be considered a ‘plant’ within the meaning of Section 17(5)(d) if it serves as an essential tool of trade with which business is carried on.
• However, if it merely serves as a setting in which business is carried on, it will not qualify as a ‘plant’.

Additionally, the law should be interpreted in a manner that ITC can only be restricted when the service is used for personal or for providing exempted supplies.

Thus, if the immovable property satisfies the functionality test, and is used in the course or furtherance of business, then taxpayers could claim the ITC on goods or service or both used for construction.

Post 55^th GST Council Meeting Era

The 55^th GST Council meeting recommended an amendment to section 17(5)(d) of the CGST Act, 2017, which is implemented retrospectively with effect from 01^st July, 2017.The amendment replaced the phrase “Plant or Machinery” with “Plant and Machinery.

Extracts of press release of 55^th GST Council Meeting:

“To align the provisions of section 17(5)(d) of CGST Act, 2017 with the intent of the said section, the Council has recommended amending section 17(5)(d) of CGST Act, 2017, to replace the phrase “plant or machinery” with “plant and machinery”, retrospectively, with effect from 01.07.2017, so that the said phrase may be interpreted as per the Explanation at the end of section 17 of CGST Act, 2017. “

Thus, above amendment removed the ambiguity or loop hole which exist because of expression “Plant or Machinery”, now section 17(5)(d) reads out the expression as “Plant and Machinery”. 

Definition of Plant and Machinery 

 “The expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes- 

• • land, building or any other civil structures;
  • telecommunication towers; and
  • pipelines laid outside the factory premises.” 

Conclusion:

In light of the above developments, it is clear that taxpayers can claim GST ITC on inputs used for the construction of immovable properties only if the property meets the definition of “Plant and Machinery” as per the section 17(6) of the CGST Act, 20107. This amendment has brought much needed clarity but has also narrowed the scope of ITC eligibility, potentially leading to the cascading effect of taxes.

Taxpayers must clearly evaluate whether their immovable properties is in compliance with the definition of plant and machinery under the amended provisions to ensure proper compliance.