Executive Summary:
The Goods and Services Tax (GST) regime in India, while aimed at simplifying indirect taxation, presents a unique and often complex landscape for the real estate and infrastructure sectors, particularly concerning Input Tax Credit (ITC) eligibility. The restrictions embedded within Section 17(5) of the CGST Act, 2017, significantly impact the ability of developers, contractors, and businesses to avail ITC on goods and services used for the construction of immovable property. This article provides a comprehensive analysis of the legal framework governing ITC in these sectors, delving into the intricacies of residential versus commercial projects, the treatment of works contracts, Transferable Development Rights (TDR), Floor Space Index (FSI), and long-term leases. It also critically examines key judicial pronouncements, including the landmark Supreme Court ruling in M/s Safari Retreats Private Ltd., to bridge the gap between legal provisions and practical implications, offering insights for professionals navigating these challenging waters.
1. Introduction
The real estate and infrastructure sectors are vital drivers of economic growth in India. With the implementation of GST, the taxation of these sectors underwent a significant transformation, aiming for greater transparency and reducing the cascading effect of taxes. However, the mechanism of Input Tax Credit (ITC), which is fundamental to the GST framework, has been heavily restricted in these sectors, leading to numerous disputes and complexities. The core of the challenge lies in understanding what constitutes “immovable property,” “works contract,” and the specific conditions under which ITC can be claimed or is outright blocked. This article aims to provide a deep dive into these complexities, offering a practical guide for professionals to ensure compliance and optimize tax positions for their clients.
- Statutory Framework: The Bedrock of ITC Eligibility
The availability of ITC under GST is primarily governed by Section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act), which lays down the general conditions for availing ITC. However, the most critical provisions for real estate and infrastructure are the restrictions and blocked credits specified in Section 17 of the CGST Act, 2017.
2.1. General Principles of ITC (Section 16):
- A registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.
- Conditions for availing ITC include:
- Possession of a tax invoice or debit note.
- Receipt of goods or services.
- Tax charged on such supply has been actually paid to the Government.
- Filing of return under Section 39.
2.2. Apportionment of ITC and Blocked Credits (Section 17):
Section 17 plays a pivotal role in determining ITC eligibility in real estate and infrastructure projects.
- Section 17(2): Where the goods or services or both are used by the registered person partly for effecting taxable supplies (including zero-rated supplies) and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies.
- Section 17(3): Defines “exempt supply” for the purpose of sub-section (2) to include activities or transactions specified in Schedule III. Importantly, Para 5 of Schedule III specifies that the “sale of land” and “sale of building after completion certificate” are neither supply of goods nor supply of services. This means no GST is levied on these transactions, and consequently, no ITC is available in relation to them.
- Section 17(5) – Blocked Credits (Crucial for Real Estate & Infrastructure): This sub-section lists specific goods or services on which ITC is not available, irrespective of whether they are used in the course or furtherance of business. The relevant clauses for our discussion are:
- Section 17(5)(c): “works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.”
- Legal Implication: A developer who receives works contract services for constructing a building (not being plant or machinery) cannot claim ITC on such services.
- Exception: If a sub-contractor provides works contract services to a main contractor, the main contractor can claim ITC on such services if he is further supplying works contract services to the developer. The main contractor is essentially consuming the sub-contractor’s works contract service to provide his own works contract service.
- Section 17(5)(d): “goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.”
- Legal Implication: This is a broader restriction. If a person constructs an immovable property (other than plant and machinery) for his own use (e.g., an office building for his business, a factory building for manufacturing), he cannot claim ITC on the goods (like cement, steel, bricks) and services (like architectural services, labor) used for such construction.
- Distinction from 17(5)(c): Clause (c) deals with works contract services received, while clause (d) deals with goods or services received for construction on own account. In many real estate projects, developers procure materials and services and construct “on their own account” for subsequent sale, making this clause highly relevant.
- “Plant and Machinery” Exception: Both clauses (c) and (d) provide an exception for “plant and machinery.” Explanation to Section 17(5) defines “plant and machinery” as “apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for the outward supply of goods or services 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.” This exception is critical for infrastructure projects where large-scale plant and machinery are installed.
- Section 17(5)(c): “works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.”
2.3 ITC in Real Estate Projects: Residential vs. Commercial
The GST Council introduced significant changes for the real estate sector effective April 1, 2019, fundamentally altering ITC eligibility, particularly for residential projects.
3.1. Residential Real Estate Projects (RREP):
- New Rates (Effective April 1, 2019):
- Affordable Housing: 1% GST without ITC.
- Definition: Carpet area up to 60 sq. m. in metropolitan cities (Chennai, Delhi NCR, Kolkata, Mumbai, Hyderabad, Bengaluru) or 90 sq. m. in non-metropolitan cities, and gross consideration not exceeding ₹45 lakhs.
- Other Residential Apartments: 5% GST without ITC.
- Affordable Housing: 1% GST without ITC.
- Implication: For residential projects, developers largely cannot claim ITC on inputs (goods and services) used in construction if they opt for these new reduced rates. This ensures that the benefit of reduced tax rates is passed on directly to homebuyers.
- Old Rates (Applicable to “Ongoing Projects” where option was chosen): Projects that commenced before April 1, 2019, had the option to continue under the old rates of 12% (for non-affordable) or 8% (for affordable) with ITC. However, a significant ITC reversal mechanism applied if the project was not fully sold by completion. This option is largely phased out for new projects.
- 80% Procurement from Registered Suppliers: A crucial compliance requirement for residential projects under the new rates (1% and 5%) is that promoters must procure at least 80% of the value of input and input services (excluding specified exempted items like TDR/FSI, long-term lease, electricity) from registered suppliers. A shortfall attracts GST at 18% on a reverse charge basis. Cement from unregistered suppliers attracts 28% GST under reverse charge.
- Same GST Rates need to be Exercised by the New Builder for under-construction Projects, as exercised by Original Promoter: The Authority for Advance Ruling, Maharashtra in the case of M/S. GODREJ RESIDENCY PVT.LTD. vide Case No.- GST-ARA-37/2023-24/B-157 dated 27.03.2025, has ruled that when a new builder takes over an under-construction housing project, they must follow the same GST rate that the previous builder (old promoter) had chosen.
3.2. Commercial Real Estate Projects (CREP):
- Rates: Generally, commercial properties (shops, offices, malls) are taxed at 12% with ITC.
- ITC Availability: Developers of purely commercial projects are generally eligible to claim ITC on inputs used for construction, provided the property is sold before the issuance of the completion certificate or first occupation.
- Commercial apartments within an RREP: If a residential real estate project (RREP) also contains commercial apartments, the GST rate for these commercial apartments is 5% (without ITC), similar to residential units. This is a crucial distinction.
3.3. Ready-to-Move-In Properties:
No GST: Sale of completed immovable property (after issuance of completion certificate by a competent authority or first occupation, whichever is earlier) is exempt from GST as it falls under Para 5 of Schedule III. Consequently, there is no ITC on inputs used for such properties if the sale occurs post-completion.
- Long-Term Lease of Land (30 years or more):
- Taxability: The upfront amount (premium, salami, etc.) for granting a long-term lease of land (30 years or more) is considered a supply of service and is taxable under GST.
- Recipient Liability (RCM): The developer/promoter is liable to pay GST on such upfront amounts under RCM.
- ITC Implications: Similar to TDR/FSI, ITC eligibility depends on the nature of the constructed property (residential vs. commercial) and the chosen tax scheme. ITC is generally restricted for residential projects under the new rates and available for commercial projects.
3.4 The “Self-Use” Conundrum and the Safari Retreats Judgment
Section 17(5)(d) is central to disputes involving ITC on immovable property constructed for the taxable person’s “own account.” The prevailing understanding was that if a business constructs a building for its own use (e.g., an office building, a factory building, or a commercial complex for leasing out), ITC on inputs used for such construction was blocked. This interpretation created a cascading effect, especially for businesses whose primary activity was leasing out commercial properties.
6.1. The Landmark Case: M/s Safari Retreats Private Ltd. v. Chief Commissioner of Central Goods and Services Tax (Supreme Court, 2024)
Background: Safari Retreats Pvt. Ltd. constructed a shopping mall for the purpose of letting it out to tenants. They sought to claim ITC on the GST paid for goods and services used in the mall’s construction (e.g., cement, steel, lifts, AC systems). The tax authorities denied ITC, citing Section 17(5)(d), arguing that the mall was an immovable property constructed “on their own account.”
Orissa High Court Ruling (2019): The Orissa High Court ruled in favor of Safari Retreats, holding that denying ITC on inputs used for construction of a commercial property intended for leasing would lead to a cascading effect and defeat the very object of GST. The High Court took a purposive interpretation, stating that if the outward supply (leasing) is taxable, the ITC on inputs for creating that supply should be allowed. It distinguished “on own account” to mean self-consumption rather than construction for the purpose of providing taxable services.
Supreme Court’s Confirmation (2024): The Supreme Court has upheld the Orissa High Court’s decision in the Safari Retreats case. While the full detailed judgment from the Supreme Court is eagerly awaited, reports indicate that the apex court has emphasized a “functional” and “essentiality” test. If a building’s construction is essential for providing taxable services like leasing or renting, it could implicitly fall under the “plant” exception or, more broadly, under the spirit of eliminating cascading effects. The Supreme Court’s decision, when released in full, is expected to bring significant clarity and relief to developers and businesses involved in constructing commercial properties for leasing purposes.
Review Petition (CIVIL) DIARY No(s). 1188/2025 C.A. No. 2948/2023 filed by the the Department against the judgment of Supreme Court is dismissed dated 20.05.2025.
Author Bio
THERE IS NO WHISPER ABOUT YOUR VIEWS ON THE JUDGEMENT OF PATNA HIGH COURT IN THE CASE OF SHASHI RANJAN CONSTRUCTION, WHICH IS A SUBJECT MATTER OF YOUR ARTICLE.
My View on the Patna High Court Judgment (Shashi Ranjan Constructions Pvt. Ltd. vs. UOI):
The judgment of the Patna High Court upholding GST liability under Reverse Charge Mechanism (RCM) on construction services provided to landowners in exchange for development rights is significant and aligns with the broader scheme of the GST law. It affirms the principle that supply of construction services, even when the consideration is in kind (i.e., share of constructed units), constitutes a taxable supply under Section 7 read with Schedule II, Entry 5(b) of the CGST Act.
What stands out in this ruling is the clear distinction made between:
Transfer of development rights (TDR), which may or may not be taxable depending on timing and notification provisions; and
Construction services rendered by the builder to the landowner, which are squarely covered under SAC 9954 and taxable under Notification No. 11/2017-CT(Rate).
The Court’s emphasis that ownership in land was not transferred, but merely a license to develop was given, reflects the practical arrangement of most JDAs, and justifies the levy of GST on services rendered by the builder to the landowner.
However, from a taxpayer’s perspective, the following points merit deeper policy-level attention:
Transitional Agreements: Agreements executed pre-GST but performed post-GST create ambiguity, particularly in valuation and tax treatment.
Barter Valuation Mechanism: Rule 27 provides some guidance, but valuation of services against in-kind consideration (like flats) remains a grey area in terms of practical application.
Input Tax Credit (ITC) Utilisation: Builders discharging RCM on such services should ideally be eligible to claim ITC, but procedural compliance often complicates this.
In essence, the judgment provides legal clarity but also calls for more administrative simplification and valuation clarity for such non-cash transactions.