I. Introduction
The constant tug of war between the legislature and the judiciary frequently raises concerns about the precarious balance of power and authority. The question, whether or not, the policy or law makers could overturn the court decisions has long been contentious. One significant incident surrounding the similar issue can be derived from the end result of Safari Retreats Private Limited v. Chief Commissioner of Central Goods and Service Tax (hereinafter “Safari Retreats Case”) which got overturned by a retrospective amendment of law, introduced through the proposal from the Goods and Service Tax Council (hereinafter “GST Council”). Concerns over the claim of ITC on goods or services utilised in the construction of an immovable property were allayed by this landmark ruling.
Such an intervention by the legislature, raises a very critical question in the minds of taxpayers: Whether the legislature has the authority to reverse judicial decisions, and if yes, to what extent such a power can be exercised? This blog attempts to critically analyze this issue in light of the Safari Retreats Judgement (supra) by keeping in mind the constitutional structure as well as the power struggle between the two organs of the government in relation to Goods and Service Tax (hereinafter “GST“) regime.
II. Safari Retreats Case: The Bigger Picture
The M/s Safari Retreats Pvt. Ltd. case (supra) highlights the ongoing battle between judicial interpretation, legislative control, and taxpayer expectation in India’s GST regime. The company’s challenge to Sections 17(5)(c) and 17(5)(d) of the Central Goods and Service Tax Act 2017 (hereinafter “CGST Act”), was on account of the disallowance of Input Tax Credit (ITC) on construction expense for an immovable property for rent purposes which is a taxable supply of service.
The Hon’ble Orissa High Court on 17th the April 2019 decided in favour of the petitioner, questioning the restrictive construction of Section 17(5)(d) of the CGST Act. Invoking the case of Eicher Motors Ltd. and Another v. Union of India and Others, AIR 1999 SC 892 (Supreme Court of India, Jan. 28, 1999), the Court argued that blocking of ITC under such circumstances vitiated the major purpose of GST of evading the cascading effect of taxation. This was in accordance with the tax neutrality concept, which is also one of the fundamental pillars of the GST regime.
The Hon’ble Supreme Court upheld the constitutional validity of Section 17(5)(d). By applying the test of functionality, the Supreme Court distinguished between “plant and machinery” and “plant or machinery,” clearly stating that buildings constructed for leasing businesses are not “plant” unless they are designed to perform core business functions. Certain precedents such as Commissioner of Income Tax v. Victory Aqua Farm Ltd., (2004) 192 CTR (Ker) 593 (Kerala High Court, Oct. 14, 2004) and CIT, Andhra Pradesh v. M/s Taj Mahal Hotel, Secunderabad, AIR 1972 SC 168 (Supreme Court of India, Aug. 12, 1971) were cited in favor of this position. Although the judgment provided an unambiguous direction of interpretation, it created nervousness among real estate taxpayers where the construction cost had a significant impact on investment planning. The harsh interpretation brought to the forefront the tension between literal statutory language and the broader economic goals of the GST.
III. Fallout of Legislative Supremacy
The solace granted to the real estate industry by such a ruling proved to be short-lived. The Finance Bill, as introduced in Union Budget 2025, overturns the Supreme Court’s ruling in the Safari Retreats Case (supra) by amending Section 17(5)(d) of the CGST Act and replacing the term ‘plant or machinery’ with the phrase ‘plant and machinery’ and such an amendment was given effect to retrospectively. Even though the said amendment aimed at clarifying. Even though the said amendment aimed at clarifying legislative intent with regard to the issue at hand but the practical implication of such an amendment was overlooked.
One of the most significant issues with taxpayers in the case where legislative changes are brought into effect retrospectively is the generation of legal uncertainty. Taxpayers, whether they are individuals or companies, rely on the existing body of law so that they may make informed decisions on their operational and economic actions. For businesses, such uncertainty can result in costly and time-consuming litigation, as they attempt to clarify or seek to contest new provisions. Furthermore, the proposed amendment will also significantly hamper the working capital of the businesses involved in the real estate sector, as the ITC in respect of construction of an immovable property will no longer be available. Such a discrepancy frustrates the very objective of the legislature to enact GST law i.e. to ease the burden on the taxpayers by creating a unified tax system.
Perhaps most importantly, loss of confidence in the legislative process is a significant consequence of such retrospective amendments. Taxpayers, business, and investors view such amendments as unjust or arbitrary which diminishes their confidence in the stability of the legal system. When retrospectivity is employed to override judicial rulings, it implies that the law can be altered at any point in time to satisfy short-term political interests instead of long-term values of legal predictability and justice. Such belief can result in declining confidence in the legislative and judicial institutions and can have adverse consequences for economic development and the business environment in general.
IV. Striking Balance: Harmonizing Judiciary and Legislature
The decision in Safari Retreats demonstrates the judiciary’s ability to fill the gap between the static constitution of tax law and the dynamic imperatives of economic reality. However, the subsequent legislative amendments in an effort to override the judicial interpretation point to an underlying tension between judicial logic and legislative intent. In order to address these issues effectively, an even-handed approach is necessary.
Clarity in legislative drafting can be one such approach. In the Safari Retreats case, the need for judicial intervention arose as a result of lack of specific and unambiguous provisions relating to certain taxable transactions. By addressing the potential areas of conflict and ambiguity at the initial stage, can help avoid disputes and facilitate effective enforcement of tax law. Furthermore, consulting legal experts, stakeholders and industry professionals during policy formulation can also significantly increase the acceptance of tax provisions among the general public.
The fact that judicial independence is the crux of keeping the power in balance within a constitutional setup is not disputed. It is also true that the legislature has the authority to enact a fresh law to fill any gap or remedy a deficiency but it cannot enact any law that directly and grossly overrules a judicial order. There is a very thin line between what a legislature can do and what it cannot do, when there is judgment of the court involved.
V. Conclusion
The Safari Retreats Case demonstrates that for democratic governance, there should be harmony between the legislature and the judiciary. Although the legislative body is allowed to veto decisions of the courts, but the same is to be done cautiously and responsibly, in consonance with the doctrine of basic structure. In the long run, developing a mutual relationship can provide a strong and harmonious legal structure that strikes a balance between the policy makers intentions and the taxpayers interests. Only this way, the GST regime can realize the intended aim to promote economic efficiency and legal certainty.
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