The GST Council's recent decision to retrospectively amend the GST law, restricting input tax credit (ITC) on construction services, has sent ripples across the real estate and infrastructure sectors. Announced during the Council's 55th meeting in Jaisalmer on December 21, 2024, the amendment aims to "correct" a drafting error in Section 17(5)(d) of the CGST Act. However, this move has sparked concerns over its legality and industry-wide impact.
Impact of Retrospective Amendment
The amendment, effective retrospectively from July 1, 2017, replaces the phrase "plant or machinery" with "plant and machinery," effectively nullifying the Supreme Court's October 2024 judgment in the Safari Retreats case. The Court had introduced the "functionality test," allowing ITC for commercial properties like shopping malls constructed for leasing or renting, providing much-needed relief to developers and infrastructure companies.
The Council’s decision effectively blocks ITC claims that were previously validated by the Court, forcing businesses to reassess past positions and reverse claimed credits.
Reactions from Tax Experts and Industry Players
Tax experts have raised critical concerns about the amendment:
- Overruling Judicial Precedent: The Supreme Court's Safari Retreats judgment broadened the interpretation of “plant” by applying the functionality test, which was hailed as a significant relief for the industry. Experts believe the Council’s move undermines judicial authority and sets a contentious precedent.
- Financial Repercussions: Companies that claimed ITC on construction services for projects like shopping malls or leased properties must now reverse these claims, creating financial and compliance challenges.
- Industry Pushback: Many industry stakeholders view the amendment as regressive, arguing that it unfairly penalizes businesses for relying on prior legal interpretations.
One tax expert noted, “The Supreme Court’s functionality test allowed shopping malls to qualify as ‘plant,’ aligning with several direct tax rulings on depreciation. This amendment disregards that precedent under the guise of a drafting correction.”
Another expert highlighted, “Safari Retreats was a progressive step towards a broader ITC framework. This decision erodes that progress, leaving companies grappling with retrospective compliance issues.”
Legal Challenges Ahead?
The retrospective nature of the amendment has sparked debates over its constitutionality, with many experts predicting potential legal challenges. Overruling a Supreme Court judgment through retrospective legislative changes could lead to prolonged litigation, delaying clarity for the industry.
Looking Forward
As the real estate and infrastructure sectors brace for the financial and operational impacts of this amendment, the focus now shifts to potential court challenges and the GST Council’s defense of its decision. Whether this amendment achieves its intended clarity or further complicates the GST framework remains to be seen.
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