Amendment on ITC for Construction Expenses in Budget 2025

Retrospective Amendment on ITC for Construction Costs

• What’s Changing : A retrospective amendment, effective from July 1, 2017, prevents entities—like commercial real estate companies—from claiming Input Tax Credit (ITC) on goods and services used in the construction of immovable property on their own account (e.g., buildings, warehouses). The government proposes a retrospective amendment (effective from July 1, 2017) that disallows commercial real estate companies from claiming Input Tax Credit (ITC) on construction costs for rental properties.
• Entities constructing immovable properties (e.g., commercial buildings, warehouses) for their own use will no longer be eligible for ITC on the goods and services used in construction.

Impact on Sectors:

• Hospitality & Commercial Leasing: The amendment particularly affects industries like hospitality and commercial leasing by restricting ITC on construction costs, potentially increasing their tax outgo. This change significantly impacts hospitality and commercial leasing sectors, potentially increasing their overall GST liability.

• Investor Confidence: Industry experts, such as Rohit Jain from Economic Laws Practice, caution that this retrospective change is seen as retrograde and regressive, undermining the stability and predictability that investors value.
• Industry Reactions:
  • Experts like Vimal Nadar of Colliers India warn that the retrospective nature of this amendment undermines stability and predictability, potentially deterring investors.
  • The actual impact will depend on whether companies have been claiming ITC since 2017 and how they adjusted their tax calculations following the SC ruling in 2024.
  • The amendment aims to clarify the definition of “plant and machinery” for ITC eligibility, but it also poses challenges for the commercial real estate sector by retroactively restricting benefits previously enjoyed.

Legal Context:

• Supreme Court Precedent: The amendment overturns part of the Supreme Court ruling in the Safari Retreats case, where ITC was allowed by considering a building as “plant.” The original Supreme Court interpretation distinguished between “plant or machinery” (permitting ITC) and “plant and machinery.” The amendment replaces “plant or machinery” with “plant and machinery.” Potential for Legal Challenge: Given the Supreme Court’s stance that vested rights should not be revoked retrospectively, taxpayers may have grounds to challenge this amendment.

Input tax credit removal set to hit commercial realty cos

The amendment overturns a recent Supreme Court decision (Safari Retreats case) where ITC was allowed by classifying buildings as “plant” under the GST Act. The revised budget replaces “plant or machinery” with “plant and machinery” as per the GST council’s recommendation, thereby narrowing the eligibility for ITC claims.

While the amendment restricts Input Tax Credit claims on construction costs for certain properties, parts of the Supreme Court’s interpretation regarding “construction on one’s own account” remain intact, offering some room for legal recourse in commercial real estate and infrastructure sectors. This change is expected to bring clarity to tax laws, though it may face legal challenges given its retrospective nature and its divergence from earlier Supreme Court interpretations.

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