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.

Bona Fide Purchasers’ Right to ITC : Supreme Court

Key Tax and ITC Developments Recent Supreme Court Ruling.

Reliance on Pr. Commissioner of Income Tax-21 v. M/s. Remfry & Sagar (2025) :  The Court heavily relied on the judgment in Pr. CIT-21 v. M/s. Remfry & Sagar (2025), where a coordinate bench rejected the Department’s contention that the licence to use goodwill was merely a device to avoid tax. This reinforces the principle that genuine business arrangements cannot be disregarded merely on suspicion of tax avoidance.

ITC Benefits for Bona Fide Purchasers Upheld: In a landmark ruling, the Supreme Court of India held that purchaser-dealers are entitled to Input Tax Credit (ITC) even if the selling dealer fails to deposit the tax collected.

Key Highlights:

• Protection of ITC: Bona fide purchasers’ ITC claims cannot be denied due to the seller’s default.
• Due Verification: Authorities must verify the genuineness of the transactions before granting ITC.
• Fairness Principle: The Court emphasized that genuine purchasers should not be penalized for another’s fault.
• Broader Impact: Although delivered in the context of the VAT regime, the ruling is expected to influence interpretation and litigation under the GST regime as well.

Pre-Deposit Shields Taxpayers from Recovery Actions : In another crucial decision, the Supreme Court ruled that once a taxpayer has made the 10% pre-deposit required under Section 107(6) of the CGST Act for filing an appeal, the Department cannot attach bank accounts or initiate recvery proceedings. Key Highlights of SC decision on Pre-Deposit Shields Taxpayers from Recovery Actions:

• No Account Attachment: After the pre-deposit, further recovery or attachment of funds is prohibited.
• Deemed Stay: The pre-deposit automatically operates as a stay on recovery actions.
• Taxpayer Relief: This ruling provides significant protection to genuine taxpayers from arbitrary or coercive recovery measures.

Similarly, a summary of the Supreme Court’s ruling in Commissioner of Trade and Tax, Delhi v. M/s Shanti Kiran India (P) Ltd. This judgment indeed marks a pivotal moment in Indian tax jurisprudence. Here’s a concise recap of its significance:Key Legal Takeaways Supreme Court’s ruling in Commissioner of Trade and Tax, Delhi v. M/s Shanti Kiran India (P) Ltd.

• ITC as a Statutory Right: The Court affirmed that Input Tax Credit is not a concession but a vested right, once tax is paid on a valid invoice from a registered seller.
• No Penalization Without Fault: Bona fide purchasers cannot be penalized for the seller’s failure to deposit tax unless fraud or collusion is proven.
• Constitutional Anchoring: The judgment harmonizes fiscal enforcement with Article 14 ensuring equality and protection against arbitrary action.
• Binding Precedent: The Supreme Court’s endorsement of the On Quest reading down of Section 9(2)(g) now becomes binding across jurisdictions.

Broader Implications

• GST Regime Impact: The reasoning is expected to influence GST disputes, especially where ITC is denied due to supplier-side mismatches (e.g., GSTR-2A/2B issues).
• Global Alignment: The judgment echoes EU VAT principles emphasizing proportionality, neutrality, and legitimate expectation.
• Administrative Reform: Encourages evidence-based enforcement and discourages blanket reversals of ITC.

Why It Matters: This ruling restores trust and balance in the tax system. It sends a clear message: compliance must be rewarded, not punished, and enforcement must be fair, proportionate, and constitutionally sound.

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