Retrospective amendment, yet again – GST Council’s recommendation to overcome recent pro-taxpayer Supreme Court judgment may fall short

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Should credit/set-off be available for taxes incurred on the input side by a taxpayer for construction of a structure/immoveable property which is integrally connected to the said taxpayer’s output side taxable activity? This is a question that has reared its head again and again in the history of Indian indirect tax laws. This debate has been rekindled with the retrospective amendment recommended by the GST Council in its recent meeting on 21st December, to overcome a Supreme Court judgment which had given a lot of hope to taxpayers.

Background to the Supreme Court judgment

Under GST, there is a specific provision restricting the benefit of credit/set-off of GST incurred for purchase of goods/services by a taxpayer “for construction of an immovable property (other than plant or machinery) on his own account”. It is important to point out that as per this provision, the benefit of credit/set-off will be available (i) if the asset/building being constructed qualifies as “plant or machinery”; or (ii) if it can be established that the taxpayer is not getting the said asset/building constructed “on his own account”.

In a judgment [Chief Commissioner of CGST vs Safari Retreats Pvt Ltd. - Civil Appeal No. 2948 of 2023], the Supreme Court interpreted the above credit restriction and laid down the following interpretation of “plant or machinery” as well as “on his own account”.

1. On “plant or machinery”- The Supreme Court noted that GST laws define the expression ‘plant and machinery’ but not the words ‘plant or machinery’ and thus the same has to be understood in a broad commercial sense. If the building in question was planned and constructed to serve a taxpayer’s special technical requirements and is essential for carrying out the taxpayer’s output activity, the building could be held to be a ‘plant’.

2. For “on his own account”- Cases of construction “on his own account” should be confined to a scenario where the structure/immoveable property in question is constructed (a) for the taxpayer’s personal use and not for providing output service; or (b) for usage by the taxpayer as a ‘setting’ /premises in which the taxpayer is carrying out business as opposed to being the very means or basis for provision of output taxable activity (for example -  leasing/licensing or selling  the said immoveable property/structure).

• By a concessionaire who operates a port, airport or similar projects under a PPP (public private partnership) model or LNG regasification terminal who has incurred/plans to incur significant input side expenses.

• By a manufacturing entity who has incurred/plans to incur significant input side capital expenditure.

GST Council’s recommended retrospective amendment

The GST Council in its recent meeting on 21st December recommended to replace the phrase "plant or machinery" with "plant and machinery", retrospectively, with effect from 1st July 2017.

As is evident, this is intended to overcome the favourable interpretation by the Supreme Court of the words ‘plant or machinery’. It is disappointing to see the spectre of retrospective tax amendment rear its head again, against the taxpayers.

All is not lost

While this retrospective amendment, if implemented, will certainly dampen the spirits especially in the commercial real estate sector in India, it is pertinent to highlight that this amendment only deals with one of the two conclusions of the Supreme Court in the Safari Retreats case.

The legal arguments based on the Supreme Court’s interpretation of construction by the taxpayer “on his own account” [see point (ii) above] will remain untouched and undiminished by this retrospective amendment and may continue to be strongly relied upon by companies in the commercial real estate space or in infrastructure/PPP space to avail credit/set-off of GST incurred for purchase of goods/services for bringing into existence a building/ asset which could qualify as the ‘means’ of provision of their respective output taxable services (that is, port or airport services, commercial renting/leasing services etc.).

Parting thoughts

Given the massive investments being made all over India for construction of critical infrastructural assets as well in the commercial real estate space, one hopes that the central and the state legislatures would re-evaluate whether to legislate this retrospective amendment recommended by the GST Council as such an amendment may significantly add to litigation under GST on the issue of input credits.

(Sudipta Bhattacharjee is Partner (Indirect Taxes & Customs) Khaitan & Co. Views expressed above are the author’s personal views and not that of Khaitan & Co.)

Views expressed above do not represent the stand of this publication.