Safari Retreats: Apex court's decision on GST tax credits brings relief to construction sector

A careful application and reassessment of previous orders are highly warranted.

By Shivam Mehta and Tanya Garg

The much-awaited decision of the Apex Court in the case of Safari Retreats Private Limited has finally been delivered, offering a moment of respite to the construction industry.

To outline the background briefly, the GST law under Section 17(5)(d) of the CGST Act specifically disallows tax credits on expenses incurred for the construction of immovable property (other than plant or machinery) where the construction is done for the taxpayer's own account.

Orissa High Court's Interpretation

The Orissa High Court, while dealing with the case of a builder constructing a shopping mall and leasing it out, allowed the tax credit on goods and services, based on the argument that no restriction could be imposed where an assessee is required to pay GST on rental income, even if the shopping mall qualifies as immovable property.

Recently, the Apex Court, in a case involving multiple matters, interpreted the restriction on the availability of credit, delving into the meanings of "plant or machinery" and "on its own account". The Court determined that construction is considered to be on the taxpayer's own account when it is made for personal use or for a setting in which business is carried out. If the construction is intended to be sold (before completion) or leased/licensed, it would not be considered "on its own account".

SC’s Ruling on 'Plant or Machinery'

While discussing the term "plant or machinery", the Court differentiated it from the term "plant and machinery" defined under GST law, giving a wider meaning to the term "plant or machinery". The GST law defines "plant and machinery" to include apparatus, equipment, machinery, etc., but excludes civil work, land, buildings, and pipelines. The Supreme Court rejected the Government Counsel's argument that "plant or machinery" should be interpreted in the same way as "plant and machinery".

However, no strict formula was provided to determine what qualifies as "plant or machinery". The Court emphasised the application of a functionality test, stating that where a building is constructed to meet the taxpayer’s special needs, it may qualify as "plant", and thus, credits of taxes paid on such construction will be available. However, hotels and cinema theatres were excluded from the ambit of "plant or machinery" based on certain Income Tax decisions, and thus no credits for taxes paid on such constructions will be available.

Application in Determining Eligibility for Tax Credit

The decision suggests that two conditions must be met to avail tax credits: the property must either be leased out or sold (before construction is complete), and it must qualify as "plant or machinery". Additionally, what qualifies as "plant" must be determined on a case-by-case basis, with the functionality test laid out under Income Tax law.

Taxpayers in the business of leasing out property, where such property qualifies as "plant or machinery", will undoubtedly benefit from this decision. The functionality test will play a crucial role in determining eligibility. The decision is expected to reduce lease rentals and boost commercial leasing by lowering costs for lessors, as taxes paid on procurements will no longer be available as credits or form part of the cost.

The Path Forward

There remains some confusion regarding the satisfaction of the two conditions mentioned above for eligibility for tax credits. A detailed reading of the decision suggests that even if only one condition is met – either the property qualifies as "plant or machinery" or it is leased/sold before completion – the benefit of the decision could still be explored. How far this will be accepted by tax authorities remains to be seen, particularly in light of the Apex Court's thorough discussion on the scope of "plant or machinery".

All in all, the decision seems to benefit the construction sector. However, careful application and reassessment of previous stances are highly warranted, especially amidst talks of the Government potentially seeking a review of the Supreme Court's decision.

(Shivam Mehta is Executive Partner and Tanya Garg, Principal Associate at Lakshmikumaran & Sridharan.)

Views are personal, and do not represent the stand of this publication.