The case of M/s Safari Retreats Private Ltd. vs. the Chief Commissioner of Central Goods and Services Tax (GST) is a significant landmark in the GST legal landscape. It raises crucial questions on the applicability of Input Tax Credit (ITC) under Section 17(5)(d) of the Central Goods and Services Tax Act (CGST Act), 2017, specifically for businesses involved in renting out immovable property. The outcome of this case has wide-reaching implications for industries, particularly those in real estate, construction, and leasing services.
M/s Safari Retreats Private Ltd. is engaged in constructing a shopping mall with the intent to rent out premises to various tenants. During construction, the company utilized vast quantities of taxable goods and services—ranging from building materials like cement and steel to professional services such as architectural and engineering consultancy.
While the construction of the mall generated significant Input Tax Credit (ITC) from GST paid on these goods and services, Safari Retreats faced an obstacle when it came to utilizing this ITC. The rental income from letting out the mall attracted GST, and the company sought to offset the GST on rental income with the accumulated ITC. However, the GST authorities disallowed this, citing the restrictions under Section 17(5)(d) of the CGST Act, which prohibits ITC for goods and services used for the construction of immovable property.
The case centers around the following key issues:
The crux of the dispute lies in the interpretation of Section 17(5)(d) of the CGST Act, which explicitly blocks ITC on goods or services used for the construction of an immovable property when used "on his own account." The provision aims to prevent businesses from claiming ITC on construction costs unless the resulting property is meant for further taxable supply (e.g., sale). However, in the case of businesses like Safari Retreats, where the property is constructed for leasing purposes (a taxable supply subject to GST), this blanket restriction seems counterintuitive.
The Orissa High Court ruled in favor of M/s Safari Retreats, holding that Section 17(5)(d) should be read down. The court observed that the purpose of ITC is to prevent the cascading effect of taxation, and denying ITC on goods and services used for constructing a property that is rented out would defeat this objective.
The court clarified that when an assessee is collecting GST on rental income, they should be allowed to utilize the ITC accumulated from the construction of the property. By interpreting the provision narrowly, the GST department would create an undue burden on businesses, leading to an excessive tax load and a break in the seamless flow of ITC.
The Orissa High Court had earlier ruled in favor of M/s Safari Retreats, allowing ITC on construction costs, reasoning that such expenses, when incurred for generating rental income (a taxable supply), should be eligible for ITC. However, the Supreme Court set aside this decision and remanded the case back to the Odisha High Court for reconsideration.
The Supreme Court did not provide a clear "yes" or "no" answer regarding whether malls constructed for leasing out are eligible for ITC. Instead, it asked the Odisha High Court to apply a "functionality test" to determine whether the mall could be classified as a "plant." If the mall passes this test, ITC would be allowed. Therefore, the ruling left the final decision to be determined based on the specific facts of the case.
The Safari Retreats case remains a significant but unresolved issue for the real estate and construction sectors. While the Supreme Court has not provided a decisive ruling, the case signals the need for more precise legal definitions and a deeper understanding of the functionality test for determining ITC eligibility. The eventual outcome from the Odisha High Court will set an important precedent for businesses constructing rental properties under the GST regime.
Section 17(5)(d) of the CGST Act disallows businesses from claiming Input Tax Credit (ITC) on goods or services used for the construction of immovable property, unless the property is used for the further supply of goods or services (e.g., sale of real estate).
Currently, there is no blanket rule. Businesses constructing properties for rental purposes may be able to claim ITC if the property qualifies under the "functionality test." Each case will need to be assessed based on its unique circumstances.
The "functionality test" is a concept introduced by the Supreme Court to determine whether a property can be classified as a "plant" under the CGST Act. If the property passes this test, ITC may be allowed.
The Supreme Court did not provide a definitive answer on whether ITC is allowed for malls or hotels. It remanded the case back to the Odisha High Court to apply the "functionality test" and determine ITC eligibility.
At SAC Consulting Services, we are committed to integrating AI to streamline your business operations. Reach out to learn more about how our AI-driven solutions can benefit you.