Constructing, Renting Immovable Property — Supreme Court To Decide On GST Implications

The Supreme Court of India has agreed to hear the dispute on whether, under the goods and services tax, input tax credits should be available to companies for construction and renting out of immovable property.

The matter has traveled from the Orissa High Court in the case of Safari Retreats Pvt., where the court upheld the company's argument. The GST department has now filed a special leave petition against the high court ruling, which is now listed before the apex court on Sept. 29.

"Given that the denial of input credit disturbs the tranquility of VAT system and is also opposed to the concept of fiscal neutrality, which lies at its very foundation, the issue does merit a real look even by the policy framers and the GST Council," said Tarun Jain, advocate at the Supreme Court.

This matter impacts all entities involved in the business of construction of immovable property and further renting it out, Abhishek Rastogi, partner at Khaitan & Co., said. Rastogi is representing the company before the apex court.

Safari Retreats is engaged in the construction of shopping malls for the purpose of renting it further for commercial use. It had paid taxes on the input goods and services utilised in the construction of immovable property, namely cement, sand, steel, aluminum, wires, consultancy services, legal services, architectural services, among others. It claimed credits on these input goods and services for utilising them against GST payable on rentals.

The GST department denied the credit claim, citing section 17(5)(d) of the Central Goods & Services Tax Act, 2017. This provision says that input credit will not be available for goods or services used for the construction of immovable property, other than plant and machinery, even when used in course or furtherance of business.

The Orissa High Court disagreed with the tax department's view and read down section 17(5)(d). The purpose of GST, the high court pointed out, is to prevent multi-taxation. Paying GST on the inputs consumed in the construction of the building and on the rentals generated by the same building without allowing availment of credits imposes the burden of double taxation.

It held that an input tax credit can be availed on goods and services used for the construction of immovable property and in the course of furtherance of business.

In the VKC Footsteps India Pvt. case last year, the Supreme Court had said that input tax credit is a legislative choice. It's the GST Council and not courts which determines areas where credit should be allowed, Jain said. Viewed with that lens, it might be difficult to sustain the Orissa High Court order, he said.

"But conceptually, the high court order makes sense—cascading effect of taxes must be avoided."

According to Jain there are two kinds of supplies — one, where the builder constructs the building and sells it off. In this case, the tax chain is broken. Second, where the building is leased for commercial purpose -- here the tax chain is intact, and not being able to avail input credit goes against the objective of GST. "This line of argument is very strong," he said.

Rastogi added that input tax credits have been statutorily put in place to obviate the cascading effect of multi-stage levies and taxes. That would be one of the key arguments of the company before the apex court, he said.