The Central Board of Indirect Taxes & Customs (CBIC) has notified October 1 as the date for bringing into force amendments in the CGST Act, enacted through the Finance Act 2025. These amendments retrospectively override the judicial interpretation in the Safari Retreats case. The changes specifically target blocked credit provisions under Section 17(5), negating the Supreme Court’s stance that buildings such as malls could qualify as ‘plant’ and, hence, be eligible for input tax credit (ITC).
“In exercise of the powers conferred by clause (b) of sub-section (2) of section 1 of the Finance Act, 2025, the Central government hereby appoints the first day of October as the date on which the provisions of clauses (ii) and (iii) of section 121, sections 122 to 124 and sections 126 to 134 of the said Act shall come into force,” a CBIC notification said.
Most critical
Among these provisions, clause 124 is the most critical. It amends Section 17(5) of the CGST Act, which blocks ITC on 11 categories of expenditure, including the construction of immovable property. The amendment substitutes the phrase “plant or machinery” with “plant and machinery”, effective retrospectively from July 1, 2017, “notwithstanding anything to the contrary contained in any judgment, decree or order of any court or authority”.
In the particular provision, the amendment substitutes the words ‘plant or machinery’ with words ‘plant and machinery.’ This amendment will be effective retrospectively from July 1, 2017, “notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority”, said the explanatory memorandum to the Finance Bill 2025.
This language is designed to nullify the judicial precedent in the Safari Retreats case set by the Supreme Court. On October 3 last year, the Supreme Court upheld an Odisha High Court ruling that allowed ITC on construction of a shopping mall, holding that the mall functioned as a plant for providing taxable services such as renting or leasing. The Court had applied a functionality test to conclude that construction integral to service supply should be eligible for ITC.
This decision upheld a ruling by the Odisha High Court in the case of Safari Retreats. The core of the issue lay in Section 17(5) of the CGST Act, which generally prohibits the application of ITC in works contract services used in constructing immovable property, with the exclusion for “plant and machinery.”
Functionality test
The crucial question was how ‘plant and machinery’ would be defined in this context. The High Court had determined that if an assessee was liable to pay GST on rental income from a mall, they were entitled to ITC on the GST paid for its construction. The Supreme Court affirmed this, stating that a functionality test should be applied to determine if a building qualifies as a plant, concluding that a shopping mall could be considered a plant if its construction was essential for providing services like renting or leasing.
Industry sources said with the enactment and notifying the appointed date will lead to further litigation. Many taxpayers, following the High Court and initial Supreme Court rulings, had claimed ITC instead of depreciation on the tax component of capital goods. Now, with the government’s insistence on the retrospective amendment, these taxpayers may be required to repay the claimed ITC along with interest.
