TAXING TIMES FOR TAXPAYERS: THE ITC DILEMMA POST-SAFARI RETREATS
The introduction of the Goods and Services Tax (GST) in India in 2017 marked a historic shift in the nation’s indirect taxation landscape. Conceptualized as a destination-based consumption tax that would eliminate the cascading effect of multiple taxes, the GST framework promised to unify the fragmented tax regime that had long plagued Indian commerce. A cornerstone of this tax system is the seamless availability of Input Tax Credit (ITC), which allows businesses to claim a credit for the tax paid on inputs used in the production of taxable outputs. The design of the ITC mechanism ensures that taxes are levied only on the value addition at each stage of the supply chain, thereby preventing tax-on-tax scenarios and enabling a frictionless commercial ecosystem. However, the system’s promise of credit seamlessness has not been without caveats, and certain exclusions have complicated its practical application.
One such critical exclusion is found in Section 17(5)(d) of the Central Goods and Services Tax Act, 2017. This provision prohibits input tax credit on goods or services used for the construction of immovable property on the taxpayer’s own account, even when such construction is undertaken in the course or furtherance of business. The language of this clause has led to interpretational ambiguities and disputes, particularly in cases where the constructed property is used not for personal consumption but as a revenue-generating asset that contributes to taxable supplies. The now-famous legal battle involving Safari Retreats Private Limited arose from this tension and has since become a focal point of legal and policy discourse in Indian tax jurisprudence.
Safari Retreats, a real estate developer, had constructed a shopping mall for the express purpose of leasing it out to various tenants, a business activity squarely within the taxable ambit under GST. Since the lease of commercial property is liable to GST, the company logically sought to claim input tax credit on the goods and services it had used during the mall’s construction. However, tax authorities rejected the claim, invoking the Section 17(5)(d) restriction. The crux of the authorities’ argument lay in their reading of the phrase “on his own account,” suggesting that regardless of the business use, the very act of constructing immovable property precluded ITC eligibility.
Aggrieved by this interpretation, Safari Retreats took the matter to the Orissa High Court, which issued a landmark ruling that fundamentally challenged the prevailing view. The High Court opined that the denial of ITC in such circumstances led to a cascading effect of taxation, thereby defeating the primary objective of GST. Since leasing out the mall generated taxable revenue, the court reasoned that denying ITC on the construction cost amounted to taxing the same value multiple times. This outcome, according to the court, was not merely unfair but economically irrational. The judges concluded that the phrase “on his own account” must be interpreted contextually and not in a literalistic vacuum. They held that if the constructed property was being used to provide taxable output services, then denying ITC would violate both the spirit and the letter of the GST framework.
The High Court’s ruling was widely hailed by industry stakeholders for aligning legal interpretation with business realities. By recognizing that a commercial structure intended for leasing should not be equated with property held for personal use, the court brought clarity to a grey area that had long burdened taxpayers. However, the central government, concerned about the fiscal implications of this interpretation, appealed the decision to the Supreme Court of India.
When the matter reached the apex court, a constitutional bench took up the task of interpreting the contentious provision and its impact on the broader GST framework. The Supreme Court, in its judgment delivered in October 2024, upheld the constitutional validity of Section 17(5)(d), affirming the legislature’s authority to prescribe exceptions and conditions in the availability of ITC. The Court emphasized that input tax credit is not an absolute or vested right but a statutory entitlement that may be regulated through legislative instruments. The Court was careful not to outright dismiss the concerns raised in the Orissa High Court’s judgment but noted that the legislative intent behind Section 17(5)(d) was clear and that the judiciary must not encroach upon the policy prerogatives of the legislature.
Interestingly, the Supreme Court did not close the door entirely on ITC for construction-related expenditures. Rather, it introduced a new analytical lens—the functionality test—to determine whether the constructed structure could be regarded as “plant and machinery.” If a building or installation serves a technical or operational function essential to the taxpayer’s business, it might still qualify for ITC despite being immovable property. For example, the Court alluded to specialized structures such as cold storage units, silos, or warehouses equipped with advanced infrastructure that perform integral operational roles. This approach was not only innovative but also reflected a growing awareness within the judiciary of the need to align legal doctrine with commercial practicality.
In a notable development, the Supreme Court did not pass a final verdict on the ITC entitlement of Safari Retreats. Instead, it remanded the matter back to the Orissa High Court to evaluate, in light of the functionality test, whether the constructed mall qualified for credit. This nuanced approach sought to strike a balance between the legislative boundaries of Section 17(5)(d) and the operational realities of modern commerce. By allowing for a fact-specific determination, the Court demonstrated judicial restraint while offering a roadmap for fairer application of the law.
However, the Central Government’s response to the Supreme Court’s judgment was swift and decisive. Perceiving a risk of widespread ITC claims based on the new judicial interpretation, the legislature amended Section 17(5)(d) through the Finance Act of 2024. This amendment replaced the phrase “plant or machinery” with “plant and machinery,” effectively closing the interpretive window opened by the functionality test. The subtle but significant change reinforced the original legislative intent, since the term “plant and machinery” as defined under the CGST Rules explicitly excludes buildings and civil structures. Furthermore, the amendment was made retrospective to July 1, 2017—the very date on which the GST regime was introduced.
This retrospective amendment has had profound implications. It effectively nullifies not just the Safari Retreats litigation but all similar cases where taxpayers might have relied on a purposive interpretation to claim ITC on immovable property. For businesses that had already claimed such credits based on favorable court orders or administrative interpretations, the amendment amounts to a retroactive clawback of tax benefits. The legislative move has raised serious concerns regarding the sanctity of judicial pronouncements and the principles of fairness and predictability in tax law. It reflects a broader tension between the judiciary’s role in interpreting laws and the legislature’s power to override such interpretations through statutory instruments.
Legal scholars and tax practitioners have voiced concerns about the constitutional implications of such retrospective amendments. Critics argue that retrospective taxation, especially when it overturns settled judicial positions, can lead to uncertainty and deter legitimate business activity. The doctrine of separation of powers requires that while legislatures may enact laws, the interpretation and application of those laws fall within the judiciary’s exclusive domain. Legislative reversals of judicial decisions, particularly when done with retrospective effect, can blur this line and raise questions about democratic accountability.
Moreover, the retrospective withdrawal of tax benefits has been criticized as violative of the doctrine of legitimate expectation. Taxpayers who structured their affairs based on prevailing interpretations and judicial guidance now find themselves facing potential tax liabilities, interest, and penalties. The arbitrary nature of such reversals also invites scrutiny under Article 14 of the Constitution, which guarantees equality before the law. A policy that punishes taxpayers for following the law as interpreted by the courts may be seen as unfairly discriminatory.
From a business standpoint, the fallout has been particularly severe for sectors like real estate, logistics, and infrastructure development. Companies operating under lease-based models—such as mall developers, industrial park operators, and retail space lessors—have invested large sums in constructing properties intended for leasing. Since rental income from commercial property is taxable under GST, denying ITC on the capital expenditure associated with such projects introduces a significant cost asymmetry. The tax paid on construction inputs becomes a sunk cost, while the output continues to be taxed. This undermines the fundamental GST principle of taxing only the value addition and disincentivizes leasing models that might otherwise be more efficient or scalable.
The government’s rationale for the retrospective amendment is rooted in fiscal prudence. Authorities argue that allowing ITC on immovable property would create revenue leakages and increase administrative complexity. However, critics contend that these concerns could be better addressed through targeted safeguards and audits rather than blanket disqualifications. For instance, credit could be conditionally allowed where there is a direct nexus between the capital asset and taxable output, provided that adequate documentation and verification mechanisms are in place.
Legal and policy observers have also pointed to the persistent ambiguity surrounding key phrases such as “on his own account.” The absence of a clear statutory or judicial definition of this phrase has led to conflicting interpretations across jurisdictions. Does it mean ownership? Personal consumption? Or merely internal use? Until these terms are precisely defined, tax authorities and courts will continue to grapple with interpretational uncertainties, leading to litigation and inconsistent application of the law.
Going forward, there is a strong case for re-examining the structure of Section 17(5) to align it more closely with economic substance and business realities. Rather than disallowing ITC based on asset type or location, a more nuanced framework could focus on the use of the input and the nature of the output supply. Such a model would be more consistent with international best practices and the original intent of GST.
In conclusion, the Safari Retreats case and the events that followed encapsulate the complex interplay between legal interpretation, legislative authority, and economic policy. The Supreme Court’s attempt to inject flexibility and rationality into the ITC framework was met with legislative counteraction that reaffirmed textual rigidity. While the government has succeeded in protecting the exchequer, it has done so at the cost of legal certainty and commercial trust. As the legal community braces for potential constitutional challenges to the retrospective amendment, one thing is clear: the debate over ITC on immovable property is far from over. Whether through judicial review, administrative clarification, or legislative reform, the future of ITC under GST will continue to evolve in response to the dynamic needs of India’s economy.
*This article represents the author’s personal views and is for informational purposes only. It does not constitute legal or tax advice. Readers should seek professional guidance for their specific situations. The author and publisher bear no responsibility for actions taken based on this content.
