Input tax credit on construction services: the open questions.
Our GST diagnostic.
1. The starting point: section 17(5).
Section 17(5)(c) of the CGST Act blocks ITC on works contract services when supplied for construction of an immovable property (other than plant and machinery), except where it is an input service for further supply of works contract service.
Section 17(5)(d) blocks ITC on goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Read together, these two provisions historically denied ITC to most companies constructing factories, offices, warehouses and commercial buildings. The denial was wide and well-established.
2. The Safari Retreats ruling.
The Supreme Court's 2024 ruling in Chief Commissioner of CGST v. Safari Retreats Private Limited introduced a meaningful crack in the blanket denial. The court held that section 17(5)(d) cannot be read to deny ITC where the immovable property constructed is itself used for making outward taxable supplies - in Safari Retreats, the property was a shopping mall constructed for renting out, where the rental was a taxable supply.
The court applied a functional test: if the construction is "plant" within the meaning of the Act (i.e. the building functions as the apparatus of the business, not merely as the setting), the ITC is available. The shopping mall qualified as plant because it was the operating asset of the business, not merely a building from which the business operated.
3. The post-Safari landscape.
The implications of Safari Retreats are still being worked through. Three categories of cases now exist:
- Clearly outside Safari (denial holds). Construction of an office building used only for the company's own administrative operations, where the building does not directly generate taxable outward supply. ITC on construction services and inputs continues to be denied under section 17(5)(d).
- Clearly within Safari (ITC available). Construction of immovable property where the property itself is the source of outward taxable supply - shopping malls, hotels, warehouses constructed for renting, certain commercial complexes. ITC on construction services and inputs is available.
- Grey zone (litigation expected). Construction of property used partly for outward taxable supply and partly for own use. Allocation methodology, accounting evidence and the dominant-use test become decisive. Several matters are at various stages of appeal.
4. Works contract services.
The exception in section 17(5)(c) - ITC on works contract services as input for further supply of works contract services - is well-settled and continues to operate. A works-contractor purchasing works-contract services from sub-contractors for the same project is entitled to ITC on the sub-contractor's invoices.
The exception does not extend to construction by an own-account end-user who happens to use works contractors for the building.
5. Manufacturing vs commercial use.
An open practical question post-Safari is whether construction of a factory (the building, not the plant and machinery inside) used for manufacturing of taxable supplies passes the functional test that Safari laid down. The factory building is the setting for the manufacturing; the plant and machinery inside are the apparatus.
Conservative position: section 17(5)(d) continues to apply because the building is the setting, not the apparatus. ITC on factory-building construction services and inputs is denied; ITC on the plant and machinery procured for installation in the factory continues to be available (as before; plant and machinery were always excluded from the section 17(5) denial).
Aggressive position: post-Safari, the factory building used for manufacturing taxable supplies qualifies as plant because it is purpose-built for the production activity that generates taxable outward supply. ITC on construction services for the factory building is available.
Each company will need to evaluate its position based on its specific facts. The aggressive position is being tested in several pending matters.
6. Practical positions today.
For companies undertaking construction activity in the current environment:
- Document the purpose carefully. The purpose of construction (rental, own use, manufacturing, mixed) determines the strength of any ITC claim. Documentation should be created contemporaneously.
- Map the outward-supply linkage. Where ITC is claimed on construction, the linkage to the outward taxable supply must be evidenced - rental agreements, manufacturing flow, business plans.
- Maintain working files supporting the position. Engagement of GST counsel, opinion notes, tax-position memos - all should sit in the file for any subsequent inquiry.
- Monitor the litigation. The post-Safari position is still evolving through advance rulings, HC decisions and CBIC clarifications. Periodic review of the position is necessary.
- Decide on protective measures. Some taxpayers are claiming ITC on the basis of a Safari-extending position and reversing if challenged; others are not claiming pending clarity. The choice depends on the financial materiality and the company's appetite for litigation.
Frequently asked
Did Safari Retreats reverse the blanket denial under section 17(5)(d)?
Not fully. The Supreme Court held that section 17(5)(d) cannot be read to deny ITC where the immovable property qualifies as plant under a functional test, and where the property is used for making outward taxable supplies. The ruling opens up specific categories (rental properties, similar income-generating properties) but does not extend to all construction across all purposes.
Is ITC on plant and machinery affected by Safari?
No. Plant and machinery are expressly excluded from the section 17(5)(c) and (d) denial. ITC on plant and machinery has always been available where the conditions of section 17 are otherwise met. Safari Retreats concerned the building, not the plant and machinery.
Can I claim ITC on construction of a warehouse used for storing my own raw materials?
Conservative position: no, the warehouse is for own-use storage, not directly generating outward taxable supply. Aggressive position: if the warehouse is plant within the Safari functional test (purpose-built for the manufacturing business of taxable supplies), the ITC may be available. The position is evolving.
What documentation should I maintain?
Contemporaneous documentation of (a) the purpose of construction, (b) the linkage to outward taxable supply, (c) the Safari-based reasoning where claimed, (d) GST counsel opinion notes where obtained, and (e) the accounting evidence of the use of the property post-construction.
Should I file for a refund of past-disallowed ITC?
Where past-period ITC was reversed under section 17(5)(d) and the property qualifies under the Safari principle, a refund claim may be viable subject to the time limits under section 54. The viability and methodology depend on the specific facts; a GST counsel review before filing is advisable.
