Top Stories Legislative Drafting Error in GST Act: Impact of ‘or’ Instead of ‘and’ in Section 17(5)(d) and the SC’s Decision in Safari Retreats This issue gained prominence in the Supreme Court’s landmark judgment in Safari Retreats Pvt. Ltd., which adopted a purposive interpretation of the provision By Navasree A.M – On December 23, 2024 3:14 pm – 3 mins read

The Goods and Services Tax ( GST ) system has faced many challenges, especially when it comes to understanding its complicated rules. One such issue involves Section 17(5)(d) of the CGST Act, 2017, which restricts claiming Input Tax Credit ( ITC ) for constructing immovable property. The problem lies in the use of the phrase “plant or machinery” instead of “plant and machinery,” causing confusion, disputes, and differing interpretations. The Section 17(5)(d) of the CGST Act states that “goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.” According to the provision ITC will not be available for goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery). Thus, even though it was a drafting error, incorporating ‘or’ instead of ‘and’ has widened the scope of ITC claiming on construction of immovable property.

However, the retrospective amendment of the provision will narrow the scope of ITC claims. When it altered to ‘Plant and Machinery’, This issue gained prominence in the Supreme Court’s landmark judgment in Safari Retreats Pvt. Ltd., which adopted a purposive interpretation of the provision. However, the 55th GST Council has now proposed a retrospective amendment to replace “or” with “and,” which could significantly alter the ITC provision. Safari Retreats Case: Key Issues and the Supreme Court’s Decision The petitioner, engaged in constructing a shopping mall to let out premises to tenants, had accumulated ITC on goods and services used in constructing the mall. The petitioner intended to utilize the ITC against rental income but was denied the credit under Section 17(5)(d) of the CGST Act. It challenged the constitutional validity of Sections 17(5)(c) and 17(5)(d), arguing that these provisions violated the principles of equality and seamless credit flow under GST. The Court emphasized that “plant or machinery” in Section 17(5)(d) should be interpreted differently from “plant and machinery” in Section 17(5)(c). The ordinary commercial meaning of “plant” should apply, allowing buildings integral to business activities to qualify as plants. The Court made  the functionality test to determine whether a building qualifies as a plant based on its role in business operations. For instance, if a shopping mall is essential for leasing or renting, it could be considered a plant.

The supreme court bench upheld the validity of Sections 17(5)(c) and (d), ruling that the denial of ITC for immovable property was justified to prevent misuse and ensure compliance with the legislative framework. Proposed Amendment by 55th GST Council: Replacing ‘or’ with ‘and’ The proposed amendment replaces “plant or machinery” with “plant and machinery” in Section 17(5)(d), effectively narrowing the scope of ITC eligibility. The GST Council proposal to amend the section as per the press release is as follows: “To align the provisions of section 17(5)(d) of CGST Act, 2017 with the intent of the said section, the Council has recommended amending section 17(5)(d) of CGST Act, 2017, to replace the phrase “plant or machinery” with “plant and machinery”, retrospectively, with effect from 01.07.2017, so that the said phrase may be interpreted as per the Explanation at the end of section 17 of CGST Act, 2017.” This change applies retrospectively, potentially invalidating ITC claims made under the Safari Retreats judgment. Impact of the Amendment The first impact will be that the ITC will now be limited to immovable properties that qualify as integrated plant and machinery, such as factory setups directly used in production.

Commercial buildings used for leasing or renting will no longer qualify unless they meet this narrow definition. The amendment negates the purposive interpretation adopted by the Supreme Court, reverting to a strict, literal reading of the provision. Further, the taxpayers who relied on the Safari Retreats judgment may now face demands to reverse the ITC they had claimed, along with interest and penalties. The retrospective application of the amendment replacing “plant or machinery” with “plant and machinery” is expected to ignite fresh litigation, as taxpayers are likely to challenge its fairness and legality. The restriction on ITC for immovable property construction could increase the cost of doing business for sectors like real estate, retail, and hospitality, impacting their profitability and growth. The single drafting error could change the possibilities of real estate sectors to claim the ITC as per the Safari retreats judgment. During the GST council press meet, the CBIC chairman has acknowledged that ‘or’ in ‘Plant or Machinery’ in Section 17(5)(d) was a drafting error which will be amended retrospectively. Thus, changing the term ‘or’ to ‘and’ will restrict the ITC claims and draw it to a narrow scope.