Safari Retreats and the Retrospective Amendment: GST Credit on Buildings

Goods and services tax was designed as a tax on value addition, with a continuous chain of input tax credit. Section 17(5) of the Central Goods and Services Tax Act, 2017 breaks that chain in specified cases. Clause (d) blocks credit on goods or services received by a taxable person for construction of an immovable property on his own account, other than plant or machinery, even when used in the course of business.

For developers and owners of malls, warehouses, hotels and office buildings let out on rent, that block is costly. They pay GST on construction and then collect GST on rentals, but cannot set off the first against the second. The litigation that followed reached the Supreme Court in Chief Commissioner of CGST v Safari Retreats Pvt Ltd, and then drew a swift legislative response.

The judgment of 3 October 2024

Safari Retreats had built a shopping mall in Bhubaneswar for leasing and sought to use credit on construction inputs against output tax on rentals. The Orissa High Court read down Section 17(5)(d) in the taxpayer's favour. On appeal, the Supreme Court took a different but still taxpayer-friendly route.

• It upheld the constitutional validity of Section 17(5)(c) and (d), rejecting the argument that the restriction was discriminatory.

• It held that the expression 'plant or machinery' in clause (d) is not the same as the defined expression 'plant and machinery' in the Explanation to Section 17, which excludes land, buildings and civil structures. Parliament had used different words deliberately in clauses (c) and (d).

• It held that whether a building is a 'plant' is a question of fact to be decided by applying a functionality test: if the building is essential to carrying on the business and functions as a tool of the trade, it may qualify as plant.

• It remanded the matter to the High Court to apply the test to the mall.

The judgment did not grant credit across the board, but it opened a factual inquiry that many taxpayers in the leasing and hospitality sectors expected to win.

The legislative response

The GST Council recommended an amendment at its 55th meeting in December 2024. Section 119 of the Finance Act, 2025 then substituted the words 'plant and machinery' for 'plant or machinery' in Section 17(5)(d), with effect from 1 July 2017, the date GST was introduced. An Explanation was added providing that the amendment applies notwithstanding any judgment, decree or order of any court, tribunal or authority.

The effect is to align clause (d) with the defined term, which expressly excludes land, buildings and other civil structures. The functionality test, as a route to treating a building as plant, is therefore removed by statute for the entire GST period. A review petition against the Safari Retreats judgment was subsequently dismissed, but that does not affect the amendment, which operates on the statute rather than the judgment.

How tribunals are applying the amendment

Early decisions of the GST Appellate Tribunal have applied the amended provision to deny credit on construction of resort and hotel buildings, treating the retrospective substitution and the overriding Explanation as conclusive. Taxpayers should expect revenue authorities to take the same position in pending assessments and audits.

What remains arguable

The amendment narrows the field considerably, but several issues remain open.

1. Constitutional validity of retrospectivity. Parliament may legislate retrospectively and validate its laws by removing the basis of a judgment, but retrospective tax legislation is subject to scrutiny for arbitrariness under Article 14. Taxpayers with significant exposure may wish to preserve this ground, particularly where they relied on the judgment in filing returns.

2. Items that are genuinely plant and machinery. The defined term still includes apparatus, equipment and machinery fixed to earth by foundations or structural support, used for making outward supplies. Lifts, escalators, HVAC systems, generators and similar installations may continue to qualify, depending on facts and how they are contracted and invoiced.

3. 'On his own account'. Clause (d) applies to construction on the taxpayer's own account. Where the taxpayer constructs for another person under a works contract, the analysis differs, and the structure of development arrangements may affect eligibility.

4. Interest and penalty. Where a taxpayer availed credit in good faith on the strength of the judgment, there is scope to argue against penalty, even if the credit itself must be reversed.

Practical steps for taxpayers

• Quantify credit availed on building construction since July 2017 and separate it from credit on equipment and installations that may still qualify as plant and machinery.

• Review contracts and invoices to see whether equipment is identified and invoiced separately from civil work, since that separation often determines what can be defended.

• Where credit was claimed after October 2024 in reliance on the judgment, assess whether to reverse voluntarily to limit interest, while preserving objections in writing.

• For future projects, factor the blocked credit into project costing and lease pricing rather than assuming recovery through litigation.

Conclusion

Safari Retreats is now best understood as a short-lived window rather than a lasting change. The retrospective amendment has restored the revenue's position that buildings and civil structures do not generate credit under Section 17(5)(d). The remaining contest lies at the margins: the constitutional limits of retrospective validation, the classification of installations, and fair treatment of taxpayers who relied on the judgment in good faith.