Centre's retrospective GST amendment in Budget 2025 may face legal scrutiny

Centre's decision to amend a section of the Good and Services Tax (GST) Act retrospectively in the Union Budget for 2025-26 may face legal scrutiny, as the government’s review petition on a case related to the issue is expected to come up before the Supreme Court in the coming weeks, tax experts told Moneycontrol.

The case pertains to Section 17(5) of the GST Act which limits the eligibility for Input Tax Credit (ITC) for any item listed under the section. Read more on the proposed amendment here.

The GST amendment pertains to a Supreme Court verdict dated October 11,2024 which had allowed infrastructure companies to offset GST paid on purchase of building materials for a property against GST payable on renting or leasing of such a property.

“The outcome of the review petition needs to be closely monitored. Though a retrospective amendment to Section 17(5) has been proposed, nullifying the impact of the Hon'ble Supreme Court's decision in Safari Retreat, which allowed GST credit on construction activities for leasing and warehousing businesses based on the functionality test, the Court's interpretation of 'own use' by the taxpayer remains unaffected,” said Harpreet Singh, Partner, Indirect Tax, Deloitte

The case before the Apex court involved a batch of writ petitions filed by half a dozen infrastructure companies, including Safari Retreats. The company had accrued input tax credits from purchase of building materials, and wanted to adjust the credit with GST payable on leasing the company. In other words, infrastructure companies earn input credits on building materials and other purchases for construction. They pay GST on the rent or lease earned on these commercial properties. The company wanted to use the tax credits availed to offset the GST payable on rental money earned.

“Even after the amendment, arguably, input credit should still be allowed if a real estate asset is created for further renting or leasing. This aspect should ideally be clarified by the Government.  In any case, from a policy standpoint, input tax credit should be allowed on all business expenditure including construction. The GST Council should deliberate on this in detail, preferably in consultation with industry,” said Pratik Jain, Partner, PwC.

Experts say if the current position of the government stands, it would have far-reaching impact on the real estate companies and their ability to be eligible for such adjustments. Generally, any expenditures incurred by companies for commercial operations are eligible for GST adjustments, experts said.

“The move will significantly increase the costs for developers, as they no longer can claim ITC on construction-related expenses. Eventually, this shall also impact the leasing businesses, where they now need to discharge a higher tax obligation. This shall create a ripple effect across the real estate sector that may stifle growth,” said Kunal Savani, partner, Cyril Amarchand Mangaldas.

Unlike regular cases which are listed, review petitions are heard privately. Usually, these cases are taken up by the judges through circulation, and in most cases, the hearing is oral. Legal experts privy to the matter however added the Safari Retreats verdict is expected to come up for hearing by end of February.

“Although the review petition is yet to be heard, it is likely that the retrospective amendment itself may face legal scrutiny, as it undermines the principle that a judgment cannot be nullified by the legislature through retrospective amendments and may be seen as a detrimental step that discourages investments,” Gourav Sogani, Partner, Economic Laws Practice said.

Legal experts also point out another key aspect of the case - retrospective amendments. Various Supreme Court rulings so far have ruled in favour of tax payers if a rule was introduced retrospectively.

“With the Finance Ministry’s review petition pending, the Supreme Court’s stance will be crucial. Retrospective taxation affecting substantial rights, often faces constitutional scrutiny under Article 14 and the doctrine of legitimate expectation. If challenged successfully, it could lead to prolonged litigation, making legal clarity essential for affected industries,” Rishabh Gandhi, Founder, Rishabh Gandhi and Advocates said.

In the past, the Government had issued retrospective tax notices pertaining to capital gains in cases such as Vodafone and Cairn India. While the notices were retrospective, the government amended the law in 2015 on a prospective basis, leading to more tax certainty.

“The central government’s retrospective amendment is geared to curtail the availing of credit and get over the Safari Retreats judgment of the Supreme Court. However, the amendment has not gotten over para 32 of the judgment, which interprets the line 'on his own account'. Para 32 still creates a scope to contend that as long as the plant and machinery is leased out or licensed out, credit would still be available,” said Soumya Panda, indirect tax lawyer at the Supreme Court.