Latest Supreme Court Judgment On GST ITC (Input Tax Credit)

The latest Supreme Court judgment on GST Input Tax Credit (ITC) has provided significant clarity on ITC claims, particularly for businesses in the construction and leasing sectors. Delivered on October 1, 2024, this ruling addresses the eligibility of ITC for real estate companies and commercial property developers. The judgment is a landmark decision, focusing on whether ITC can be claimed for the GST paid on construction costs, which has implications for businesses involved in leasing and renting properties. This article delves into the key aspects of the judgment and its impact on taxpayers, offering insights into how it reshapes the interpretation of ITC under the GST framework.

There Are Three Types Of GST Under The Indian GST System:

1. CGST (Central Goods and Services Tax): Collected by the Central Government on intra-state supplies.
2. SGST (State Goods and Services Tax): Collected by the State Government on intra-state supplies.
3. IGST (Integrated Goods and Services Tax): Collected by the Central Government on inter-state supplies.

GST has helped in streamlining the indirect tax structure in India, reducing tax cascading, improving compliance, and creating a more uniform tax regime across the country. GST is charged at every stage of the production and distribution process, but it is ultimately borne by the final consumer. The tax is reimbursed to all parties involved in the production process, except for the final consumer.

Overview of Goods And Services Tax (GST) System In India

Unified Tax Structure

GST consolidates various indirect taxes such as value-added tax (VAT), excise duty, and service tax into a single tax, simplifying the tax compliance process for businesses and consumers.

Tax Rates:

GST has a four-tier tax structure with rates of 0%, 5%, 12%, 18%, and 28%, depending on the classification of goods and services. Additionally, there are special rates for certain luxury goods and essential items.

Input Tax Credit (ITC):

Businesses can claim ITC for the GST paid on inputs used in the production of goods and services, which helps to eliminate the cascading effect of taxes.

Threshold Limits:

Small businesses with a turnover below a specified threshold (Rs. 40 lakhs for most states and Rs. 20 lakhs for special category states) are exempt from registering under GST, reducing the compliance burden.

Digital Compliance:

The GST system is largely digital, allowing for online registration, return filing, and payment processes, which enhances transparency and efficiency.

Anti-Profiteering Measures:

GST includes provisions to ensure that the benefits of reduced tax rates or ITC are passed on to consumers, preventing businesses from unjustly increasing prices.

In summary, GST is a transformative tax reform aimed at simplifying the indirect tax structure in India, promoting ease of doing business, and enhancing compliance through digital means.

The Latest Supreme Court Judgment On GST Input Tax Credit (ITC)

The latest Supreme Court Judgment regarding Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime was delivered on October 1, 2024. This ruling is particularly significant for real estate companies and businesses involved in the construction of commercial properties intended for leasing or renting.

Chief Commissioner Of Central Goods And Service Tax & Ors. vs. M/s Safari Retreats Private Ltd. & Ors

Safari Retreats built a shopping mall and sought Input Tax Credit (ITC) on GST paid for construction costs, arguing that denying ITC would lead to double taxation since the rental income was also taxed. The Supreme Court ruled that a building could qualify as a "Plant" under Section 17(5)(d) of the CGST Act if it is essential for leasing or renting, allowing ITC on construction costs when the building serves a business purpose. The Court upheld the constitutional validity of Section 17(5)(c) and (d), stating that they are rational and non-discriminatory. The case was sent back to the Orissa High Court to apply a "Functionality Test" to determine if the mall qualifies as a plant.

Ms. Vidya Drolia vs. The Union of India, Civil Appeal No. 2948 of 2023, Supreme Court Of India, Decided On October 1, 2024

In the case of Ms Vidya Drolia vs. The Union of India, which was primarily addresses the issue of Input Tax Credit (ITC) under the Goods and Services Tax (GST) framework, particularly focusing on the concept of "vested rights" in ITC claims. The Supreme Court ruled that the taxpayer has a "vested right" to input tax credit (ITC) on GST paid on purchases from a registered dealer. The court's judgment protects commercial entities from being penalized for situations that are beyond their control. 

The court's ruling was based on the following:

• The taxpayer was eligible for ITC on GST paid on purchases from a registered dealer
• The supplier's registration was canceled, but the taxpayer should not be denied ITC for GST paid on purchases 

This judgment is a crucial development in the interpretation of ITC under GST, reinforcing the rights of taxpayers and clarifying the conditions under which ITC can be claimed. The court's ruling provides protection to commercial entities from being penalized for situations that are beyond their control.

Singhal Singh Rawat vs. Commissioner Of Central Goods And Services Tax (CGST)

In this case, the Delhi High Court quashed the order cancelling the petitioner’s GST registration with retrospective effect, emphasizing that the proper officer did not provide sufficient evidence to justify the cancellation. The Court noted that the petitioner was not given adequate opportunity to respond to the proposed action, which is a critical aspect of due process in administrative actions.

This judgment reinforces the importance of procedural fairness in GST registration matters and protects taxpayers from arbitrary administrative actions.

Conclusion

The Latest Supreme Court Judgment on GST ITC (Input Tax Credit) has brought much-needed clarity to businesses, especially in the construction and leasing sectors. By affirming the eligibility of ITC for real estate developers and protecting taxpayers from unjust denial of claims, this ruling sets a critical precedent for future cases. Businesses are now better positioned to assess their ITC claims and compliance strategies in light of these legal interpretations. This judgment reinforces the importance of procedural fairness and upholds the rights of taxpayers under the GST regime, significantly impacting the landscape for commercial property and construction companies.