Retrospective GST Change After Safari Retreats: ITC Block on Construction Re‑imposed and Its Fallout

1. Introduction

1.1 Context: GST, ITC and the Construction Dilemma

Goods and Services Tax, rolled out in 2017, was designed as a unified value‑added tax across India, with Input Tax Credit (ITC) as its central pillar. Under GST, a registered person can offset the GST paid on inward supplies against the GST payable on outward supplies, thereby preventing tax‑on‑tax.

This structure assumes that ITC flows seamlessly through the supply chain. However, Section 17(5)(d) of the CGST Act, 2017 creates a significant break in this chain by blocking ITC on goods or services used for construction of immovable property, subject to a narrow exception for “plant or machinery”.

The statute did not expressly clarify whether a building itself can be regarded as “plant” for this purpose. This gap triggered extensive litigation, culminating in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., and eventually in a retrospective legislative response that has profound consequences for assessee‑developers, hoteliers and infrastructure entities.

1.2 How the Dispute Arose

Sectors heavily reliant on immovable assets—real estate, retail malls, warehousing, hospitality, infrastructure—were directly hit by the bar in Section 17(5)(d). For an assessee who constructs a commercial complex to lease out units, the building is not an ancillary facility; it is the core revenue‑producing asset.

If ITC on construction is denied:

  • The entire GST on materials and input services (cement, steel, design, works contracts, etc.) becomes a cost.
  • The effective tax incidence on rentals escalates because output GST is levied on a base that already embeds unrecoverable input GST.

Industry stakeholders argued that such commercial structures, when used as the primary tool of trade, should be covered by the expression “plant” when a functionality test is applied. The department, on the other hand, consistently maintained that “plant or machinery” did not and could not include buildings or civil structures.

1.3 What Happened in Safari Retreats

In Safari Retreats, the assessee constructed a shopping mall at Bhubaneswar and sought ITC on the GST paid on construction‑related goods and services. The department denied the claim invoking Section 17(5)(d). The Orissa High Court sided with the assessee, and the matter went up to the Supreme Court.

On 3 October 2024, the Supreme Court in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., 2024 SCC OnLine SC 2456 held that the expression “plant or machinery” appearing in Section 17(5)(d) should be interpreted in line with commercial understanding and long‑standing judicial precedent applying a functional or “tool of trade” test. Where a building is functionally integral to the business model, it can be treated as “plant” for ITC purposes. The Court emphasised that this determination is fact‑specific and not automatic for every building.

For a brief period, this ruling opened the door for ITC on construction in cases where the immovable property was itself the business instrument (for example, malls, hotels, business centres let out on rent).

1.4 Finance Act, 2025: Swift Retrospective Overturning

The relief was short‑lived. The Finance Act, 2025 amended Section 17(5)(d) by replacing the phrase “plant or machinery” with “plant and machinery” and added an explanation deeming that the provision always stood in this amended form from 1 July 2017, the date GST commenced.[2]

By characterising the change as clarificatory and making it retrospective from 01‑07‑2017, the legislature effectively wiped out the interpretative basis of the Supreme Court’s ruling in Safari Retreats. Assessees who had claimed or planned to claim ITC relying on the judgment suddenly faced the prospect of credit reversal, plus interest and possible penalties, for multiple years.

2.1 From VAT/CST Fragmentation to GST Continuity

Before GST, India’s indirect taxation system was fragmented—excise, service tax, VAT, CST, entry tax and other levies were imposed by different authorities. Cross‑credit was limited or barred, leading to cascading. GST sought to convert this into a single value‑added system, with ITC as the mechanism for ensuring tax is levied only on value addition at each stage.

2.2 Core ITC Provisions: Sections 16 to 18

The statutory scheme is broadly as follows:

  • Section 16 lays down conditions to avail ITC:

    • The assessee must possess a valid tax invoice.
    • Goods or services must be actually received.
    • Tax must be paid to the Government.
    • Returns must be filed.

  • Section 17 deals with:

    • Apportionment of credit in case of mixed use.
    • Certain credits that are outright blocked.

  • Section 18 addresses transitional credits and change‑in‑use scenarios.

2.3 Blocked Credits and Section 17(5)(d)

Section 17(5) lists circumstances in which ITC is expressly disallowed. Clause (d), prior to amendment, read in substance as follows:

“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.”

Thus, there was:

  • A general block on ITC for construction of immovable property on one’s own account, even if used for business; and
  • A carve‑out where such construction was for “plant or machinery”.

The Safari Retreats dispute turned on the scope of this exception.

2.4 Meaning of “Plant or Machinery”: The Interpretative Puzzle

The CGST Act, 2017 does not define “plant or machinery” specifically for Section 17(5)(d). There is a definition of “plant” in Section 2(75), but the Supreme Court in Safari Retreats held that this definition does not govern Section 17(5)(d).

Instead, the Court drew upon earlier jurisprudence such as:

  • CIT v. Karnataka Power Corporation, (2001) 247 ITR 268 (SC) – where the Supreme Court observed that “plant” embraces apparatus used for carrying on the business.
  • Scientific Engineering House Pvt. Ltd. v. CIT, (1986) 157 ITR 86 (SC) – which held that even a building could be regarded as a plant if it is employed as a tool of trade.

These decisions applied a functional test: if the asset is employed as an instrumentality of business, not merely as a passive setting, it can be “plant”. GST legislation, in the Court’s view, was framed against this background.

2.5 Why ITC on Buildings Was Restricted in the First Place

The policy rationale for blocking ITC on immovable property is often explained on these lines:

  • Buildings generally provide long‑term capital benefits and are not consumed in the production cycle.
  • Allowing ITC on construction could cause an immediate large revenue hit.
  • Tracking and matching such high‑value credits across long time horizons may be administratively complex.

The carve‑out for “plant or machinery” was presumably aimed at industrial installations and specialised structures that are clearly production‑linked. However, ambiguity persisted for commercial structures like malls, office complexes and hotels that serve as revenue‑earning tools rather than mere premises.

3. Safari Retreats – From High Court Win to Supreme Court Clarification

3.1 Facts of the Case

Safari Retreats Private Limited developed a shopping mall in Bhubaneswar and intended to lease out units to various businesses. It availed ITC on GST paid on construction‑related inputs and input services, asserting that the mall itself was “plant” as it constituted the apparatus by which rental income would be generated. A show‑cause notice denied the credit on the basis of Section 17(5)(d), prompting a constitutional challenge before the Orissa High Court.

3.2 Orissa High Court’s Stand

The Orissa High Court accepted the assessee’s plea. It reasoned that where an immovable structure is used for the very activity from which business income is earned—here, renting of commercial space—the structure should be treated as “plant” for purposes of Section 17(5)(d). On this basis, it held that blocking ITC would defeat the core logic of GST as a value‑added tax.

The department appealed, culminating in the Supreme Court’s detailed analysis in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd.[1]

3.3 Supreme Court’s Key Findings

The Supreme Court, speaking through Chief Justice D.Y.