Why disallowing input tax credit for leased commercial development is a flaw

Since its introduction, the Goods and Services Tax (GST) has redefined India's indirect tax landscape by streamlining taxation and eliminating the cascading effect of taxes across industries. However, one persistent policy continues to hinder growth in the commercial real estate sector: the denial of input tax credit (ITC) on construction services. 

In simple terms, commercial developers constructing assets for lease are unable to claim credit for the GST paid on construction costs. This restriction increases the financial burden on developers, drives up lease costs, and undermines India’s global competitiveness in attracting business investments. 

From the government’s perspective, constructed buildings are immovable property, and their sale does not generate GST revenue and hence, credit is not required to be allowed. Over time, this rationale has shaped a restrictive tax policy that denies ITC to developers of residential and commercial spaces. 

While residential developers benefit from lower GST rates on sale of under construction units, commercial real estate developers receive no relief, paying 18% GST on lease rentals—a cost that includes embedded tax on construction.  The current policy creates an undue financial burden on businesses seeking leased commercial space, forcing developers either to absorb GST costs or pass them on through higher rentals—neither of which supports a thriving commercial property ecosystem. 

Construction credits: A legal conundrum that needs a pragmatic solution  

The complexities of GST policy for commercial leasing were brought to the forefront in the landmark Safari Retreats case, where the Supreme Court addressed whether developers of malls—constructed explicitly for leasing—should be eligible for ITC on construction costs. The Court ruled that GST credit should be permitted when: 

• The construction qualifies as a “plant.” 
• The development is “not on the developer’s own account”, meaning it is intended for leasing. 

Recently, legislative amendments have clarified that “plant” does not include buildings, leaving the sector in ambiguity on whether credit can still be taken where the construction is for leasing purposes.  With the recent dismissal of the government’s review petition by the Supreme Court, uncertainty surrounding ITC eligibility for leased commercial developments has intensified, leaving developers in a precarious predicament.  

The current ambiguity forces developers to either advocate, absorb the financial burden of GST costs or pass it on to tenants in the form of higher lease rents, impacting business affordability.  With the legal route having been exhausted, all eyes are therefore on the policy wing of the government to suitably address the matter. 

The government may consider distinguishing between construction for own use and commercial leasing, ensuring ITC eligibility for developers constructing leased properties.  Allowing GST credits for developers constructing assets meant for being leased/licenced, would align GST with its original intent, ensuring tax neutrality.  

Examples of this could include various types of commercial buildings being built for being leased or licensed for use by other businesses, viz., office spaces, co-working spaces, data centres, malls, warehouses and the like.  The principle being, these are essentially assets that generate GST revenues by themselves.  In other words, credit should be allowed where the building is not used by the developer for conduct of his business but is meant for other parties to conduct their businesses in.   

Also, many countries, including the UK, Australia, and Singapore, allow ITC on commercial property construction, provided the asset is used for taxable supplies such as leasing. India could benefit from a similar approach, ensuring tax neutrality and eliminating cascading effects. 

The government may well harbour apprehensions of excessive claims of credits with the building or asset being sold soon after its deployment by way of a lease or licensing.  To mitigate concerns about excessive credit claims, ITC could be: 

• Allowed in equal instalments over four to five years. 
• Subject to reversal upon sale of the building, based on a predefined formula. 

 Unlocking the Potential of India’s Commercial Real Estate

The inability to claim ITC makes large-scale commercial infrastructure projects financially unviable, deterring investment in high-quality commercial spaces. This has a direct impact on: 

• Global Capability Centers (GCCs) seeking premium office spaces in India. 
• Foreign investors evaluating India’s business ecosystem. 
• Startups and enterprises relying on cost-effective leasing options to accommodate flexible ways of working.