GST Amendment to Increase Realty Project Costs, Lease Rents

The GST Council’s recent decision to retrospectively amend the Central Goods and Services Tax (CGST) Act from July 1, 2017, could significantly impact commercial real estate projects. The amendment restricts input tax credit (ITC) on construction services for commercial properties like malls, shops, and office spaces, leading to higher project costs and lease rents, according to experts.

Previously, a Supreme Court ruling in the Safari Retreats case allowed ITC claims on construction costs for rental properties. However, the Council’s 55th meeting in Jaisalmer reversed this ruling, making ITC inapplicable. Industry leaders predict that this change will raise project costs and rentals by up to 18%, reflecting the GST rate.

Sudipta Bhattacharjee, Partner at Khaitan & Co., expressed concern over the retrospective amendment, stating that it might dampen the burgeoning enthusiasm in the commercial real estate sector. He added, “Litigations are likely to continue, and developers who previously availed ITC may now pass the additional cost to tenants.”

Sunil Pareek, Executive Director at Assetz Property Group, emphasized the financial burden on tenants, stating, “Rentals of Rs 100 per square foot could increase to Rs 118 due to the non-availability of ITC.” Sanjay Dutt, MD and CEO of Tata Realty & Infrastructure, pointed out that the amendment denies the commercial real estate sector the equality it expected compared to residential properties.

The amendment also revises the interpretation of the terms “plant or machinery,” replacing them with “plant and machinery.” This clarification aims to streamline definitions, but questions remain about ITC eligibility for properties sold or leased before construction completion. Shivam Mehta, Executive Partner at Lakshmikumaran and Sridharan Attorneys, said, “This creates a new challenge for assesses, potentially leading to further litigation.”

With project costs rising and legal battles looming, the amendment could slow the momentum in India’s commercial real estate sector, impacting developers, tenants, and investors alike.