Realty project costs, lease rents likely to rise on GST change

The GST Council’s decision to retrospectively amend the Central Goods and Services Tax (CGST) Act to restrict input tax credit (ITC) on construction services for commercial real estate such as malls, shops, etc, for leasing could push project costs and increase rents, said experts. Developers could also move court against the  amendment, experts added.

In a case involving one Safari Retreats, the Supreme Court earlier allowed ITC claims on construction costs for rental properties. However, at the 55th meeting at Jaisalmer , the Council decided to retrospectively amend the Act, reversing the ruling that allowed ITC. 

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Sudipta Bhattacharjee, partner, Khaitan & Co, said the proposal for retrospective amendment will dampen the new-found enthusiasm in commercial realty and litigations will unfortunately continue. “Those who have historically been availing ITC may now be more apprehensive about being challenged by the GST authorities and may choose to pass it on to their tenants,” he said .

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Project costs could go up by 18% if ITC was not allowed, experts said.

Sunil Pareek, ED, Assetz Property Group, said, “The impact will be passed on as higher rentals to tenants partly or fully, depending on the return targets of the developers.” Logically, a rental of Rs 100 per sq ft, which becomes Rs 118, can end up being an additional 18% on Rs 118, he said.

Sanjay Dutt, MD and CEO, Tata Realty & Infrastructure, said there would be a loss of potential gain “which on the law of equality (with residential properties) expected by the industry was not given”.

The Council recommended replacing the phrase “plant or machinery” with “plant and machinery” retrospectively from July 1, 2017. The Court interpretated that the terms in the CGST Act were distinct and had ruled that ITC eligibility must be assessed case-by-case, considering the taxpayer’s business nature and the building’s operational role.

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