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FICCI and Assocham Urge Government to Allow ITC on Commercial Properties for Leasing

India s leading industry and commerce associations, Federation of Indian Chambers of Commerce and Industry (FICCI) and Associated Chambers of Commerce and Industry in India (Assocham), have urged the government to permit real estate developers to claim Input Tax Credit (ITC) on commercial properties used for leasing purposes. This demand follows concerns about recent amendments to the Central Goods and Services Tax (CGST) Act and their potential impact on the real estate sector. Industry Bodies Seek ITC Clarification for Commercial Leasing FICCI and Assocham have written to the Finance Ministry, advocating for Input Tax Credit (ITC) benefits under the CGST Act for commercial assets built for leasing. Their appeal highlights the potential economic and real estate growth benefits if ITC is allowed on such properties. The core argument is that permitting ITC on leased commercial properties will help maintain the credit chain, thereby stimulating investment, supporting real estate development, and boosting economic growth. Background: Budget Amendment & Supreme Court Ruling The representation by these industry bodies follows a Budget proposal introducing a retrospective amendment to the CGST Act. This amendment is believed to override the Supreme Court ruling in the Safari Retreats Pvt Ltd case, which had earlier allowed businesses to claim ITC on properties deemed as plant under the functionality test. The Safari Retreats Case Ruling: The Supreme Court had ruled that if a building is constructed for the purpose of leasing, it could be classified as a plant, making it eligible for ITC under Section 17(5)(d) of the CGST Act. However, in this year s Budget proposal, the Finance Ministry proposed an amendment to Section 17(5)(d), replacing the term plant or machinery with plant and machinery . This amendment, effective retrospectively from July 1, 2017, is expected to nullify the Supreme Court s judgment, restricting ITC claims on leased commercial assets. Tax experts have pointed out that this change will override the Supreme Court ruling and may significantly impact real estate developers who rely on ITC for cost efficiency. Potential Financial Implications for the Real Estate Sector FICCI has highlighted the financial impact of the proposed change on the commercial leasing industry, which adds approximately 55-60 million square feet of built-up area annually in India. Projected GST Impact on Commercial Leasing: Average Construction Cost (Pre-Tax): ₹2,500 ₹2,800 per sq. ft. Estimated GST Revenue from Annual Construction: ₹2,500 crore ₹3,000 crore Potential Revenue Loss Due to ITC Claim (If Allowed): ₹900 crore ₹1,100 crore per year While some developers haven t availed the ITC credit, others have chosen to capitalize the GST cost and claim depreciation benefits. FICCI argues that the actual revenue impact on the government would be minimal, making the request feasible. Industry Recommendations & Government s Challenges FICCI has proposed that the government should permit ITC claims on commercial properties constructed for leasing while ensuring that ITC remains blocked for buildings meant for personal use. However, implementing this change poses challenges for the government: Financial Impact: Allowing ITC would reduce GST revenue, affecting the exchequer. Legal & Constitutional Hurdles: Even after the Finance Act 2025 is enacted, the proposed amendment must be ratified by more than 50% of Indian states as per constitutional law. Conclusion: A Crucial Decision for Commercial Real Estate The decision on Input Tax Credit for leased commercial properties is a crucial one for the Indian real estate sector. While FICCI and Assocham argue that allowing ITC would spur investment and economic growth, the government remains cautious due to potential revenue losses and legal complexities. As the debate continues, developers and investors must closely monitor policy developments that could shape the future of commercial real estate taxation in India.