Safari Retreats Case Explained Why GST on Construction Cannot Be Used to Pay Rent Liability

For several years, one question troubled businesses engaged in commercial leasing:If rent is taxable under GST, why should the GST paid on construction of that very property be blocked as Input Tax Credit (ITC)?This debate finally reached closure with the Supreme Court judgment in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd..

This blog explains the issue, the journey of the case, the Supreme Court’s reasoning, and what businesses must practically do going forward.

Background of the Dispute

Safari Retreats Pvt. Ltd. constructed a shopping mall. The intention was not personal use but leasing out shops, which is a taxable supply under GST. The company claimed ITC of GST paid on construction, arguing that:

• Renting is taxable

• Construction was done solely for business

• Blocking ITC causes tax cascading, which GST aims to eliminate

The department denied ITC under Section 17(5)(d), which blocks credit on construction of immovable property on own account.

Orissa High Court View (2019)

The Orissa High Court ruled in favour of the taxpayer, holding that:

• Section 17(5)(d) should be read purposively

• If output supply is taxable, input credit should be allowed

• Denial defeats the very objective of GST

This judgment gave rise to widespread belief that ITC could be claimed for construction of malls, offices, and commercial buildings meant for renting.

Supreme Court Judgment (Final Law)

The Supreme Court reversed the Orissa High Court ruling and held decisively:

GST paid on construction of immovable property is blocked ITC under Section 17(5)(d), even if the property is used for taxable renting.

Key Legal Findings of the Supreme Court

1. ITC is not an absolute right

The Court reaffirmed that ITC is a statutory concession, not a fundamental or vested right. The legislature has full authority to restrict or block it.

2. Clear wording of Section 17(5)(d)

Section 17(5)(d) explicitly blocks ITC on:

“goods or services received for construction of immovable property on own account”

The Court held that intent, business use, or taxable output cannot override explicit statutory language.

3. Renting does not change the nature of construction

Even if rent is taxable:

• Construction remains “on own account”

• Renting is a subsequent activity

• Blocked credit cannot be revived or deferred

There is no concept of postponed eligibility under GST law.

4. Equity and hardship are irrelevant

Arguments on cascading effect or business hardship were rejected. The Court clarified:

“Courts cannot rewrite tax statutes on equitable considerations.”

Any relief must come only through legislative amendment, not judicial interpretation.

Can Companies Claim ITC Later When Rent Becomes Payable?

No.If ITC is blocked at the time of construction:

• It never enters the electronic credit ledger

• It cannot be carried forward

• It cannot be used to pay rent GST liability later

Blocked ITC becomes part of project cost permanently.

Important Exceptions (Still Allowed)

ITC may still be available if:

• The taxpayer is a works contractor providing construction services (not constructing on own account)

• The asset qualifies as plant & machinery (specifically excluded from immovable property definition)

Hence, structuring before construction starts is critical.

Practical Impact on Businesses

• Commercial builders and lessors must capitalise GST paid on construction

• Any aggressive ITC claims may lead to interest, penalty, and litigation

• Old credits claimed based on Orissa HC ruling are now vulnerable to reversal

Final Takeaway

The Safari Retreats Supreme Court judgment settles the law conclusively:

Taxable rent does not make blocked construction ITC eligible.

GST on construction of immovable property used for renting is a cost, not a credit. Businesses must plan structures carefully at the inception stage, because once blocked, ITC is blocked forever.