Introduction
The phrase “plant and machinery” is delineated under Section 17 of the Central Goods and Services Tax Act, 2017 (“the Act”). Prior to the amendment, Section 17(5)(d) of the Act used the term “plant or machinery.” The inconsistency resulted in diverse interpretations by authorities and courts until the Supreme Court clarified the matter in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., ruling that “plant” and “machinery” should be understood independently according to their commercial usage and meaning, rather than the explanation provided in Section 17. The Finance Bill of 2025, through Section 119, amended Section 17(5)(d) of the Act to include the term “plant and machinery.” This article examines the rationale behind this amendment and its implications on the interpretation of the definition by authorities.
According to Section 16 of the Act, every registered person can claim input tax credit (“ITC’) on goods or services received, subject to the prescribed conditions specified under Section 49, provided that the goods and services are intended to be used in the course of their business. In some cases, registered persons are not eligible to receive ITC benefits, as stated in Section 17 of the Act. Section 17(5)(d) states that a taxable person cannot claim ITC for goods or services used to construct immovable property (except plant or machinery) , even if it is used during the course of business.
Section 17 provides a definition for “plant and machinery,” a term utilised in Chapters V and VI, including Section 17(5)(c), which imposes an analogous restriction in the context of works contracts, as: ‘plant and machinery’ refers to machinery or equipment that are fixed to the ground with structural support and are used for outward supply of goods or services. However, it does not include buildings, land, telecom towers, and pipelines outside the factories.
This explanation in Section 17(5)(d) indicates that the limitations on claiming ITC under clauses (c) and (d) pertain not only to new construction but also to reconstruction, renovation, additions, alterations, or repairs, provided that these expenditures are capitalised in the financial records. If the ITC claim pertains to revenue receipts, it cannot be rejected.
Judicial Interpretation
Initially, courts and authorities interpreted the word “plant or machinery” as “plant and machinery,” in conjunction with its meaning under the Act. In 2021, this matter was addressed in Re: Mother Earth Environ Tech Pvt. Ltd where the authority determined that by delineating “plant and machinery,” the legislature aimed to specify a distinct genus, class, or category. The juxtaposition of the terms “plant” and “machinery” suggests that one term is influenced by the other. Their definition must be drawn from the definition of “plant and machinery” as explained in section 17, with the associated exclusions. The authority sought to ascertain if a landfill could be classified as “plant or machinery,” so assessing if ITC could be claimed for its construction on the assessor’s own account. The authority determined that a landfill is a civil structure, so it was excluded from the scope of the term “plant and machinery.”
The Supreme Court adopted an alternative approach in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd, where SC determined that the phrase “plant and machinery” in Section 17(5)(c) of the act, is separate from the term “plant or machinery” in Section 17(5)(d). In interpreting Section 17(5)(d), the terms “plant” and “machinery” should be evaluated individually, according to their commercial definitions, without being constrained by the exclusions specified in the explanation to Section 17. The Court underscored that the stratification of an immovable property or developed asset as a “plant or machinery” must be assessed individually using the functionality test. The assessee constructed a shopping mall and leased its units. The assessee incurred significant GST expenses throughout the development of the mall and sought to claim ITC on the GST payment for the rented and leased properties. The Court determined that the designation of the mall as a “plant” would rely on the particular circumstances of the case. Merely leasing a facility does not inherently classify it as a “plant”; it must be evaluated based on its utilisation for the outward supply of goods or services in accordance with the Act.
Implications
During the 55th GST Council Meeting, it was proposed to amend the terms “plant or machinery” in section 17(5)(d) to “plant and machinery,” with retrospective effect from July 1, 2017. The objective of this amendment was to synchronize it with the definition given in section 17 of the Act. This recommendation was implemented by the Government in the Finance Bill, 2025, as stated in section 119. The retrospective application of the provision nullifies the Supreme Court’s decision in Safari Retreats and other related cases that depended on it. The advantage conferred by Safari Retreats was ephemeral, as the ruling was issued on October 3, 2024, yet it was adopted by several High Courts.
This affects multiple critical service sector companies, including the real estate and hospitality sectors. Previously, assessments may assert the advantage of ITC based on the interpretation of “plant or machinery” in Safari Retreats, contingent upon the functionality test and the investigative process conducted by the authorities. This allowed promoters of residential real estate projects to assert ITC eligibility by arguing that the sale of houses prior to obtaining the completion certificate or first occupancy constituted a supply of service under Schedule II of the Act. With the phrase now amended and its meaning significantly narrowed, the manufacturing sector will continue to be one of the few sectors that may assert ITC on the building of immovable plants and machinery with considerable certainty.
There is still a lot of confusion about the claimed ITC because the amendment has not been implemented yet, but its transitional implementation will be significant. There is a lot of uncertainty for companies since they don’t know if the ITC claims made under the old interpretation would have to be reversed. If the authorities were to issue a clarifying circular, it would alleviate compliance concerns for impacted industries by providing much-needed direction on how to handle previous claims and making the transition easier.
Conclusion
The Finance Bill 2025, which retrospectively amends Section 17(5)(d) of the CGST Act, 2017, has affected numerous sectors and entities, especially in the hospitality and construction industries. By altering the term “plant or machinery” to “plant and machinery,” the amendment narrows the scope for claiming ITC on construction-related costs, significantly impacting businesses involved in the construction and leasing of commercial projects such as shopping malls, hotels, cinemas, and other commercial and retail complexes that had previously depended on the more flexible interpretation developed in Safari Retreats judgment.
This alteration heightens financial pressure, complicates compliance, and raises the likelihood of needing to retract previously submitted ITC claims. This may result in increased operational costs, particularly for capital-intensive industries such as real estate and hotels, where construction expenditures constitute a significant portion of the total investment. The retrospective nature of the amendment, which invalidates prior rulings, fosters uncertainty and may impact enterprises’ cash flow and profitability.
Businesses impacted by this shift must critically reevaluate their tax positions and compliance plans, especially for prior periods. Due to the complexity introduced by this amendment, explicit transitional guidelines and additional clarifications from the government would be essential to mitigate disruption and facilitate smoother implementation.
Finally, it is impossible to disregard the amendment’s impact on important industries and the economy as a whole, even while its goal is to bring the provision’s wording into line with the broader framework of the Act. This change highlights the importance of stable and predictable tax policies to attract investment and give companies confidence in the ever-changing tax environment.
This blog is written by Sai Krishna Cheekati, BA.LLB, 4th year Law student at Amity Law School, Noida