ITC removal under GST law impacts commercial real estate
A major retrospective amendment to India’s Goods and Services Tax (GST) law, effective July 1, 2017, has sent ripples across the commercial real estate industry. The change bars developers from claiming Input Tax Credit (ITC) on construction costs for rental properties, fundamentally altering taxation for commercial real estate players. ITC, which allows businesses to offset taxes paid on goods and services used in business operations, has long been a crucial relief for real estate developers, warehouse operators, and hospitality businesses. However, the revised Budget 2025 provision restricts ITC eligibility for construction, dealing a significant financial blow to the sector. The move is expected to increase project costs, reduce profit margins, and potentially discourage new investments in rental spaces.
The amendment also contradicts a recent Supreme Court ruling in the Safari Retreats case, which had provided relief to commercial developers by permitting ITC claims on properties classified as “plant” under GST regulations. The court had differentiated between “plant” and “machinery”, allowing real estate entities to claim tax credits on construction-related expenses. However, the latest GST amendment modifies this classification, replacing “plant or machinery” with “plant and machinery”, effectively nullifying the legal precedent set by the court. Industry experts believe this shift may lead to renewed disputes and legal battles, with businesses forced to reassess their tax liabilities. Vimal Nadar, Head of Research at Colliers India, noted that the extent of the amendment’s impact will depend on whether developers had claimed ITC since 2017 or started factoring it in after the 2024 court ruling. In either scenario, developers now face a higher financial burden, which may slow down leasing activity in key urban markets like Mumbai, Bengaluru, and Delhi-NCR.
From an urban development standpoint, the new policy may worsen India’s commercial space crunch. With the commercial real estate sector already grappling with high construction costs and regulatory delays, the removal of ITC could make leasing less attractive for investors and developers. Cities such as Mumbai and Bengaluru, where demand for Grade A office space and commercial hubs is consistently high, may see a drop in new rental project launches. This could impact job growth, startup ecosystems, and business expansion, as companies may find it costlier to lease office spaces. Additionally, with hospitality and retail sectors also affected, shopping malls and hotels—already recovering from pandemic-induced setbacks—may face further financial strain, leading to higher rental costs for businesses and ultimately higher prices for consumers.
From a sustainability perspective, the decision raises concerns over the long-term environmental impact of commercial construction. The higher financial burden on developers may lead to cost-cutting measures, where sustainable building materials, energy-efficient designs, and green certifications could take a backseat. India’s real estate sector accounts for nearly 40% of global carbon emissions, and the push towards green buildings requires strong financial incentives. With ITC no longer available, some developers may prioritise cost-effective but environmentally unsustainable construction methods. If green buildings become costlier to develop, it could slow down India’s transition to net-zero emissions, contradicting the government’s own sustainability goals for the real estate sector.
The latest GST amendment has not only intensified taxation burdens on commercial real estate developers but has also shaken investor confidence in long-term leasing projects. As developers reassess project feasibility, urban infrastructure and sustainable development initiatives could face unintended setbacks, making it crucial for policymakers to reconsider the broader economic and environmental ramifications of the decision.
