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The Supreme Court ruled that real estate companies can claim Input Tax Credits (ITC) on construction costs for commercial properties intended for renting or leasing.
This decision is expected to reduce investment costs for real estate companies, potentially boosting the sector.
What is Input Tax Credit (ITC)?
ITC is one of the foundational elements of the GST system that allows businesses to claim credit for taxes paid on inputs used in their business.
It implies at the time of paying tax on output, one can reduce the tax he has already paid on inputs and pay the balance amount.
It enables an uninterrupted and seamless credit flow across the supply chain.
It eliminates the cascading effect of taxes by imposing tax only on the value addition to the input.
ITC Working Mechanism: When someone buys a product/service, he pays taxes on the purchase and on selling, he collects the tax.
He adjusts the taxes paid at the time of purchase with the amount of output tax (tax on sales) and balance liability of tax (tax on sales minus tax on purchase) has to be paid to the government.
Key Highlights of the Supreme Court Ruling on ITC
Real estate companies can claim ITC on costs related to buildings classified as "plants" for rental or leasing purposes.
ITC is available only if the construction is for commercial use; it is not available for buildings intended for the owner's own use.
The classification of a building as a "plant" will depend on its functionality and role in the business.
The ruling effectively clarifies and narrows the application of certain provisions in the GST Act, ensuring ITC is available unless the business nature does not meet the required tests
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