CGST Amendment 2025: A Setback for Real Estate Developers?

Introduction

When it comes to taxation in real estate, even minor policy tweaks can create ripples across the sector. The recent amendment to Section 17(5)(d) of the CGST Act, introduced in Union Budget 2025, is one such change that has left real estate developers, investors, and businesses scrambling for clarity.

The amendment effectively denies Input Tax Credit (ITC) on the construction of immovable property, even if the property is intended for leasing or renting. The move has sparked debates on whether it’s a corrective measure or a revenue-driven maneuver. More importantly, it raises crucial questions for the real estate sector—how will it affect commercial leasing? Will it push up costs for businesses? What does it mean for investors?

Let’s break it all down.

Understanding the CGST Amendment

The latest amendment to the Central Goods and Services Tax (CGST) Act revolves around Input Tax Credit (ITC)—a provision that allows businesses to offset the GST paid on inputs against their final tax liability.

What Changed?

• Previously, real estate developers could claim ITC on the construction of properties meant for leasing (such as commercial spaces, office buildings, and malls).
• Post-amendment: ITC is completely disallowed for any construction of immovable property, even if it is used for business purposes like leasing.
• The change applies retrospectively from July 1, 2017, meaning developers who claimed ITC in previous years may now face tax reversals.

Why This Matters?

• Leasing commercial properties just became more expensive—developers can no longer offset the GST they pay on construction materials, which means higher costs.
• Businesses renting office spaces and retail stores may see rent hikes, as developers pass on the increased tax burden.
• Existing projects may require financial restructuring to accommodate the loss of ITC.

What is "Plant and Machinery" in Real Estate?

One of the key aspects of this amendment is the government’s clarification on the definition of "plant and machinery."

Definition under CGST Act:

• The term "plant and machinery" refers to equipment and installations that are fixed to the building and are essential for business operations.
• This typically includes lifts, escalators, centralized air-conditioning units, in-built electrical systems, and internal pipelines.
• However, buildings, land, and any civil structures are not considered "plant and machinery" and remain ineligible for ITC.
  (Source: CGST Act, Explanation to Section 17(5)).

This distinction is crucial because it determines what part of a real estate project qualifies for tax benefits and what does not.

Why Did the Government Introduce This Amendment?

1. Closing a Legal Loophole (The Safari Retreats Case)

• The Supreme Court’s Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019) ruling had allowed ITC for leased properties, arguing that leasing is a business activity.
• This amendment nullifies that ruling, making it clear that ITC on construction is not allowed, even if the property is leased.

2. Preventing Revenue Loss

• The government claims that allowing ITC on leasing led to revenue leakages, as companies used it to reduce their GST liabilities significantly.
• This amendment is seen as a measure to boost GST collections by removing ambiguities in tax laws.

3. Encouraging Ready-to-Move Commercial Spaces

• Developers might now shift focus to selling commercial properties outright instead of leasing them, since selling a property allows them to recover GST costs in pricing.

But does this policy align with the reality of how commercial real estate works? That’s where things get tricky.

Impact on Commercial Real Estate

Refined Statement on Cost Impact

• Since developers can no longer claim ITC on construction materials and services, the overall cost burden on new commercial projects is expected to rise.
• The extent of cost escalation will depend on factors like:
  • The size and nature of the project.
  • The proportion of construction expenses that were previously eligible for ITC.
  • Developers' ability to adjust pricing or explore alternative financing models.
• Experts anticipate a potential increase in leasing and rental costs, as developers may pass on the additional tax burden to tenants.

2. Leasing Prices Could Go Up

• Since developers cannot claim ITC, they may increase lease rentals to offset the cost.
• Office spaces, malls, and retail units could become more expensive for businesses and corporates.

3. Potential Slowdown in Commercial Construction

• Developers may delay or reconsider launching new commercial projects, particularly those meant for leasing.
• Smaller businesses looking to lease spaces might struggle with affordability.

Does This Amendment Impact Residential Real Estate?

Unlike commercial leasing, residential real estate remains largely unaffected. Here’s why:

• Ready-to-move properties are outside GST’s purview, so no direct impact there.
• Under-construction homes were already ineligible for ITC, so this amendment does not bring any new change.
• Affordable housing projects remain exempt from major tax changes.

The only segment that might feel some heat is luxury residential developments that have commercial elements (like serviced apartments or mixed-use projects). But for the average homebuyer—nothing really changes.

Legal and Compliance Challenges for Developers

1. Retrospective Tax Reversals
   • Developers who have already claimed ITC since 2017 may now have to repay those credits, leading to significant tax liabilities.
2. Legal Disputes Likely
   • The real estate industry is expected to challenge this amendment in court, arguing that denying ITC for leasing contradicts the principles of GST.
3. Increased Compliance Burden
   • More scrutiny on tax filings, potential litigations, and the need for revised accounting strategies.

Final Thoughts: A Strategic Shift in Real Estate?

This amendment is a clear signal from the government—it wants to discourage tax benefits on leasing while boosting tax collections.

Who is Most Affected?

✅ Commercial real estate developers
✅ Businesses looking to lease office/retail spaces
✅ Investors in leasing-based commercial properties

Who Remains Unaffected?

❌ Homebuyers & residential developers
❌ Affordable housing projects
❌ Real estate investors focused on property sales

While the government aims to close loopholes and increase tax revenue, the move could have unintended consequences—such as higher costs for businesses and a potential slowdown in commercial real estate development.

For developers, the way forward will be to rethink project structuring, explore alternative tax-efficient models, and possibly shift focus to property sales rather than long-term leasing.

One thing is certain—the real estate sector is entering a new tax era, and only the most adaptable players will thrive.

That’s the big picture on the CGST amendment’s impact on real estate. If you’re a developer, investor, or tenant, understanding these changes is crucial for future financial planning.

What do you think? Will this amendment help the economy or hurt commercial real estate growth? Until then….

(Authored by Ramkrishna Agrawal)