Introduction
The issue of input tax credit (ITC) on leasing of commercial property under GST has assumed renewed importance after the Supreme Court’s decision in Safari Retreats. While the judgment has brought clarity on certain aspects of construction-related credits, it has also triggered fresh confusion—particularly on whether ITC is available on GST paid on lease rentals of commercial immovable property. Many taxpayers have incorrectly assumed that Safari Retreats either fully opens or completely shuts the door on ITC in leasing arrangements. Neither assumption is correct.
Leasing transactions occupy a distinct position under GST. Unlike construction of immovable property “on own account,” leasing involves a continuing supply of services, typically subject to GST at the applicable rate. The core controversy lies in distinguishing blocked credits relating to construction from eligible credits on leasing or renting services. Post Safari Retreats, tax authorities have intensified scrutiny of ITC claims where lease rentals are linked—directly or indirectly—to construction or fit-out activities.
As a result, businesses leasing malls, offices, warehouses, and commercial complexes face uncertainty on credit eligibility, reversal exposure, and audit risk. This article examines the post-Safari Retreats reality of ITC on leasing of commercial property, explains the statutory position under Section 17(5), and identifies where credit is legitimately available—and where it continues to be blocked. The focus is on practical compliance, not theoretical expansion.
Statutory Position under Section 17(5): Construction vs Leasing
The starting point for analysing ITC on leasing of commercial property is Section 17(5)(d) of the CGST Act, which blocks credit on goods or services used for construction of immovable property when such construction is carried out on own account, even if used in the course or furtherance of business. Crucially, the restriction is activity-specific, not asset-specific. It applies to construction, not to every subsequent or related transaction involving immovable property.
Leasing or renting of commercial property is treated under GST as a taxable supply of services, distinct from the activity of construction. Where a registered person pays GST on lease rentals, such tax is not incurred “for construction” but for receipt of a leasing service used for making taxable outward supplies. The statute does not expressly block ITC on lease rentals per se.
However, the difficulty arises where lease arrangements are intertwined with construction, fit-outs, or capital works. As per our experience, tax authorities closely examine whether the GST paid on leasing is, in substance, linked to construction activity or represents an independent service cost. If lease rentals merely recover construction cost indirectly, credit claims become vulnerable.
Therefore, Section 17(5) draws a clear but often misunderstood line: ITC on construction inputs is blocked, whereas ITC on GST paid for leasing services may be available, subject to factual scrutiny. Understanding this statutory distinction is critical to avoid over-claiming or unnecessary reversals post Safari Retreats.
Impact of Safari Retreats (SC) on Leasing Transactions
The Supreme Court’s decision in Safari Retreats has often been misunderstood as a blanket relaxation of ITC restrictions relating to immovable property. In reality, the judgment is context-specific and does not dilute the statutory framework governing leasing transactions under GST. The Court examined the phrase “on own account” in Section 17(5)(d) and recognised that the restriction must be interpreted in light of the nature of the activity undertaken by the taxpayer. However, it did not hold that ITC becomes automatically available in all cases involving commercial immovable property.
For leasing transactions, the relevance of Safari Retreats lies primarily in what the judgment does not say. It does not convert construction-related credits into eligible credits merely because the constructed property is later leased. Nor does it remove the statutory distinction between blocked construction inputs and taxable leasing services. As per our experience, post-Safari Retreats audits show that authorities continue to deny ITC where leasing arrangements are perceived as a means to monetise self-constructed property.
The judgment therefore cannot be read as a licence to reopen settled exclusions under Section 17(5). Instead, it reinforces the need to examine the immediate purpose for which inputs or services are used. If GST is paid for construction “on own account,” the credit remains blocked, irrespective of future leasing. Safari Retreats clarifies interpretation but does not rewrite the statute. Any ITC claim on leasing must still pass the statutory test independently.
ITC on GST Paid on Lease Rentals: When Is Credit Available?
The most critical practical question for taxpayers is whether ITC on GST paid on lease rentals of commercial property is available under GST. From a statutory perspective, lease rentals represent consideration for a taxable supply of renting services, and GST paid thereon is an input service cost. Where such leasing services are used in the course or furtherance of business and are linked to taxable outward supplies, ITC eligibility arises under Section 16, subject to Section 17 restrictions.
As per our experience, ITC on lease rentals is generally allowed where the lessee is not involved in the construction of the immovable property and merely avails the property as a tenant. For example, businesses leasing office space, retail units, or warehouses from third-party owners typically have a strong case for availing ITC on GST charged on rentals. The credit is linked to a service, not to construction.
However, complications arise where the lessor and lessee are related, or where lease rentals are structured to recover construction costs. In such cases, authorities examine whether the leasing arrangement is a genuine service transaction or a continuation of construction “on own account.” As per our experience, documentation, commercial substance, and separation of construction contracts from lease agreements play a decisive role. ITC on lease rentals is not automatic—it is fact-driven and compliance-sensitive.
Common Errors in ITC Claims on Leased Commercial Property
One of the most frequent reasons for denial of ITC on leased commercial property is the failure to segregate construction-related credits from leasing-related credits. As per our experience, many taxpayers mechanically avail ITC on all GST paid in connection with leased premises, without examining whether such credits are hit by Section 17(5). This often includes GST paid on fit-outs, interior works, structural modifications, or capital improvements carried out either by the lessor or the lessee.
A common error is treating fit-out or refurbishment expenses as part of routine leasing costs. Where such works result in construction or enhancement of immovable property, ITC may be blocked, even if the premises are used exclusively for business. Another frequent mistake is assuming that Safari Retreats permits ITC merely because the property is commercially exploited through leasing. As discussed earlier, the judgment does not override the statutory bar on construction-related credits.
Errors also arise in related-party leasing arrangements, especially where lease rentals are artificially structured to recover construction costs. Tax authorities often look beyond contractual form to examine the substance of the transaction. Inadequate documentation, absence of separate agreements, or lack of clarity on ownership of improvements significantly weakens ITC claims.
As per our experience, audits increasingly focus on invoice-level scrutiny, examining whether GST paid relates to construction, improvement, or leasing services. Failure to adopt a disciplined, transaction-wise approach exposes taxpayers to reversals, interest, and penalties.
Practical Compliance Takeaways for Taxpayers
From a compliance perspective, ITC on leasing of commercial property under GST demands a fact-sensitive and documentation-driven approach. The first step is to clearly distinguish between GST paid on construction or capital works, which is generally blocked, and GST paid on lease rentals, which may be eligible subject to conditions. This distinction should be evident not only in internal accounting but also in contractual documentation.
As per our experience, taxpayers with the strongest ITC positions maintain separate agreements for construction, fit-outs, and leasing, supported by clear invoicing and payment trails. Where fit-outs are unavoidable, careful evaluation is required to determine whether they constitute construction of immovable property or movable installations. Conservative classification at the outset often avoids prolonged disputes later.
Businesses should also review leasing arrangements involving related parties or long-term leases, as these attract heightened scrutiny. Commercial rationale, arm’s length pricing, and clear separation of construction recovery from rental consideration are critical. Periodic internal reviews of ITC positions—especially after major judgments like Safari Retreats—help identify risks early.
Ultimately, ITC on leased commercial property is not prohibited by default, but it is not automatic either. A statute-first approach, supported by documentation and restrained interpretation, is the most sustainable way to manage audit exposure and ensure compliance under GST.
Key Takeaways
The GST treatment of ITC on leasing of commercial property hinges on a clear statutory distinction between construction-related inputs and leasing-related services. Section 17(5)(d) blocks ITC only in respect of goods or services used for construction of immovable property on own account. It does not, by itself, prohibit ITC on GST paid for leasing or renting of commercial premises.
The Supreme Court’s decision in Safari Retreats does not dilute this statutory position. While the judgment clarifies the interpretation of “on own account,” it does not convert blocked construction credits into eligible credits merely because the constructed property is commercially exploited through leasing. Post-Safari Retreats, tax authorities continue to examine the immediate purpose and substance of the expenditure rather than its eventual commercial use.
As per our experience, ITC on lease rentals is generally sustainable where the lessee is a genuine recipient of leasing services and is not involved in construction or capital enhancement of the property. However, credits become vulnerable where lease rentals are structured to recover construction costs, where fit-outs amount to immovable property, or where documentation fails to clearly segregate construction from leasing.
A cautious, statute-aligned approach—supported by proper agreements, clean invoicing, and periodic review—is essential to manage audit risk in this area.
Key Points to Remember
- ITC on leasing of commercial property is not blocked per se under GST; the restriction under Section 17(5)(d) applies only to goods or services used for construction of immovable property on own account.
- GST paid on lease rentals constitutes input service tax, and ITC may be available where leasing services are used in the course or furtherance of taxable business activities.
- The Safari Retreats (SC) ruling does not permit ITC on construction-related credits merely because the constructed property is subsequently leased or commercially exploited.
- A clear distinction must be maintained between construction or capital works (generally blocked) and leasing or renting services (potentially eligible).
- Fit-outs, interior works, and structural modifications require careful evaluation, as they may amount to construction of immovable property even in leased premises.
- Related-party or long-term leasing arrangements attract heightened scrutiny, particularly where lease rentals appear to recover construction costs.
- As per our experience, documentation and contract structuring play a decisive role in sustaining ITC claims during audit.
- ITC eligibility must be assessed based on the immediate purpose of the expenditure, not on the eventual commercial use of the property.
- A statute-first, conservative approach significantly reduces audit objections and litigation exposure in leasing-related ITC claims.
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Sources and References
- Central Goods and Services Tax Act, 2017
Section 16 and Section 17(5), read with the Explanation relating to construction of immovable property and plant and machinery. - Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST
Supreme Court decision interpreting the expression “on own account” under Section 17(5)(d).
Short Disclaimer
This article is intended for general informational purposes only and does not constitute legal or professional advice. The applicability of GST provisions depends on specific facts and circumstances, and professional advice should be sought before taking any tax position.
