For years, developers who built commercial property purely to rent it out faced an odd result: they paid GST on the construction, they charged and paid GST on the rent — but the credit in between was blocked. A fresh order from the Madras High Court, dated 28 August, has kept that debate very much alive.

The court set aside the orders against ESNP Property Builder and Developers, a firm that had built commercial property for leasing and claimed credit for the GST paid on its construction. The tax department had rejected the claim. The High Court didn't decide the credit either way — instead it held that the officer had failed to properly apply the Supreme Court's 2024 ruling, and directed the department to hear the company afresh and pass new orders within five months.

That procedural nudge matters more than it sounds. It confirms that officers cannot treat this as a settled, one-line rejection.

How we got here: Safari Retreats

The whole line of argument traces back to Chief Commissioner of CGST v. Safari Retreats, decided by the Supreme Court on 3 October 2024. There, a developer had built a shopping mall and leased out the units, and claimed credit on the construction cost.

The Court drew a sharp distinction. The phrase used in Section 17(5)(d) — "plant or machinery" — is not the same as the defined term "plant and machinery" used elsewhere in Section 17. Because "plant" is not separately defined, it takes its ordinary commercial meaning. So a building can be a "plant" — if, on the facts, it functions as the apparatus of the business rather than just the premises. Whether it does is a question of fact, decided by a functionality test.

Just as importantly, the Court separated construction for one's own use from construction meant to be leased or sold. Building an asset to earn taxable rent, the reasoning went, is not the same as building for your own consumption.

The 2025 amendment — and the gap it left open

The government moved to close this down. Through the Finance Act 2025, Section 17(5)(d) was amended to replace "plant or machinery" with "plant and machinery" — the defined term that expressly excludes land, buildings and other civil structures. The change was notified to take effect from 1 October 2025 but given retrospective effect from 1 July 2017, and it states it applies regardless of any earlier court judgment.

On the face of it, that neutralises the "a building is a plant" route. But — and this is the point experts are now flagging — the amendment touched only that one phrase. It did not disturb the words "on his own account," which is the very limb Safari Retreats used to separate self-use from letting out.

Speaking to the press, KPMG's national indirect-tax head Abhishek Jain has noted that the change doesn't settle the issue — the "own account" language, on which Safari Retreats turned, is left standing. Businesses sitting on large construction credit, he suggests, should examine their positions carefully rather than assume the matter is over.

— as reported in press commentary on the ESNP order

Abhishek Rastogi of Rastogi Chambers has made a related point: where a commercial building is put up specifically for leasing and the structure itself is the means of earning taxable rent, the Safari Retreats reasoning still bites. The officer has to look at why the property was built and how it connects to the taxable business.

— as reported in press commentary on the ESNP order

What a strong claim actually needs

If you're a developer holding construction credit on let-out property, the ESNP order is an opening — but only if your file proves the property was never for self-use or sale, and was built to generate taxable rent. In practice, that means assembling:

• Proof of business character. MoA/AoA showing commercial leasing, renting or property management as a core object of the company.
• Executed lease agreements. Contracts with tenants showing the property is actively let out, not held for own use.
• Output-tax record. GSTR-1 and GSTR-3B showing you charge and pay GST on the rental income the building generates.
• Purpose-built evidence. Board resolutions, sanctioned plans and project approvals showing the building was designed from inception for commercial exploitation — a mall, IT park or warehouse, not a self-use office.
• A clean input trail. Construction invoices segregated so the specific goods and services map directly to this leased property.

The functionality test, in plain terms

The Supreme Court didn't hand down a rigid formula. It said each case turns on whether the building functions as a "plant" for that business — echoing the older "tool of the trade" idea from income-tax jurisprudence. In practice, three questions decide it:

"Mere setting" vs "tool of trade"

This is the line your submissions have to draw. The same four walls can fall on either side of it, depending on the business.

To land on the right side, be ready to show purpose-built design (plans engineered for commercial exploitation), indispensability (no structure, no leasing business), a direct revenue link (rent is paid for the use of this specialised asset), and enduring utility (a long-life capital asset built to attract and hold tenants).

The legal ground to stand on

Expect the department to lead with the retrospective 2025 amendment. The strongest counters, in order of durability:

• The "own account" distinction. Constructing to lease to third parties is not construction "on his own account." The Madras HC flagged that the 2025 amendment did not touch this limb — so the Safari Retreats reasoning survives on it.
• The ESNP procedural mandate. An officer cannot reject the claim by merely citing the amendment. They must examine the factual end-use of the building and engage with the Supreme Court's principles before passing any order.
• The anti-cascading objective. Denying credit on construction while taxing the resulting rent produces tax-on-tax — the exact cascade GST was designed to remove.
• The functional-plant argument. Weaker after the amendment, since the imported defined term excludes buildings — but still worth running on the right facts, alongside the grounds above rather than alone.

ESNP itself is a reminder of the stakes: the firm had sought the return of roughly ₹9.52 crore reversed from its credit ledger and about ₹10.09 lakh from its cash ledger, and the court directed the authorities to re-credit or refund those amounts within two weeks. Numbers of that size are exactly why the "assume it's over" approach is the expensive one.

Disclaimer: This article is general information on a developing area of GST law and is current as at the date of publication. It is not legal or tax advice and should not be relied on for any specific transaction. Case outcomes turn on their own facts, and the position may change with higher-court rulings on the 2025 amendment. Please consult a qualified professional — talk to efiletax — before acting.