The main aim of the Union Budget for 2025-26 has been the boosting of the ease of doing business, a focal concept for all businesses to ensure seamless growth with reduced tax and compliance burden. However, certain changes to ensure a rational interpretation may challenge the prospect of achieving the desired outcome, such as the proposed amendment of clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act to substitute the expression "plant or machinery" with the expression "plant and machinery".

This has been explained by clause 119 of the finance bill to remove any ambiguity in interpretation and avail input tax credit (ITC) in such cases. The highlight of this clause is that the amendment is proposed to take effect retrospectively from the 1st day of July 2017, which erodes several court rulings and decisions, apart from having large-scale implications. The core object of this post would be to analyse these implications in the backdrop of a landmark case which has, in a way, inspired this proposal.

Legal background
The Central Goods and Services Tax (CGST) Act of 2017 is a comprehensive GST law. Section 17 of the act explains those inputs and input services on which a credit of input tax (ITC) cannot be availed or blocked. Sections- 17(5)(c) and 17(5)d of the CGST Act will be the crux of this article.

The former states that input tax credit (ITC) shall not be available in respect of the works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service, while the latter restricts the ITC in respect of "goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on one's account including when such goods or services or both are used in the course or furtherance of business". Here, "plant and machinery" in section 17(5)c excludes land and buildings and other structures that require structural and foundational support, telecommunication towers, and pipelines set up outside factory premises, explained in the section.

Furthermore, the captioned words "AND and "OR" differentiate both clauses.

The expression "plant" or "machinery" has not been clearly explained in any part of the act, thereby stirring up confusion in ensuring a flawless interpretation. This confusion has been solved to some extent in a landmark case stated below.

Chief Commissioner of Central Goods and Service Tax & Ors. Vs Safari Retreats Private Ltd. & Ors. (Supreme Court of India) the Safari Retreats case
Facts of the case:
A company (Safari Retreats Private Ltd). had constructed a shopping mall and accumulated ITC on the goods and services used during the construction phase. They aimed to offset this credit against GST payable on the rental income received from tenants. However, tax authorities rejected the claim of the company, based on Section 17(5)(d). a writ petition was filed by the company before the Supreme Court against the decision of the revenue.

The Supreme Court referred the case back to the Hon'ble Orissa High Court to determine the interpretation of the words- plant or machinery, which has not been defined in any part of the act. The apex court has also directed the high court to apply the test of functionality to determine what all comes under the word plant, as both are separated in clause 5(d) of the section.

The High Court held that if the assessee is required to pay GST on the rental income from the mall, it is entitled to ITC on the GST paid on the construction of the mall. It was held that the narrow interpretation given by the Department to Section 17(5)(d) would frustrate the very object of the Act. It read down the said provisions relying on a precedent, holding that ITC shall be admissible in respect of the supplies used for the construction of a shopping mall wherein the services associated with leasing out units (as a further supply of services) is chargeable with GST, and ITC is admissible on such services as per section 17(5)(b)(i) of the CGST act.

The test of functionality and the question of "and/ or" in clause 5(d)
The major aspect of the court's ruling was the discussion on the meaning of the word- plant in section 17(5)d, which is distinct from the conjunctive meaning of plant and machinery in section 17(5)c, and the construction of the property on one's account on which, ITC is blocked. The court, applying the doctrine of reading down, held that leasing services rendered by The company during the construction of the shopping mall- a building necessary for effectuating the service, cannot be categorised under services received for individual usage alone but rather must be for a further taxable supply, which is leasing services (in this case).

It has also applied the test of functionality to determine the meaning of the word plant and held that it includes the word building, though not specifically explained in the act. We can refer to the case of Commissioner of Income Tax v. Taj Mahal Hotel and Solid and Correct Engineering Works in which the CIT has held that the word plant includes the word- building and had justified the same using the test.

Concerning the "and/or" debate, it is important to define the extent of coverage of the words- "plant" and "machinery" separately (not "plant and machinery") as both are to be construed in isolation from each other due to OR in between them. In drafting a deed or statute, the word "and" ordinarily implies the conjunctive, while "or" ordinarily implies the alternative or is used as a disjunctive to indicate substitution.

There is a presumption that the draftsman of the section/clause intended to express its ordinary meaning as disjunctive and that he did not intend to use the words "and" which will be read "or" and "or" will be read "and". In this particular case, such a construction cannot be justified as the explanation that is given in section 17(5) is to be construed about both words simultaneously, which gives rise to the need to define them individually, negating the act of reading "and" in place of "or" and vice-versa. When OR is used, a dichotomy arises, and both the words suddenly obtain a standalone interpretation as seen in the safari retreats case, and ITC can be claimed on either of them (and not both together, in the case of section 17(5)d only) if installed independently.

It can be deduced that 'Plant' is different from the term "plant and machinery'. The word plant alone may include the word "building" as per the functionality of the supply, whereas plant and machinery together exclude land, buildings, or other civil structures, as stated in the explanation to section 17(5). This calls for an amendment in the CGST act to delineate the extent of both words when used individually, and until then, the interpretation can be based on court decisions and commercial application.

Proposal to amend section 17(5)d with retrospective effect:
With an object to reduce further ambiguity that can arise, the finance bill presented in February 2025 introduces clause 119, which proposes to amend the word OR and replace it with AND in section 17(5)d of the act. However, the amendment is to be awarded a retrospective effect recommended in the 55th GST Council meeting, with an explanation to clarify that the said amendment is made notwithstanding anything to the contrary contained in any judgment, decree or order of any court or any other authority.

This action would not only nullify the decision of the Supreme Court in the safari retreats case but would also raise qualms as to the availment and reversal of ITC. This is because the ITC that was claimed on "plant" as under section 17(5)d from 1 July 2017 may be ordered to be reversed in pursuance of the amendment, and the ITC that couldn't be claimed on plant OR machinery be allowed to be claimed in a lump sum? It can adversely impact taxpayers, causing unnecessary regulatory challenges despite the intention being in the spirit of the law.

The apex court has, in several cases, established a stance against a retrospective effect that has an adverse effect save only when the statute explicitly provides for retrospective application, emphasising that retrospective operation should not be given to a statute to impair an existing right or create a new obligation. Many cases in the past have highlighted the serious difficulties that arose due to retro amendments.

In Vodafone International Holdings BV v. Union of India (Vodafone case) (2012), a retrospective amendment of one of the sections of the income tax act resulted in the violation of a treaty entered by India and the Netherlands affecting, the parties to the case, causing huge losses to both. The permanent court of arbitration later directed the govt of India to pay damages, and the Taxation Law (Amendment) Act was passed after many years in 2021 to undo this retrospective effect. A similar impact could be seen in Cairn Energy Plc Cairn UK Holdings Limited v Republic of India. (Cairn energy case)

Analysis of the proposal (pros and cons)
Such an effect, per se, may not be wholly unfounded, but an objectionable part of it is the period to which the provision is taken back. In the Vodafone case, a provision in the Income Tax Act was amended and made applicable from April 1962. Such an effect has drastic consequences. There is a need to rationalise this, as it may create complicated situations.

As far as the recent proposal is concerned, its approval may cause disruptions. Several business concerns may incur potential losses in the form of ITC reversals and reversal, too, as the two words shall hereby be interpreted together in consonance with the existing explanation of plant and machinery in the section. Also, the taxpayers who have not been able to claim ITC due to the application of the law may be able to claim it on the net value of inputs and input services from the 1st of July 2017. Such possibilities are not conclusive unless section-specific provisions concerning ITC reversal and availment are incorporated.

It is Important to observe that credit availment due to the retro effect can benefit those taxpayers who couldn't avail ITC earlier by reducing their tax burden immensely, promoting efficient tax planning. However, a sudden increase in the amount of credit due to the longer period may be detrimental to the interests of revenue, causing huge losses to the treasury. These scenarios can also influence pending cases and may nullify decisions of courts and tribunals, as has been the impact of any retrospective law. It is important to prevent the amendment from defeating its very purpose, and a prospective effect would be advisable.

Conclusion
The amendment proposed is a welcome move that can allay any confusion in ascertaining the eligible amount of ITC. Although the intention behind it seems in favour of the letter and spirit of the law, the pros and cons of the proposal test the priorities of the government, which is evident from their far-reaching outcomes explained in the foregoing parts of the article. It does merit a reconsideration of the need to give a retrospective angle to this provision to allow a clear interpretation and application of the law.