Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things, wrote the celebrated economist Adam Smith almost three centuries ago in the Wealth of Nations.
It would appear that this formula for national affluence is relevant even in the present day.
Resonating with Smith’s poetic analysis, the top court, in a significant verdict on Thursday, has brought about much needed relief to the construction sector by giving it the leeway to claim tax credits accumulated in pursuance of the construction of immovable properties.
If the construction of a building is essential for supplying services, such as renting it or giving it on lease, the building could be held as a ‘plant’ for the purpose of availing input tax credits under the Goods & Services Tax Act, the apex court has held.
This judgement has laid to rest the longstanding controversy behind the tax department’s stand to deny tax credits on an interpretation of the statute that didn’t sit right with the highest court of the land.
To understand the controversy, the statutory provision governing tax credits on immovable properties requires some attention.
Section 17(5)(d) of the GST Act states that the facility of availing tax credits shall not be available for any goods or services availed by a taxpayer for the construction of immovable property (other than in the construction of a plant ‘or’ machinery), even when done so in furtherance of the business.
This means that tax credits will not be available for the construction of immovable properties unless it can be ascertained that the immovable property is a plant or machinery.
Crucially, the GST Act defines the expression ‘plant and machinery’ but is silent on the definition of ‘plant or machinery’. The legislature has made a conscious attempt to exclude land, buildings, and other civil structures from the definition of ‘plant and machinery’.
The department has maintained that the term ‘plant and machinery’ is pari materia to the term ‘plant or machinery’ and therefore the denial of tax credits on buildings and other such civil structures is barred by law.
The tax department argued before the court that the term ‘plant and machinery’ features at more than ten places in the statute, but ‘plant or machinery’ features nowhere but in Section 17(5)(d). This anomaly, the department contended, was due to a mistake on the legislature’s part and not because it intended it to be this way.
The court was not moved by the department’s argument.
In holding that a taxing statute must be read as it is, with no additions and no subtractions on the grounds of the legislature's intention or otherwise, the court laid out parameters for when an immovable property can be considered a plant for the purposes of Section 17(5)(d).
It said that whether a building is a plant or not is a question of fact. A factual question that is to be decided keeping in mind the business of the registered person and the role that the building plays in the said business, the court said.
The Right Way To Read Tax Law
The court opined that the law on the interpretation of tax statutes is fairly well settled, however, it gave insights, in a clear and concise manner, that should be kept in mind when going over tax statutes so as to avoid confusion and incongruity in its interpretation.
The court has said that while dealing with a taxing provision, the principle of strict interpretation should be applied. If, however, two interpretations are possible, courts should ordinarily interpret the provisions in the taxpayer’s favour.
In interpreting a taxing statute, the court observed that equitable considerations are entirely out of place and taxing provisions cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed, the court said.
Equity and taxation are strangers. But if construction results in equity rather than injustice, such construction should be preferredSupreme Court of India
On the aspect of manifest unjustness of provisions, the court opined that if the literal interpretation is manifestly unjust, producing a result not intended by the legislature, only in such a case can the court modify the language of the provision. However, the court observed that it is not unfair for the taxpayer to be able to evade punishment if the legislature fails to state its intentions clearly through the legislation in question.
In the context of the case at hand, the court also observed that where an undefined word in a taxing statute is to be construed, it should not be interpreted in accordance with its definition in another statute that does not deal with the related subject. It should be understood in its commercial sense.
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