The Real Estate players have traveled a bumpy road as far as Indirect taxes are concerned. Right from the era of Sales tax, the sector has faced challenges probably like no other sector. When GST was introduced, the sector was hopeful of some respite – not in financial terms, but in terms of clarity of law and smooth implementation of the same. For a few months, the industry experienced it also only to discover that they are back into the same quandary as before.
However, to rescue the industry players and give some liberation, the Gujarat High Court in a landmark decision has decided that the standard rate prescribed for fixed deduction of land value is optional and not mandatory. The decision in the case of Munjaal Manish bhai Bhatt vs. UOI has surprised the industry in more than one way. Vide this article we wish to deliberate on the ruling and the impact that it may cast on the sector.
Issue at hand
The backdrop of the litigation is that entry no. 3 of Notification No. 11/2017 along with paragraph No. 2 read with Notification No. 3/2019 Central Tax (Rate) dated 29/3/2019 (“said Notifications”) prescribe that in case of valuation of construction services, which involve the transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land (which is deemed to be one-third of the total amount charged for such supply).
Separately, Section 7 of CGST Act, 2017 (the Act) defines the scope of ‘supply’. The said definition also clarifies the following:
If any transaction is determined to be a supply within the meaning of GST law, Schedule II would determine whether it is a supply of goods or services. As per entry no. 5(b) of the said schedule, complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier, is treated as service.
Any transaction which forms part of Schedule III, is neither a supply of goods nor a supply of services – i.e., it is not covered within the ambit of GST law and hence not taxable. Entry no. 5 the said schedule specifies sale of land subject to entry no. 5(b) of Schedule II and sale of the building.
From the above, one can infer that the sale of land is not within the purview of the GST law – subject to it being covered by Schedule II. Moreover, the said notifications have prescribed a deemed value to land when a building or a complex is sold along with the land or undivided share inland. This deemed value is 1/3rd of the value of supply. Therefore, the value which would attract GST in the present scenario would be Total value of supply less one third of such value (ascribed to land). It is this deemed value of land that has unsettled the industry and is now being litigated.
Facts of the case:
The writ petition has been filed and combined for two petitioners. One of the petitions has been filed by a petitioner who purchased a bungalow constructed on land and signed an agreement wherein value of land and construction of building was indicated separately. They believed that GST was to be paid only on the value ascribed to construction of bungalow as sale of land was outside the ambit of GST. However, the seller, applied the standard abatement of 1/3rd of value towards land and collected GST accordingly. The petitioner believed that because of the cited notification, the entire consideration towards the sale of land has not been excluded for the purpose of computing tax liability under the GST Acts and has hence filed this petition.
In case of the second petitioner, an advance ruling application was filed seeking a ruling on the question whether there was any tax liability under the GST Acts on supply of developed land. The advance ruling authority held that the deduction for sale of land was admissible only to the extent of 1/3rd of the total consideration on the basis of the notification. Such ruling has been affirmed by the appellate authority for advance ruling. Hence, the validity of the notification as well as the advance ruling appellate order have been challenged by filing the writ applications before this Court.
Petitioners point of view:
The petitioners contended that the standard abatement prescribed by said notifications is ultra vires the law. Entry no. 3 of the said Notification was challenged on the grounds that the said entry was ultra vires Section 7 read with entry no. 5 of Schedule III. Further, the petitioner also contended that the deeming fiction created by the Notifications is contrary to Section 15 which prescribes valuation under GST law.
The petitioners detailed out the history of taxation of land, building and construction services, the landmark judicial precedents and the even the minutes of meeting of GST council wherein taxation of real estate sector was being deliberated. The petitioner vehemently argued that the standard abatement and the deeming fiction created by it is without any valid basis, completely arbitrary, discriminatory and violative of Article 14 of the Constitution of India.
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