MAY 02, 2017

By S Sivakumar, K Vidhyashree, Advocates and R Vaidyanathan, Consultant

IN what could be a major confusion that could affect the Realty Sector, it seems that there are contradictory provisions contained in the GST law, insofar as they deal with the sale of land. In terms of Section 7(2)(a) of the CGST Act read with Sl No. 5 of Schedule III, the following entry is an activity or transaction which shall be treated as neither a supply of goods nor a supply of services:

Consequently, sale of land by anybody and sale of building by Realty Players after obtaining the Completion Certificate in terms of Clause 5(b) of Schedule II shall neither be a supply of goods nor a supply of services and would be outside the purview of the CGST Act.

Be that as it may…. let's take a look at Section 17(3) of the CGST Act dealing with apportionment of credit and blocked credits, which reads as under:

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Rule 10 (2) of the draft Input Tax Credit Rules issued by the Central Government further states as under:

Explanation.- For the purposes of this Chapter,-

(1) "capital goods” shall include "plant and machinery” as defined in the Explanation to section 17;

(2) for determining the value of an exempt supply as referred to in sub-section (3) of section 17:-

(a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

(b) the value of security shall be taken as one per cent. of the sale value of such security .

Thus, we have two situations relating to sale of land, that are covered under the GST law…

+ As per Section 7(2)(a) read with the Third Schedule, sale of land and sale of building by Realty Players are neither supply of goods nor supply of services, while, as per Section 17(3) read with the draft ITC Rules, sale of land and sale of building by the Realty Players would be treated as 'exempt supplies' within the meaning of Section 17 necessitating reversal of common input tax credit in terms of the formula given in the Rules.

Of course, there is a separate definition for 'exempt supply' under Section 2(47) which reads as under:

2 (47) "exempt supply”   means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

We would wonder if anything could be more confusing than the treatment of 'sale of land' under the GST law. Can a transaction or an activity which is not a supply (of either goods or services) at all be treated as an exempted supply for purposes of reversal of input tax credit on common input supplies? Can we have two separate definitions for 'exempt supply', viz. one, in Section 2(47) and the other one, in Section 17(3)?

Needless to say, these provisions which seem contradictory to each other, are bound to result in mindless litigation, drastically affecting the Realty Sector.

Of course, we have very similar provisions under the Cenvat Credit Rules, 2004 as amended from 13.04.2016. In terms of the Explanation 3 to Rule 6(1) of the CCR, for the purpose of Rule 6 (dealing with reversal of credit on common input services when such services are used also for providing output exempted services), exempted service as defined in Rule 2(e) as - shall include an activity, which is not a 'service' as defined in section 65B(44) of the Finance Act, 1994, provided that such activity has used inputs or input services. Thus, a transaction or an activity which is not a 'service' can still be treated as an 'exempted service' for purposes of reversal of cenvat credit on common input services, under the current service tax law. Of course, many of us feel that the amendment brought about with effect from 13.04.2016 is ultra vires Section 65B(44) of the Finance Act, 1994 and is consequently not valid.

It must be stated here that the Realty Sector has not yet fully understood the implications arising out of the amendments made in the cenvat credit scheme vis-à-vis reversal of credit on sale of land and/or building from 13.04.2016. In the least, these amendments were brought about only in the Cenvat Credit Rules, 2004, as stated above. Now, the Government, in its infinite wisdom, has thought it fit to bring these contradictions related to 'sale of land' right into the CGST Act, which would affect not only services but also goods, as the reversal would cover ITC relatable to inward supply of goods involved.

Before concluding…..

Some clarity would seem to have emerged insofar the levy of GST on joint development agreements is concerned. Section 7(1)(a) clearly defines 'supply' to include all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Thus, the Developer or the Builder who is constructing apartments in exchange for land from the landowner would be subject to the levy of tax under the GST law, given the fact that supply includes barter.

Conclusion: The statutory provisions contained in the CGST Act, as they relate to 'sale of land' and 'sale of building' are bound to create a lot of litigation, to the detriment of the Realty Sector. It is time the Government takes a second look at these provisions before time runs out.