MARCH 21, 2018

By Rishab J

WHENEVER a person considers availing commercial space for undertaking business, there is always an intention to undertake a consolidated transaction to also purchase the underlying land. The two-folded benefit of purchasing the land are appreciation in the value of land over a period of time and certainty in availing commercial space. With this background, we shall try to analyse the GST implication on availing the commercial space with underlying undivided share in land for a single consideration.

Value of the Construction services provided with transfer of title in land

Reference is required to be made to exemption as provided in light of entry 5 in Schedule III of the Central Goods and Service Tax Act, 2017, which provides that the sale of land shall neither be treated as supply of goods nor as services for the purpose of GST.

Therefore, when a single consolidated amount is charged for providing construction services, the government has prescribed the methodology to be adopted to determine the value of such services. Para. 2 read with Serial No.3(1) of Notification 11/2017- Central Tax (Rate) dated 28th June, 2017 provides that where the value of the undivided share in land is included in the cost of construction services then the value of such land shall be deemed to be equal to one third of the total value. This can be deducted for the purpose of discharging GST.

Hence, in cases where the composite supply of construction service including land is provided, and a single consolidated amount is charged by the supplier for both transfer of land, not leviable to GST and for construction services, leviable to GST, then the value of such supply i.e. construction service is deemed to be equal to two- third of the total amount charged.

Let us now analyse the broad classification of the commercial properties, which are possessed under the following 2 categories-

1. Freehold property- refers to properties that are "free from hold" of any other entity except the owner for an indefinite period. According to Black's Law dictionary, the term freehold is defined as "An estate in land or other  real property held for uncertain duration; that is, either of  inheritance  or held by a free tenure".

2. Leasehold property- refers to those properties usually whose title is retained with the owner but all the other rights in relation to such property are transferred to another person. The term "Leasehold" is defined in Black's Law Dictionary as, "An estate in realty held under a lease; an estate for a fixed term of years".

The aforementioned notification is applicable to the first category of the transaction. However, there has been an emerging trend in the Real Estate sector, wherein the second category of transaction is undertaken, i.e.the underlying land in the constructed property is transferred to the buyer with leasehold rights over the land for long duration, for example 75 years, 99 years, etc. Under this transaction, the land owner is not required to transfer title of the land, however he shall relinquish all other rights over the property for definite term, i.e.,long term.

One of the major reasons behind such transaction is that in metropolitan cities, there has been an emerging trend wherein,the cost of the land forms at least 80-90% of the total consideration. Therefore, the purchaser of the commercial space ( hereinafter referred to as "Customer") is required to shell out huge consideration, if he undertakes the purchase of commercial space with proportionate land.

In these circumstances, it is beneficial to the customer to take commercial space with a caveat of long term lease, which enables him to use the commercial space for a definite period of time by paying less consideration. Therefore, the lump-sum consideration paid shall represent consideration for 2 different supplies-

1. Towards lease of the land

2. Towards value of the constructed building.

The lease amount is charged in lieu of the owner agreeing to relinquish all his rights over the property for the duration of the lease.

The aforementioned situation was not addressed by the Notification No. 11/2017- Central Tax (Rate), therefore various representation were made by the industry for addressing the disparity among similar transaction involving transfer of title and involving transfer of land under lease model.

Accordingly, the government has amended Notification No.11/2017- Central Tax (Rate) vide Notification No. 1/2018 Central Tax (Rate) dated 25th January, 2018, to render the aforementioned transaction at par with construction services involving transfer of land for the purpose of determining value for the purpose of GST.

Value of the Construction services provided with lease of land

Serial No.16 of Notification No. 11/2017-Central Tax (Rate) was substituted vide Notification No. 1/2018- Central Tax (Rate), which provides that where a composite supply of construction services is provided along with supply of land or undivided share of land by way of lease or sub lease, then the consideration upto the extent of one third of the amount of total consideration shall be leviable to tax at Nil rate . According to the proviso to the said entry, if the value of the lease exceeds one third the amount, then such value shall be leviable to GST.

This implies that where the Developer/builder collects any specific charges towards lease from the occupant, then the Developer is liable to discharge GST on the activity of renting/leasing of the property under the GST Law. However, if a consolidated amount is charged, then tax for one third of the amount shall be chargeable at NIL rate.

Amendment- Retrospective or prospective

In this regard, it is pertinent to note that the Notification No.1/2018-Central Tax(Rate) is silent on whether this substitution shall have retrospective impact or otherwise. It is a settled legal position that unless otherwise stated, an amendment will be prospective in nature. Thus, it can be contended that the benefit of aforesaid deduction will be available for all the future supplies.

Further, we may refer to the ratio laid down by the Hon'ble High Court of Karnataka in the case of Commr. Of C. Ex. & S.T., Bangalore v..Fosroc Chemicals (India) Pvt. Ltd. - 2014-TIOL-1609-HC-KAR-CX, wherein the Court while concluding that the impact of substitution to the Cenvat Credit Rules, 2004 would be considered as retrospectively and held that,

"When a subsequent Act amends an earlier one in such a way as to incorporate itself or a part of itself into the earlier, then the earlier Act must thereafter be read and construed as if the altered words had been written into the earlier Act with pen and ink and the old words scored out so that there is no need to refer to the amending Act at all."

Therefore, in the light of the aforementioned judgement, the impact of substitution of Serial No.16 of Notification No. 11/2017-Central Tax (rate) vide Notification No. 1/2018-Cental Tax (rate) can be considered to be retrospective, in effect from 1st of July, 2017.

However, in the absence of a clarity to this extent, clarification by the CBEC in this regard will be appreciated.

(The author is an Associate, Lakshmi kumaran & Sridharan, Bangalore and the views expressed are strictly personal.)