JUNE 26, 2020

By K Srinivasan

AS per Para 2 of Notification No.11/2017-CTR dated 28/6/2017, in case of supply of service involving transfer of land, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land in such supply, and it shall be deemed to be 1/3 rd of total amount charged for such supply.

Explanation:- For the purpose of this paragraph, total amount means the sum total of :-

(a) Consideration charged for aforesaid service; and

(b) Amount charged for transfer of land, including by way of lease or sub lease.

In states like Kerala, Karnataka, Rajasthan and Tamil Nadu, in matters of property development from land to construction of residential complexes, there is a practice of splitting the transaction into two parts;

1. Value of Land/ Undivided portion of land -Sale Agreement

2. Value of Construction Agreement

Whereas in states like Maharashtra, the Agreement is but a consolidated one for the entire value of land and construction and there is no splitting of the said value for the purpose of registration under the Stamp Act.

In the former states, there's a chance to deflate the value of land to save upon Stamp duty and as well as take advantage of the abatement given under the scheme which turned out to be much higher the actual land cost on record adopted for registration.

Whereas in the case of latter states, there was no way land value could be of one's own choice, for the registration value adopted for calculation of stamp duty was on the entire cost of the project, where

a) Market value of land cost itself was much higher than the abatement offered

b) The registration charges by way of stamp duty was much higher since the same was on total value of property, comprising land and superstructure and

c) The cost of the project was disparately higher compared to the former states, resulting in an anomaly.

The Act had though provided for abatement towards value of land/undivided land cost technically from the total value of the property comprising land and construction, the dispensation of percentage of abatement offered was felt anomalous and unsatisfactory between the two sets of states for the aforementioned reasons.

The Government was unable to iron out some of these practical differences in cost of the projects between two sets of states as pointed out above, caused by the adoption of the value for construction service.

The Government was long awaiting a golden opportunity to do away with this divergent practice and make it all uniform for everyone. Then GST came in handy when it introduced a uniform reduction of 1/3 rd of the total value towards the land portion out of the total amount charged for the Constructed property.

Here again a question raised by the former states is where there is still the practice of a split Agreement for sale of land/Undivided portion of land, why not the actual cost of land which is available on record, be allowed to be deducted rather than a notional value of 1/3 rd of land from the total amount charged for the constructed property, which is far less than the actual cost occupied by land in the value of the constructed property?

To this question the Government answered through its FAQ No.36/I No, valuation mechanism prescribed in Para 2 of N. No 11/2017-CTR dated 28/6/2017 clearly prescribes one-third abatement towards value of land.

The latter states in the meanwhile have also represented through CREDAI, that in their states the cost of land is as high as 60% to 70 % of the total value of constructed property and handing out a third of the total value as abatement towards land value is totally unrealistic and unjustified.

The former states too have joined in these representations, stating that even for them the cost of land, in metropolitan areas has steeply risen to occupy 50% to 60% of the total value of the constructed property and therefore prescribing 1/3 rd of land value as abatement is, both arbitrary and unreasonable.

In the above backdrop, came the ruling of the AAR Gujarat to add more fury to the fire the sector is already under. The AAR Gujarat held in the case of Sh. Dipesh Anil Kumar Naik, Surat, dated 19.05.2020 - 2020-TIOL-134-AAR-GST that GST is applicable on sale of plot of land for which primary amenities such as, Drainage line, Waterline, Electricity line, Land levelling etc. are provided by the developer, as per the requirements of approval/ Sanctioning Authority.

Applicant, the owner of land, develops the land with infrastructure and sells such sites to end customers who may construct independent houses/villas in the plots.

Sale price includes the cost of the land as well as the cost of common amenities on a proportionate basis. The rate charged is on super built-up area basis and not the actual measure of the plot.

As per Para 5 of Schedule III of the CGST Act Sale of Land, transaction shall be out of GST net only if the activity is exclusively dealing with raw transfer of title/ transfer of ownership of land, which is an immovable property.

Sale of developed plot is said to be not the exact equivalent of sale of land as per Para 5 of Schedule III and is tantamount to rendering of service, in view of the SC decision in the case of Narne Construction P Ltd. [CIVIL APPEAL NOS. 4432-4450 OF 2012, Order dated 10th May 2012]

Clause 5(b) of the Schedule-II of the CGST Act, 2017, which includes “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer as a 'Supply of service' is found to be the nearest match to the above described development activity, carried out by the applicant on the land.

Sale of developed plots, thus held to be covered under the above referred said clause 5(b) of Schedule II, namely 'construction of a complex intended for sale to a buyer' liable to GST.

Assuming without agreeing to the above ruling that the performing on the land the said activities, some of which are as required by the Municipal Plan sanctioning Authorities while rest of them are as per his own scheme to enhance the ready usability of the Plots, by which, as soon as completion of construction, one could move, plug in and use it, even then the value of the said activities alone can be considered for charging to GST and not the entire sale value of the developed plots as a whole, provided the said development is under a third party arrangement and squarely inapplicable to self-development, is the humble view of the Author.

The activities done on the land are levelling of the land, construction of boundary wall, construction of roads, laying of underground cables and water pipelines, laying of underground sewerage lines with sewer treatment plant, development of landscaped gardens, drainage system, water harvesting system, demarcation of individual plots, construction of overhead tanks, other infrastructure works.

When these activities are carried out on a vacant plot by a third party developer, either before consideration is received or after, even then it would not be a taxable supply under GST, as all of it is part and parcel of the land, which is an immovable property and can be sold even as developed plots only by the Landowner and not by the developer, rightly excluded under Para 5 of Schedule III to the Act, to be treated neither as supply of goods or services.

The above transaction in land would in normal course can at best attract Article  268(1)(b) read with Article 246(3) under Schedule VII entry 63 of List II, in so far as levy and collection of tax in the form of stamp duty is concerned, which is vested with the states.

Last but not the least, the AAR baffled by the absence of a mechanism to abate the value of the land from the transaction cost to arrive at the value of development of the plots, as provided in the case of construction of complex service under N.No.11/2017-CTR dated 28/6/2017 as 1/3 rd of total cost of construction Project, even if you assume the aforesaid activities to be taxable for a while, had still thrown the baby with the bath water.

He could not have even retrieved the baby by finding some way to vivisect the transaction to carve out the development activity as a taxable part of the transaction and thereby held it alone as taxable, since it is neither a third party development or Joint development, and hence not taxable in this case, which in the view of the Author.

The Karnataka AAR's order in the case of Maarq Spaces Pvt. Ltd., Bengaluru dated 30.09.2019 - 2019-TIOL-454-AAR-GST [upheld in - 2020-TIOL-28-AAAR-GST] and the M.P AAR's order in the case of M/s Vidit Builders, Jabalpur dated 06.01.2020 - 2020-TIOL-47-AAR-GST, would at least stand some chances of survival, in respect of a joint development agreement where it has been decided that the consideration received by the developer as his share, under a JDA will be taxable.

Another question that still arises in the above AAR BLR & M.P rulings is, whether Notification No. 4/2018-CTR will apply in respect of joint development agreements of land also, as this notification is related to taxing of development rights in respect of construction service of complex, building or civil structure only?

The AAR (Gujarat), in another case of M/s Satyaja Infratech dated 20/9/2019 - 2020-TIOL-80-AAR-GST had decided that the entire sale consideration, i.e. 100% of the plot value would be taxable. Therefore, what will be the taxable value remains a being question mark there as well?

But both AAR's Gujarat have simply forced themselves ironically, into equating the sale of developed plots to a taxable supply under Clause 5(b) of the Schedule-II of the CGST Act, 2017, which includes construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer as a Supply of service, besides choosing not to extend any benefit of abatement under the said N.No.4/2018-CTR either.

Be that as it may. The final argument of the developer would be that development right to allocate developed land/plot springs from the lawful possession of right to pass benefit arising from land as a 'profit a prendre' and when it goes hand in hand with sale of the land as an immovable property within the meaning of Transfer of Property Act, 1882, General Clauses Act, 1897, The Indian Registration Act, 1908, DLF Commercial Projects Corporations - 2019-TIOL-1514-CESTAT-CHD, and a combined reading of all these Acts and the cited Judgement/s in particular, it goes to show that it will amount to sale/transfer of immovable property and, therefore, can't be liable to a tax under GST.

Finally, it is in the humble opinion of the Author that Builder/Developers don't mind paying GST on construction service as it has come to stay as a taxable service/supply for long now. Only the cost of developments/construction carried out on the land can at best be the subject of GST.

But, other than such acquiesced matters of tax up till now, there can be no levy of GST on transfer of incidents arising out of land such as easement rights and transfer of immovable property which is equipped with certain additional amenities.

The overarching methods of the Centre to tax in a roundabout way, what is not permitted to be done directly would be clear traversing of State Law and it is quite undesirable in a federal democracy which is lately touted as a great virtue of the GST system of taxation under the direct constitutional oversight of the GSTC.

Nothing is ever too late in the day, if only the Government quickly rapped the benches and ordered a quick course correction, is the sincere belief of all the stake holders as shared by the Author, even as they are staring with bated breath and utter dismay at the glaring faux pas committed on them by the AAR, in the above instance, as it has far reaching consequences for everyone of them including the states.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)