NOVEMBER 17, 2020

By Dr G Gokul Kishore

ONE of the most quoted or used expressions under tax laws is "liability precedes exemption" or "exemption presupposes liability". However, in indirect taxation, this principle hardly applies as the tax administration without clarifying whether tax liability exists, proceeds to provide exemption or prescribe procedures through various notifications. This behaviour is more pronounced in GST regime as this Part-90 will demonstrate.

Development rights - Taxability in doubt only for taxpayers

Development rights being benefits arising out of land have been jurisprudentially settled to be "immovable property" and, therefore, transfer of such rights will be treatable as transfer of immovable property itself. But such settled law is either ignored or sought to be overcome in GST. Notification No. 4/2018-Central Tax (Rate) was issued in January, 2018 to prescribe time of supply in respect of transfer of development rights to a developer by land owners (mentioned as "registered persons" in the notification). Later, when special carve out was made for realty sector, Notification No. 13/2017-Central Tax (Rate) was amended from April, 2019 to specify promoter as person liable under reverse charge mechanism for payment of tax on "services supplied by way of transfer of development rights". Along with this, exemption under Notification No. 12/2017-Central Tax (Rate) was also amended to grant exemption to transfer of development rights in specified circumstances.

All the above - exemption, time of supply and reverse charge amply evidences that the policy makers and tax administration are under the notion that transfer of development rights is a service and, therefore, the same is liable to GST. The major faux pas committed by draftsman is to leave Schedule - II of CGST Act in respect of "Land and Building" open i.e. without including transfer of development rights as supply of service. While Schedule - II cannot cast liability but can only categorize a transaction as either supply of goods or supply of service, at least the intention could have been made clear in the parent statute instead of seeking to tax such transactions through presumption created by various notifications.

GST law can be considered as modern and progressive only if it recognizes established jurisprudence on a particular subject and codifies the same by harmonizing it or integrating it. If settled law is to treat transfer of development right as a transaction in immovable property, GST law cannot invent property law through taxation of certain rights inhering in such immovable property. It is time for the GST Council Secretariat and CBIC to brainstorm and come out with proposal for amendment to CGST Act to exclude such immovable property transactions instead of taxing them indirectly through such notifications.

Housing society - Exemption v. principle of mutuality

Various advance rulings have been delivered holding cooperative housing societies are liable to GST in respect of their activities. Definition of various terms like business, person, etc., are literally interpreted to the exclusion of other definitions or provisions to come to the conclusion that members of the society and society are two different persons and principle of mutuality will not be applicable thus attracting tax. One of the grounds for adopting such position is Notification No. 12/2017-Central Tax (Rate) which grants exemption to unincorporated or registered non-profit body (housing society) in respect of services provided to own members against reimbursement of charges or share of contribution. The threshold prescribed for such exemption is Rs. 7500 per member per month.

Such a piece of subordinate legislation is taken as gospel by authorities to consider the Supreme Court judgment in Calcutta Club- 2019-TIOL-449-SC-ST-LB as irrelevant under GST. It is significant to note that this judgment is eloquent on this issue and it unambiguously applies principle of mutuality by holding even 46th Amendment to the Constitution as not impacting such principle. Merely by using "whether incorporated or not" in definitions in CGST Act, established legal principles cannot be overcome. While piercing corporate veil is sacrosanct when entities are not transparent, equally sacrosanct is to recognize mutuality and service to self in case of such associations, clubs and societies which are bodies constituted by members for mutual benefit and there is neither quid pro quo nor consideration involved when activities are undertaken. [Please see Apsara CHS Ltd. 2020-TIOL-65-AAAR-GST & 2020-TIOL-166-AAR-GST]

Lot of debate has taken place on this issue but the tax administration is content in pushing taxpayers to various fora. Simplification of processes does not only mean online filing of returns but also recognizing judicially settled principles and adopting approach consistent with such principles. The courts may or may not affirm the position adopted by the department on such issue but a civilized and mature tax administration is expected to respect judge-made law as well. It is for the GST Council to take cognizance of this weighty issue for appropriate resolution.

Long term lease - Not akin to sale?

Notification No. 12/2017-Central Tax (Rate) grants exemption to upfront amount called premium or salami collected for long term lease of industrial plots or certain other specified plots by State Government Industrial Development Corporations or such entities where government is majority owner. Long term lease is for a period of thirty years or more. Notification No. 13/2017-Central Tax (Rate) shifts the liability to pay GST on such amount (on leases granted by others) by the promoter under reverse charge mechanism. Relying on the definition of supply including lease, Schedule - II classifying lease as supply of service along with the above notifications and Bombay High Court judgment in Builders Association of Navi Mumbai v. UOI - 2018-TIOL-2767-HC-MUM-GST advance ruling authorities and the department have been taking the stand that such lease cannot be equated with sale even if the period is fairly longer. Definition of lease in Transfer of Property Act wherein the words "in perpetuity" have been used is also taken as supportive of such stand.

Long term lease is argued as akin to sale and in certain States, such leases are treated as conveyance of immovable property. While in lease, only possession along with certain rights are transferred, it is only in sale, ownership gets transferred through an appropriate deed of conveyance. This may denote that even long-term lease is lease alone and is not treatable as a transaction similar to sale. However, considering various rulings, this issue is not unambiguously clear. Exemption notification cannot be the basis to presume levy for taxing such transactions rather the statute should contain references to Transfer of Property Act or other laws as may be necessary to convey the intention loud and clear. [Please see Jinmagal Corporation - 2020-TIOL-282-AAR-GST]

[The author is an Advocate, Gokul & Subha Advocates, Chennai. Views expressed are personal.]

See Part - 89