GST Payable Only On The Cost of Construction and Not On The Cost Of Land: Gujarat High Court

The Gujarat High Court, while giving major relief to the buyers, has held that GST is payable only on the cost of construction and not on the cost of land.

The bench of Justice J.B. Pardiwala and Justice Nisha M. Thakore has observed that in the sale of a flat, villa, or commercial property, the actual land value or undivided share is not at all subject to GST. The value of the land or undivided share of land used to construct the flat is not subject to GST; only the construction costs are.

The applicant/assessee is a practicing advocate who entered into an agreement with Navratna Organisers & Developers Pvt. Ltd. for the purchase of a plot of land. The agreement also encompassed the construction of a bungalow on the said plot of land by the respondent for the writ applicant.

The writ applicant was liable to pay all taxes, including the GST. The writ applicant bona fide believed that, by virtue of the clause, he would be liable to pay tax under the Goods and Services Tax Act, 2017 on the consideration payable for the construction of a bungalow, as it would constitute a supply of construction services under the GST Acts.

The respondent, however, relied upon entry no. 3(if) of Notification No. 11/2017-Central Tax (Rate) dated June 28, 2017, informed the writ applicant that he would be liable to pay tax at the rate of 18% GST under the GST Acts on the entire consideration payable for land as well as the construction of a bungalow after deducting 1/3rd of the value towards the land in accordance with the notification. The respondent raised an invoice against the writ applicant to collect tax from the writ applicant.

The entire consideration towards the sale of land has not been excluded for the purpose of computing tax liability under the GST Acts. 1/3rd of the total consideration has been deemed to be land value in the notification.

The petitioner contended that Section 9 (1) of the GST Act is the charging section, which imposes a tax on the "supply" of goods and services. The scope of "supply" is defined in Section 7. By virtue of Section 7 (2) of the GST Act, the transactions specified in Schedule III of the GST Act are excluded from the purview of supply. The sale of land is included in Entry No. 5 of Schedule III to the GST Acts. Thus, the sale of land is neither a supply of goods nor a service. The imposition of tax on consideration received towards the sale of land by virtue of delegated legislation is therefore ultra-vires Sections 7 and 9 of the GST Acts.

The petitioner contended that a collective reading of the provisions would indicate that the sale of any land, whether developed or not, would not be subject to tax under the GST Acts and that the tax liability has to be restricted to construction undertaken pursuant to the contract with the prospective buyer. If that be so, then deduction of the entire consideration charged towards land has to be granted, and the same cannot be restricted to only 1/3rd of the total value as is sought to be done by the impugned notification.

The department contended that if the contention of the writ applicant is accepted that the value of the land must be taken as one being declared in the agreement, then it may lead to absurd results wherein, in an attempt to save tax, the developer and buyer may mutually decide that 99% of the total consideration would be the value of land and the balance would be construction. This may lead to huge losses to the public exchequer and is against the basic concept of tax.

The issue raised was whether the notification providing for 1/3rd deduction with respect to land or an undivided share of land in cases of construction contracts involving elements of land violates the provisions of the GST Acts and/or Article 14 of the Constitution of India.

The court held that Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification under the Gujarat Goods and Services Tax Act, 2017, which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land, are ultra-vires the provisions as well as the scheme of the GST Acts. Application of the mandatory uniform rate of deduction is discriminatory, arbitrary, and violative of Article 14 of the Constitution of India.

"The impugned paragraph 2 of Notification No. 11/2017-Central Tax (Rate) dated June 28, 2017 and the parallel State tax notification are read down to the effect that the deeming fiction of 1/3rd will not be mandatory in nature. It will only be available at the option of the taxable person in cases where the actual value of land or an undivided share in land is not ascertainable," the court said.

The court said that since the writ applicant has actually borne the burden of tax and tax was paid under protest by virtue of the interim order of the Court, it is directed to be refunded to the writ applicant.

Case Title: Munjaal Manishbhai Bhatt Versus Union Of India

Case Citation: 2023 Livelaw (Guj) 94

Case No.: R/Special Civil Application No. 6840 Of 2021

Date: 06/05/2022

Counsel For Petitioner: Uchit N Sheth

Counsel For Respondent: Devang Vyas

Click Here To Read The Order