Currently, GST is levied on sale of under-construction flats/units Residential or Commercial Properties wherein the entire value of flat or unit (including value of underlying land) is taxed after giving Ad Hoc deduction of 1/3 of value of flat/unit towards land irrespective of actual value of land.
Hon’ble Gujarat High Court’s recent ruling of last week that actual value of land should be deducted before levying GST on under-construction flats would reduce the tax outflow for homebuyers/prospective allottees, provided the contractual arrangement transparently denotes the land value.
In urban area or metro cities actual value of land is much higher than 1/3 value of flat and application of 1/3rd deduction is arbitrary in nature as it is applied uniformly irrespective of the area, size and location of land. This is indirectly levying tax on land which is beyond the legislative competence of the Union to levy GST on land.
In its verdict on Friday last week, the division bench of the Gujarat High Court comprising of Mr. Justice J.B. Pardiwala and Ms. Justice Nisha M. Thakore in case of Munjaal Manish Bhai Bhatt vs Union of India [CIV. APPL. 1350/2021 –GUJ. HC] vide order dated May 6, 2022 has read down paragraph 2 of Notification No. 11/2017 mandating 1/3rd deduction of Land as ultra-vires. Gujarat HC decision will squarely apply where sale agreement clearly specifies value of land and construction services. This is a well-reasoned and fair decision, if followed, the tax incidence on individuals buying under-construction flats will reduce substantially.
Noting that the impugned notification is contrary to the statutory provisions of the CGST Act, the division bench held that one of the most glaring features of the impugned deeming fiction is its arbitrariness in as much as the same is uniformly applied irrespective of the size of the plot of land and construction. Allowing the petition, the Court observed that “the prescription under Section 15(5) of the CGST Act has to be by Rules and not by Notification. Be that as it may, wherever a delegated legislation is challenged as being ultra-vires the provisions of the CGST Act as well as violating Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Government had competence to issue such delegated piece of legislation. Even if it is presumed that the Government had the competence to fix a deemed value for supplies, if the deeming fiction is found to be arbitrary and contrary to the scheme of the statute, then it can be definitely held to be ultra-vires.”
Further, the court observed that mandatory deduction of 1/3rd for value of land is not sustainable in cases where the value of land is clearly ascertainable or where the value of construction service can be derived with the aid of valuation rules. Such 1/3rd deduction can be permitted at the option of a taxable person particularly in cases where the value of land or undivided share of land is not ascertainable.
The flat buyers who have already borne the incidence of excess GST due to standard 1/3rd deduction, may proceed to file refund claim with the jurisdictional GST authority of the developer. This judgement is important owing to the impact it will have on real estate arrangements and development agreements across India. Particularly, where the value of land is on the higher side (for example in the four metro cities) vis-a-vis construction cost, when compared with other cities and towns of India, if it could be fairly established that the actual value of land / undivided share of land is as per the records than the actual value has to be reduced from the total consideration resulting in a lower GST impact.
This ruling ideally shall pave the way for a clarificatory circular by the department that would bring smiles to the entire ecosystem. It is expected that now the Government will come up with Valuation Rules as earlier done in the service tax regime.
The developers may not take this stand, till the GST Department synchronises itself with the judgment of the Hon’ble Court. In such a scenario, developers may continue to pay tax on 2/3rd consideration of flats under protest and thereafter, the Developers/Buyers may file the refund claim with the jurisdictional GST authority of the Developer.
In these inflationary times, the verdict is certainly a boost for the real estate sector given the potential reduction in GST outflow, provided the contractual arrangement transparently denotes the land value / value of undivided share of land.
This is a triumph for the entire real estate sector against the imposition of tax on arbitrarily computed taxable value in this regime of GST as well as in the erstwhile regimes of VAT on the same principle. Huge amount of VAT, Service Tax or GST had already been illegally collected on the land portion from the homebuyers/prospective allotees and paid to the Government coffers. This is one of the glaring examples of undue burden on homebuyers/prospective allotees of residential or commercial properties due to delayed justice.