GST on Construction Services – Deduction of a one-third of value of land towards construction services is not proper and Unconstitutional in Construction Services- Hon’ble Gujarat HC
The Honorable Gujarat High Court delivering an impact making judgement in the case of MUNJAAL MANISHBHAI BHATT vs UOI in R/SPECIAL CIVIL APPLICATION NO. 1350 of 2021 of has held that a portion of a GST notification mandating the deduction of a one-third of the value of land towards construction services, deeming it “arbitrary”.
The issue involved is that the ad hoc notional deduction of one-third towards value of land in construction services has been a subject of debate and impacts home buyers severely in various cases.
Attention is drawn here to Entry 3(if) of Notification No. 11/2017-Central Tax (Rate) along with paragraph no. 2 of the notification read with Section 7(2) of the GST Acts, Entry No. 5 of Schedule III to the GST Acts as well Section 9(1) and Section 15 of the GST Acts;
The Paragraph (2) of the above notification along with explanation goes thus:-
In case of supply of service specified in column (3) of the entry at item (i) against serial no. 3 of the Table above, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, and the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.
Explanation. – For the purposes of paragraph 2, “total amount” means the sum total of,-
(a) consideration charged for aforesaid service;
and
(b) amount charged for transfer of land or undivided share of land, as the case may be.
This decision will have a major impact in cases where land value is more than one-third. The inference of the court ruling is that deduction can be higher than one-third, thereby reducing GST brunt on homebuyers. The court held that the deeming fiction leads to arbitrariness and results in violation of constitutional provisions and fundamental right to equality and therefore ultra vires the GST Act and the overall scheme governing applicability of GST on construction services/sale of land.
It must be noted that there is no GST on transfer of land and building, being immovable property outside the ambit of definition of GOODS and the actual value of land must be excluded when GST is made applicable on construction services. Goods have ben defined under Section 2(52) of the CGST Act 2017 as
“every kind of movable property other than money and securities but includes actionable claims ,growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
The essential ingredients of the above definition is summarised to include:
- Every kind of movable property
- Actionable claims
- Growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
While goods does not include:
- Money and
- Securities
Also one should comprehend that Article 14 of the Indian Constitution comes into play to ensure that the higher deduction towards the value of land is available without any restriction. Article 14 of the Constitution actually bestows Equality before law, while the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India, i.e. ensures Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth or otherwise.
The above principles have already been addressed by the honorable Supreme Court in the case of Gannon Dunkerley and Co. v/s State of Rajasthan on the subject of Works Contract vs Service tax. It was observed that the value of goods was to be ascertained from the books of account of the assessee. Only in the event where it was not possible to ascertain the actual value, it was held that the State could prescribe a formula on the basis of fixed percentage of value of contract. It was however clarified that such prescribed value should not appreciably differ from the actual value.
Further, while the valuation provisions prescribe an open market value as a guiding principle, creation of ad-hoc deeming provision to determine value of services through a notification definitely and most certainly raises questions on its validity. The provisions of Rule 27(1)(a) open market value of a supply of goods or services or both means the full value in money, excluding GST payable by a person in a transaction, Where the supplier and recipient of supply are not related and Price is the sole consideration, to obtain such a supply at the same time when the supply being valued is made. Article 366(29A) of the Constitution also has a say here.
In the light of this decision, the transactions will be interesting going forward for flats where ascertaining value of undivided share of land may become contentious and a standard rate of deduction may not withstand judicial scrutiny after this judgement and likely to fail miserably.
Reading the judgement in full it is seen that Gujarat High Court unequivocally spells out that even without going to Schedule III, the only service which is supplied to home buyers is the construction service and it is such supply alone can be taxed. However, it can also be seen that Sale of land is included in the Entry No. 5 of the Schedule III to the GST Acts. Thus, the sale of land is neither supply of goods nor services. 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 respectively of the GST Acts. Hence, that the land is not a plain parcel, but developed, cannot be grounds for imposing tax on the tsale of such land. One should also note that though the decision has held such action ultra-virus to the constitution the provisions have been saved.
The impact of this judgement is that builders may consider filing refund of excess tax paid under Section 54 of the CGST Act 2017 and pass on benefits to home buyers so as to eschew from attracting the doctrine of Unjust Enrichment.
Consciously, the Tax officers must also be looking from the angle of Anti-Profiteering in terms of Section 171 of CGST Act, 2017, which provides that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices as the builders must carefully and correctly quantify the benefit of reduction of taxes so that there are no complexities in the days ahead.
But one should believe positively that extending certain concessions, abatement is with an intent and objective to extend tax benefits in the interest of the constitutional rights of the citizens. But still as it has been held in several cases that a delegated legislation cannot travel beyond the scope of the parent legislation.
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