CA Venkat Prasad. P
CA Lakshman. K
GST on Construction service – Forced 1/3rd land deduction is ultra vires – Analysis of Guj HC decision and its impact:
The Real estate industry prone to many taxation disputes. The common reason for these disputes lies in the fact that Real estate transaction is very complex involving 3 components viz., Goods, Services and Land which are amenable to different indirect taxes by different authorities. The attempt of every authority to collect more revenue & attempt of taxpayer to minimize the tax impact created long battlefield for different facets of Indirect taxation. The very basis of levying in VAT/sales tax and Service taxes were held to be wrong which compelled the Government to make frequent amendments (+ in Constitution of India) to overcome such infirmities.
When the GST was introduced to subsume Service tax & VAT into single tax, many felt that disputes would disappear at least in the areas of very basis of taxation, valuation. However, the 3rd component i.e. Land not being subjected to GST & the way lawmakers made the GST law with many infirmities & ambiguities has given sufficient scope for continuation of such past disputes. In this article, Authors discussed one of such disputes in valuation for levy of GST on the Real estate transactions.
Before GST, the VAT is used to be levied on the sale of goods in Construction activity while service tax is levied on the service component (Labour). The 3rd element is liable for Stamp duty. Both Service tax & VAT laws has made provisions to identify its respective components and if not ascertainable, option was given to the taxpayer for paying tax at Composite rate. For example, Service tax provisions says that identify the labour component of the transaction and pay service tax at full rate. If not ascertainable, opt for fixed abatement/deduction of 70% and pay service tax on 30% of total amount. Similar provisions were there under VAT laws also. Thus, pre-GST laws have always gives chance for ascertaining the actual value of taxable event and if not ascertainable then only asked for payment at deemed value after prescribed deductions.
After GST, the first 2 components are subsumed into single tax (GST) and the 3rd component (Land) is continued to be liable for Stamp duty & kept out of GST. This required the lawmakers to provide mechanism to tax only the 2 out of 3 components. For this, the Government vide Notification No.11/2017-CT(R) dated 28.06.2017 as amended provided that non-taxing component (land) is 1/3rd of total amount charged thereby fixing that land value in real estate transaction is 1/3rd irrespective of actual value available or identifiable.
It is a known fact that the land value may not be the same across the country as the same depends on various factors viz., location, Socio & Economic and it is dynamic. There would be huge variation in the land cost between Metro cities, Towns and Rural areas while the construction cost may not vary much in any of the places.
Deeming 1/3rd of the total amount charged as land value would lead to levy of GST on the land value in many cases though the sale of land is neither supply of good nor supply of services as per SI No.05 of Schedule-III. Whereas, in the non-metros the construction service would not get completely taxed. Following illustration gives a bird’s eye picture of the issue involved in claiming the deemed deduction towards land.
|Guesstimate Cost of Construction per SFT (A)
|Guesstimate unit sale price per SFT including land value (B)
|Average value of land (C=B-A)
|% of land value (C/B*100)
Challenging this anomaly, Writs Petition were filed before various High Courts. Recently, the Hon’ble High Court of Gujarat has examined the issue in the case of Munjaal Manishbhai Bhatt Vs UOI 2022-TIOL-663-HC-AHM-GST and held as follows
Implications of the judgement:
a. As per the above decision, the actual value of land can be claimed as deduction where ever it is available.
b. If the land value is not ascertainable, the value of construction with the aid of valuation rules can be adopted for payment of GST. Rule 30 of CGST Rules, 2017 provides for cost +10% valuation.
c. There cannot be a sale in respect of construction undertaken prior to agreement with the buyer and the factum of supply would be initiated only once the agreement is entered into between the supplier and recipient for consideration.
Course of action:
The Revenue department may appeal before Hon’ble SC & chance for retrospective amendment is not ruled out. In this background, the following are suggested:
a. For File a refund application for the excess taxes paid in previous year. If it was passed onto customer, customer can directly file for refund or else return the excess tax to the customer and claim refund by the Builder.
b. Launch protest of paying GST on deemed 1/3rd deduction instead of actuals and claim refund of the same when the issue is finally settled by Supreme Court or time limit to make demand is over.
c. It is advised to have a specific clause specifying the value of land in the agreements entered with the customers for justifying the deduction while such value shall marry with the combination of construction cost, profit margins & final sale price.
d. Submit a representation to the GST council for implementation of this decision
e. File a Writ Petition before the Jurisdictional High Court wherever feasible.
The Government qua GST council shall act in True spirit of GST law (avoidance of cascading effect) and allow the deduction of actual value of land more so when the State Government prescribes the minimum land prices of every area & collect stamp duty thereon. The very same State governments shall not escape stating that actual value deduction may lead to disputes or tax avoidance etc.,
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