The real estate industry, along with GST professionals, has often faced confusion on “Whether GST applicable on the sale of an under-construction immovable property when no construction service is provided post-sale?”
There has been a lot of confusion and multiple interpretations on this issue. Many believed that simply because the property was under construction, GST would automatically apply. However, the recent judgment of the Karnataka High Court in M/s Rohan Corporation India Pvt. Ltd.[ WP No. 12700 of 2023] has brought clarity to this question and has narrowed down the scope of applicability of GST.
Before diving into the judgment, let’s briefly look at the legal background.
Legal Provisions Relevant to the Issue
- Section 7(1) of the CGST Act defines the scope of supply. GST is chargeable only when there is a “supply of goods or services” (or both) for a consideration in the course or furtherance of business.
- Section 7(1A) says that if something qualifies as a supply under Section 7(1), then Schedule II will help classify whether it’s a supply of goods or services.
- Section 7(2) provides a list of activities in Schedule III that are neither the supply of goods nor supply of services, and hence, fall outside GST altogether.
Now, coming to the entries that deal with immovable property:
- Para 5(b) of Schedule II states that construction of a building (for sale) is treated as supply of service, but only if the consideration is received before the issuance of the completion certificate or before first occupation, whichever is earlier.
- Schedule III, Para 5 says that sale of land or building (other than the case covered above) is not a supply, and hence not taxable under GST.
Core Argument: When Is the Sale of Property Not a Supply?
The Karnataka High Court emphasized that merely selling a partly constructed property does not automatically amount to “supply of construction service” under GST.
The Court clarified the position with the help of earlier landmark rulings like:
- Larsen & Toubro Ltd. v. State of Karnataka (2014) 1 SCC 708
- Commissioner v. Larsen & Toubro Ltd., 2015 (39) STR 913 (SC)
- Munjaal Manishbhai Bhat v. Union of India, 2022 (62) GSTL 262 (Guj.)
Key Test: Is There a Construction Service Involved?
The court held that for the sale of immovable property to be a supply of service under Para 5(b);
- There must be a “construction activity” undertaken by a builder/service provider after entering into an agreement with the buyer, and
- If no such service is rendered after the agreement, and the agreement is only for sale of the property as-is, then there is no taxable “supply” under GST as per Schedule III.
So even if a property is under construction, if it’s sold as-is and no further construction is carried out after the sale, the transaction will fall under Schedule III and GST will not apply.
Simplified: Why Completion Certificate Isn’t the Only Test
The department often argues that if no completion certificate is issued, GST must apply. But this judgment makes it clear: the presence or absence of a completion certificate is irrelevant if there’s no construction agreement and no service rendered post-sale.
What really matters is:
“Was there a construction service performed by the seller for the buyer, after entering into an agreement?”
If no, then it’s not a supply of service Para 5(b) of Schedule II, and rather falls under Schedule III, i.e. non-taxable under GST.
Why This Judgment Matters
- Provides a clear test for professionals to determine the GST applicability on under-construction properties.
- Provides a safeguard for buyers who acquire incomplete buildings without availing construction services.
- Helps in filing refund claims where GST was paid under protest on such transactions.
Final Takeaway
The judgment clearly establishes that GST is levied on construction services related to immovable property, and not on the immovable property itself. The crucial factor for determining GST applicability is the presence of a construction service, not merely the sale of an under-construction property.
Therefore, the mere fact that a property is sold while under construction does not automatically attract GST. What truly matters is whether there exists a construction contract or service obligation after the sale. If no such construction service is provided post-sale, it does not qualify as a “supply” under GST—hence, no tax liability arises.
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Disclaimer: This article is for educational purposes and should not be treated as legal advice. Please consult a tax advisor for case-specific guidance.
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