In re Vinod Kumari Goyal (GST AAR Karnataka)
The GST landscape is continually evolving, with new rulings and interpretations emerging to provide clarity on ambiguous topics. A pivotal decision by the GST Authority for Advance Ruling (AAR) Karnataka in the case of Vinod Kumari Goyal has shed light on the applicability of GST on works contract services by landowners for prospective apartment buyers.
1. Applicability of GST on Landowners:
The central issue is whether a landowner, who isn’t executing construction but enters into agreements with buyers for selling apartments before the issuance of a completion certificate, is liable for GST. The ruling emphasized that the landowner, by entering into such agreements, acts as a supplier of works contract services to buyers. As a result, they fall under Section 7(1) of the CGST Act, 2017, making them liable to pay tax under Section 9(1) of the same Act.
2. Tax Rate Determination:
If the landowner is liable for tax, the rate is derived from entries 3(i) to 3(id) of the Notification No. 11/2017 – Central Tax (Rate) dated 28.06.2017, as modified by Notification No.3/2019, dated 29.03.2019. Factors influencing the tax rate include the apartment’s nature (residential or commercial) and its categorization (affordable or otherwise).
3. Credit Claiming Conditions for Landowners:
A key point was whether a landowner could claim credit for the tax charged by the developer under the old scheme. The authority clarified that credit can be claimed provided:
- The landowner was a registered dealer at the time the construction service supply occurred.
- The tax payable by the landowner for their apartment supply exceeds the tax charged by the developer.
4. Eligibility to Claim Input Tax Credit on Other Expenses:
When it comes to claiming input tax credit on other expenses, the ruling stated that the landowner cannot claim input tax credit on expenses other than the tax levied by the developer for construction services. This is in line with the provisions of entries 3(i) to 3(id).
Conclusion: The ruling of the GST AAR Karnataka in the case of Vinod Kumari Goyal plays a pivotal role in clarifying the GST implications for landowners. Landowners acting as suppliers to prospective buyers are within the GST ambit, and their ability to claim credits is subject to certain conditions. This decision helps in creating a clearer GST framework for real estate transactions, ensuring compliance and transparency.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, KARNATAKA
ORDER UNDER SECTION 98(4) OF THE CGST ACT, 2017 AND UNDER SECTION 98(4) OF THE KGST ACT, 2017
M/s. Vinod Kumari Goyal, No. 579, 14th Cross, J P Nagar, Phase I, Bengaluru -560 078 (hereinafter referred to as The applicant’), having GSTIN 29AEOPG0891F1ZA have filed an application for Advance Ruling under Section 97 of CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of KGST Act, 2017 read with Rule 104 of KGST Rules, 2017, in FORM GST ARA-01 discharging the fee of Rs.5,000/- each under the CGST Act and the KGST Act.
2. The applicant is a proprietary concern registered under the provisions of Central Goods and Services Tax Act, 2017 as well as Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act and KGST/SGST Act respectively). The applicant is the owner of land and has entered into a joint development agreement (JDA) with M/s. Total Environment Building Systems Private Limited, Bengaluru for development of residential apartments.
3. The applicant has sought advance ruling in respect of the following questions:-
i. Whether Applicant being land owner not executing construction work, is liable to pay tax in respect of agreements to be entered with customers for sale of apartments (other than affordable) belonging to the Applicant’s share before issuance of Completion Certificate in a project under JDA, area sharing model, where construction work is executed by developer and the developer is liable to pay tax on the portion of apartments to be handed over to the Applicant on or before issuance of Completion Certificate?
ii. If Applicant is liable for tax, applicable rate of tax on sale of apartments before issuance of completion certificate?
iii. If Applicant is liable for tax, whether Applicant can claim credit of tax charged by developer on the portion of apartments belonging to the Applicant where developer has opted for payment of tax under old scheme i.e., 18%?
iv. If Applicant is liable for tax, whether Applicant can claim input tax credit on other expenses, other than tax charged by Developer for supply of apartments?
4. Admissibility of the application: The question is about the “admissibility of input tax credit of tax paid or deemed to have been paid” and “determination of the liability to pay tax on any goods or service or both” is admissible under Section 97(2)(d) and 97(2)(e) of the CGST Act 2017.
5. BRIEF FACTS OF THE CASE: The applicant furnishes some facts relevant to the issue:
5.1 The applicant states that they are the owner of land measuring 5 Acres 39 Guntas at survey no. 32/1 and 33/2 situated at Talaghattapura, Uttarahalli Hobli, Bengaluru South Taluk. They have entered into a joint development agreement(JDA) on 30.03.2007 and Supplementary Agreement on 12.05.2008 with developer M/s. Total Environment Building Systems Private Limited, Bengaluru, in respect of 5 Acres of land for development of residential apartments.
5.2 The applicant has stated the important terms and conditions of JDA as below:-
(i) Cost of construction shall be borne by Developer;
(ii) Both the parties have agreed to share the apartments in the ratio of 32% (for Applicant): 68% (for Developer);
(iii) Apartments belonging to their share shall be the sole and absolute properties of the Applicant and Developer respectively;
(iv) In consideration of the Applicant permitting the Developer to develop the property, the Developer has agreed to pay refundable deposit of Rs.4,50,00,000/-
(v) The Applicant has agreed to pay the applicable tax on Applicant’s share of construction activity, which is liable to pay tax in the hands of developer at the time of handing over apartments;
(vi) The Applicant has also agreed to pay the statutory deposits and fees payable to the statutory authorities / local authorities i.e., BESCOM & BWSSB etc., in respect of Applicant’s share of apartments.
5.3 The applicant states that the Project is developed under the name “The Magic Faraway Tree Phase 2 & Phase 2A” on phase-wise basis. Project is registered under RERA, bearing registration number PRM/KA/RERA/1251/310/PR/171015/000424. Presently the developer is constructing phase II and it is in closure stage. The developer is in the process of seeking closure certificate from Local Authority (BBMP). The developer has commenced the project during pre-GST regime by obtaining Commencement Certificate from Bruhat Bengaluru Mahanagara Palike vide Certificate No. 15/2015-16, Dated: 02/03/2016. The developer is registered under the GST Law, having GSTN -29AABCT9452F1Z2, registered office at No. 78/1, ITPL Main Road, Imagine Campus, EIPI Zone, Whitefield, Bengaluru.
5.4 The applicant states that with effect from 01.04.2019 onwards GST structure on real estate services relating to residential apartments has been altered by giving an option to the dealers to continue with old rate of tax with ITC for an ongoing project and new rate of tax i.e., 1% (for affordable residential apartment) / 5% (other than affordable residential apartments) without ITC. Developer has exercised an option to pay tax under old scheme i.e., 18% with ITC as envisaged under Notification No.3/2019 dated: 29.03.2019.
6. Applicant’s Interpretation of Law:
6.1 Applicant’s view on question 1- The applicant submits that Section 7 deals with ‘Scope of Supply’ which inter alia include transactions in the nature of barter or exchange. The said provisions read as under:
Section 7. Scope of supply. –
(1) For the purposes of this Act, the expression – “supply” includes-
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
6.1.1 The applicant submits that the transaction under JDA falls under the terms barter or exchange, where applicant being land owner transfers development rights to the developer and the developer constructs apartments to the land owner. Both the supplies, i.e., transfer of development right and construction activity have been classified as supply of service under GST.
6.1.2 The applicant submits that as per Notification No. 11/2017-CT(R) dated 28.06.2017 as amended by notification No.3/2019 CT(R) dated 29.03.2019 and based on GST , Council recommendations, new tax structure has been implemented for construction Services with effect from 01/04/2019. As per the new tax structure system, for an ongoing project an option was given either to opt for continuation of tax rate with old scheme i.e., 18% with ITC or new scheme i.e., 1.5% or 7.5% without ITC. Accordingly, developer has opted with old scheme (18% with ITC).
6.1.3 The applicant submits that under GST, the activity of construction of apartments to the extent of applicant’s share in lieu of transfer of development right by the Applicant to the developer amounts to supply of service, which attracts tax in the hands of developer on or before the issuance of Completion Certificate in terms of Notification No. 6/2019, Dated: 29/03/2019.
6.1.4 The applicant submits that the above transaction falls under the definition of Works Contract’ as defined under section 2(119) of the Act, which is classified as supply of service.
6.1.5 The applicant submits that one of the essential requirement for a transaction to fall under the definition of works contract is “transfer of property in goods (whether as goods or in some other form) involved in the execution of such contract”. In other words, a contract for building or construction of an apartment should involve transfer of property from one person to another.
6.1.6 The applicant submits that in the present case, developer who is executing work for construction of an apartment, is the person who transfers property in goods (whether as goods or in some other form), therefore the transaction between developer and Applicant amounts to Works Contract’ which attracts tax under GST Law in the hands of developer in terms of Notification No. 6/2019, Dated: 29/03/2019 on or before issuance of Completion Certificate in respect of apartments to be handed over to the Applicant.
6.1.7 The applicant submits that, once the transaction is liable to tax in the hands of developer the same transaction cannot be made taxable in the hands of applicant when applicant sells the apartment to his customer even if agreements are entered with customers before issuance Completion Certificate which sans transfer of property in goods (whether as goods or in some other form) from Applicant to the prospective customers.
6.1.8 The applicant is of the view that, in case of construction of building or apartments, transfer of property in goods happens only once and not on multiple times. In other words, during execution of work by the developer, goods are incorporated in the building, therefore there is a transfer of property in goods from the developer to the Applicant. Thereafter, there is nothing left to the Applicant to transfer goods to the prospective customers. Therefore, the subsequent transactions cannot be taxed once again in the hands of Applicant, which runs contrary to the definition of Works Contract’ as defined under section 2(119) of the CGST & KGST Act, 2017.
6.1.9 The applicant submits that, in the absence of transfer of property in goods (whether as goods or in some other form) in the execution of contract, transaction cannot be termed as “Works Contract”, therefore Applicant is not liable to pay tax on sale of apartments to the customers belonging to her share even if such sale happens before issuance of Completion of Certificate.
6.2 Applicant’s view on question 2 – The applicant submits that, without prejudice to the view expressed at issue 1, Notification No.3/2019, dated: 29.03.2019 has provided a onetime option for registered person to opt for payment of tax either with old scheme (i.e., 18% with ITC) or with new scheme (i.e., 7.5% without ITC).
6.2.1 The applicant submits that, conditions mentioned at column no. 5 of Notification No.3/2019, dated: 29.03.2019 at item (ie) 8s (if) specifically mention that, an option to choose rate of tax was provided up to 20th May 2019. If such option was not exercised it shall be deemed that, registered person has opted the rate under new scheme i.e., 7.5% without ITC.
6.2.2 The applicant submits that, during the time of implementing the new scheme, applicant was not registered under GST Law, hence applicant could not able to exercise an option.
6.2.3 In view of the above legal premise, the applicant is of the view that, if their transaction i.e., sale of residential apartments (other than affordable) to the prospective customers before issuance of Completion Certificate, attracts tax, the rate of tax shall be 7.5% as prescribed at item (ia) SI.No. 3 of 11/2017 (Central Tax Rate) Dated: 28.06.2017 as amended vide Notification No.3/2019, dated: 29.03.2019
6.3 Applicant’s view on question 3- The applicant submits that, under new scheme input tax credit is restricted to the developer but not for land owner. Therefore, they are eligible to claim credit of tax charged by the developer.
6.3.1 In this regard, applicant states conditions mentioned at column 5 of Notification No.3/2019, dated: 29.03.2019, which reads as under,-
Explanation. –
(i) “developer- promoter” is a promoter who constructs or converts a building into apartments or develops a plot for sale,
(ii) “landowner-promoter” is a promoter who transfers the land or development rights or FSI to a developer- promoter for construction of apartments and receives constructed apartments against such transferred rights and sells such apartments to his buyers independently.
(iii) the landowner-promoter shall be eligible to utilise the credit of tax charged to him by the developer-promoter for payment of tax on apartments supplied by the landowner promoter in such project.
6.3.2 On perusal of the above provisions, the applicant is of the view that land owner is eligible to claim input tax credit charged by developer, irrespective of whether developer had opted for payment of tax under old scheme or new scheme.
6.3.3 The applicant submits that the recommendations of 43rd GST Council Meeting, makes clear that the intention of the Legislature was to avoid multiple taxes on the same transaction, therefore land owner has been allowed to claim and utilize the input tax credit which is charged by developer to the Applicant.
6 .4 Applicant’s view on question 4 – The applicant submits that they will be incurring expenses towards brokerage, marking and furnishing etc., for sale of apartments. As per input & input service definition U/s. 2(59) and 2(60) of the CGST & KGST Act, 2017, these are the goods or services used or intended to be used in the course or furtherance of business.
6 .4.1 The applicant submits that, as per section 17(1) 8s (2) of the Act, on the essential condition for claiming input tax credit is “use or intended to be used in the course of furtherance of taxable business”.
6 .4.2 Without prejudice to the submissions made at issue 1, the applicant submits that, if sale of apartments to the prospective customers, before issuance of completion certificate is liable for tax, Applicant fulfils the essential conditions prescribed U/s. 17(1) & (2) of the CGST & KGST Act, i.e., “use or intended to be used in the course of furtherance of business” which is taxable in nature, hence they would be eligible to claim input tax credit on expenses to be incurred towards brokerage, marketing and furnishing etc.,
PERSONAL HEARING / PROCEEDINGS HELD ON 18.05.2023
7 . Sri Sanjay Dhariwal, Chartered Accountant and Duly Authorised Representative appeared for personal hearing proceedings held on 18.05.2023 and reiterated the facts narrated in their application.
FINDINGS & DISCUSSION
8 . At the outset we would like to make it clear that the provisions of CGST Act, 2017 and the KGST Act, 2017 are in pari-materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act.
9. We have considered the submissions made by the applicant in their application for advance ruling. We have also considered the issues involved on which advance ruling is sought by the applicant and the relevant facts along with the arguments made by their authorized representative and also their submissions made during the time of hearing.
10. The first question is taken into discussion first and the same reads as under:
Whether Applicant being land owner not executing construction work, is liable to pay tax in respect of agreements to be entered with customers for sale of apartments (other than affordable) belonging to the Applicant’s share before issuance of Completion Certificate in a project under JDA, area sharing model, where construction work is executed by developer & developer is liable to pay tax on the portion of apartments to be handed over to the Applicant on or before issuance of Completion Certificate?
10.1 The applicant is a landowner and he has entered into an agreement with the developer and getting the construction services done of his share of the developed property. The landowner wants to know that whether GST is attracted if the apartments of his share of developed property so being constructed are entered into agreement for sale before the completion certificate is issued. This issue is examined.
10.2 Supply is defined under Section 7 of the CGST Act, 2017 as under:-
“7. Scope of Supply
(1) For the purpose of this Act, the expression “supply” includes
(a) all form of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
…………”
“works contract” is defined in clause (119) of section 2 of the CGST Act as under:
“works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
In the pertinent question, the point to be noted is that it is a contract for construction of an immovable property where in the transfer of property in goods is involved in the execution of such contract by the applicant to the prospective purchaser of apartment and hence is a works contract.
10.3 Entry No. 6 of Schedule II to the CGST Act clearly states as under:-
“6. Composite supply
The following composite supplies shall be treated as a supply of services, namely:-
(a) works contract as defined in clause (119) of section 2; and
(b) ……”
Further entry no. 5 of Schedule II to the CGST Act also clearly states as under:-
“5. Supply of services
The following shall be treated as supply of services, namely:
(a) . . .
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after the issuance of completion certificate, where required, by the competent authority or after its first occupancy, whichever is earlier.
……………….”
10.4 From the above, it is clear that the activity on which the applicant has sought ruling is related to construction of a complex or building or a part thereof, and the same is made more clear by the inclusive portion of the above sub-entry i.e., a building intended for sale to a buyer. The exclusion for this is only where the entire consideration has been received after the issuance of completion certificate or after its first occupancy, whichever is earlier. Since in the present case, the applicant states that the agreement for sale of an apartment is going to be made before the receipt of completion certificate and a part consideration is going to be received at the time of agreement, the activity is a service as per entry 5 (b) and also entry 6(a) of Schedule II to the CGST Act.
10.5 The contention of the applicant is that once the transaction is liable to tax in the hands of the developer, the same transaction cannot be made taxable in the hands of the applicant when the applicant sells the apartment to his customers even if agreements are entered with customers before issuance of completion certificate which sans transfer of property in goods from applicant to the prospective customers is incorrect. The developer is providing construction services to the applicant and the applicant is providing again the construction services to the prospective customers. Hence there are two supplies involved, first from the developer to the applicant and the second from the applicant to the prospective customers.
10.6 It is also pertinent to note that the agreements for supply of constructed apartments with the prospective purchasers are entered by the applicant which is a supply of service as per section 7 of the CGST Act and there is no direct supply of construction services to the prospective purchasers by the developer. The developer is only providing services to the applicant and not to the prospective purchasers.
10.7 The applicant is acting as a supplier of works contract service to the prospective purchasers of apartments and hence he is a supplier under Section 7(1) of the CGST Act, 2017 liable to pay tax under Section 9(1) of the CGST Act, 2017.
Regarding the second question, whether the applicant, if liable for tax, what is the applicable rate of tax on sale of apartments before issuance of completion certificate, the following is noted:
11.1 Notification No.3/2019, dated: 29.03.2019, item (i) of entry No-3 states as under:
