Key Takeaways for real estate industry from recent Gujarat HC Decision on GST

1. Background:

Recently, honorable Gujarat High Court (HC) in case of Munjaal Manishbhai Bhatt vs. Union of India[1]on 6 May 2022, disposed off few matters relating to the GST on land in transactions of under construction bungalow/flat/unit/s sold by the builders to the buyers. The judgment is considered to be a landmark one as a big relief has been provided to the builders as well as the flat/unit buyers. It clears out various confusions created by the Government in case of GST on under construction flats/units.

The given article tries to explain the issue, the solution provided by the High Court and also the key take-aways by the stake holders.

2. What is the issue?

Normally, there is no GST on building or land. However, if the construction is ongoing at the stage when the builder enters into the transaction of sale of the flat/ commercial unit, the same is subjected to GST. However, the Government has provided for an ad-hoc deduction for the value of land involved in the transaction which is at present 33% of the total value of the flat/unit as per Notification no. 11/2007 Central tax (Rates) dated 28^th June , 2017.

The issue is what if the actual value of land is more than 33% of the total contract value of the flat/unit. Let’s take an example:

In a sale of under construction flat/unit:

Value of Land	Rs. 10 lacs
Value of Construction	Rs.   5  lacs
Total value of the flat/unit	Rs. 15 lacs

Ideally, GST should be applicable only on the value of construction which is Rs. 5 lacs in the above case. However, due to the present mechanism prescribed by  the aforesaid Notification, the deduction is available only upto 33% which in the present case would be Rs. 5 lacs as against the actual value of Rs. 10 lacs. Therefore, the builder would end up paying GST on the balance Rs. 10 lacs (Gross Value Rs. 15 lacs minus ad-hoc 33% deduction for land Rs. 5 lacs). The interesting thing about this Notification is, it does not provide any option to the builder (supplier) to work out the actual value of land. It casts a compulsion to follow the ad-hoc mechanism of 33% towards the value of land.

As a result, the suppliers in many cases were paying GST on a higher value than what is actually required.

3. What was the case before Gujarat High Court?

Writ petitioners urged to the Court to strike down such a mechanism which led to taxation on land in an indirect manner and  to permit the applicants  an option of  paying GST only on the actual value of construction services supplied by the petitioners.

4. The Decision by the Court:

Following are the key observations of the Gujarat High Court:

a. Ad-hoc rate of 33% cannot be applied for ascertaining the value of land for calculating goods/service portion in the sale of under construction flat/unit/s. More so when the actual value of the land is available in the contract

b. Government cannot rewrite the contract which is already entered by the two independent parties and try to find the value of supply when it is specifically provided in the contract

c. GST law has prescribed Valuation Rules which are comprehensive enough to take care of various situations where the taxable value cannot be determined from the transaction value

d. Ad-hoc deduction of 33% towards the value of land should be given as an option and not as a compulsion

The Court also took the note of special powers of the Government to make the rules for prescribing any notional value for determination of taxable value. The decision of the High court appears to be quite logical and well-founded based on various previous Supreme Court judgments. Therefore, even if challenged by the Government, the likelihood of it getting affirmed by Supreme Court appears to be very high.

 5. What are the key takeaways:

 a. For Builders/Developers:

i. If the separate value of land is clearly mentioned in the agreement and if the same is higher than 33% of the total flat/unit sale value, the same can be claimed as deduction from the total value charged for the flat/unit

ii. The balance value can be taken as 110% of the cost of construction services or such value as may be determined using reasonable means consistent with the principles and general provisions of the Statute

iii. The balance value represents works contract services, therefore, even the input tax credit can be claimed in respect of inputs, input services (including works contract services) and capital goods

iv. Possibilities of claiming refund, if any, may be explored

v. Future agreements can be drafted in appropriate manner

vi. Sale price of flats/units can be made more competitive

vii. Past tax demands pending, if any, can be defended on the basis of the above judgment

viii. Levy of penalties can be defended based on this Judgment

ix. Possibility of paying tax only on the balance portion of the works contract at the time of entering sale agreement may be explored

b. For flat/unit buyers:

i. On the lines of above points, flat buyers can discuss and negotiate with the builders while buying under construction flats/units

ii. Due care may be taken while drafting the agreements

iii. Possibility of lower stamp duties can be examined. Usually, either there is no stamp duty or lower stamp duty on the works contract agreements in most of the States

iv. Possibility of claiming refund in respect of taxes paid in the recent past may be explored

c. For Government:

i. It was specifically pointed out during the GST Council meeting that standard rate of deduction for land may not withstand judicial scrutiny. This discussion finds place in the minutes of the 14^th GST Council meeting. In spite of the same, notification  was issued prescribing ad-hoc and arbitrary deemed value of land to be the 1/3^rd of total value

ii. These sort of Notifications lead to unconstitutional collection of taxes from the honest citizens which in turn tarnish the image of Government

iii. Government may have to refund the amount of undue tax collected, as Article 265 of Constitution of India prohibits collection of any amount as tax without the authority of law

iv. Hence, Government may identify and keep an eye on the draftsmen who are drafting the notifications in contravention of the GST Council’s recommendations and the tax policies of the Government

v. Government should stay away from issuance of such notifications which try to tax on the items like land which are not even subject matter of GST

vi. Government must realize that by adopting such sub-standard mechanisms to collect more taxes, the focus of taxmen on curbing actual evasion goes for a toss. Tax collection from the honest by unfair means covers up the gap of taxes not collected from the dishonest.

6. Conclusion: 

Judgments of this caliber, reinforces the trust of the citizens in the Judicial machinery of the Nation. Let’s respect such good decisions and the Judges who are alert and bold to protect legal rights of the honest taxpayers. One should try to make the best possible use of this Judgment.

[1] R/Special Civil Application No. 1350 of 2021 with 6840 of 2021 and 5052 of 2022