Background
Taxation always aims at a grab of a share of profit made by business through an economic activity. It is only fair as per established convention of taxation world over, that such activities lend themselves to a tax, as a means to promote common good in a welfare state.
Development of lands into suitable sites for occupation and living by communities in urban and sub-urban areas is the order of the day in all developing countries, to meet the growing housing needs of people.
Urban and Town planning departments therefore draw up schemes to regulate development activities undertaken by both Government bodies and private enterprises, aimed at meeting the housing needs of the people.
Development of lands by private enterprises and co-operative housing Societies are a definite commercial endeavor aiming at improvement of land in enhancing their usability and in turn add value and the marketability to lands.
The justification behind the new Tax on development activities
Lands owned by individuals and societies are taken over by specialized domain experts, called variously as developers, contractors and Promoters, specializing in plotting of land and construction of buildings and complexes for a commercial consideration of profit.
The above described economic activity has rightly caught the attention of the Government as a means of taxation for netting revenue for the state.
Accordingly, tax was sought to be levied on the development activity of construction of complexes comprising residential and commercial units.
It had a checkered history in Service Tax until the tax could crystallize, following the famous Raheja Constructions and L&T cases and since then taxation of Construction service has come to stay as a permanent feature of taxation of services.
Whether it is right or wrong to bring it within the taxing fields of the Centre is still a big question as per the Author and the most competent verdict will be eventually that of the Apex Court, provided it is brought up before it with the right arguments. Be that as it may.
Whether development of plots amounts to construction of complex service chargeable to GST@18%?
Lately, development of plots is under tax dispute, under GST. Originally, in a catena of AAR/AAAR rulings it was held as construction of a Complex service.
It further carried a suggestion to tax the entire value of such plots on the built-up area instead of the extent of land, albeit it still remaining a piece of land instead of a construction in any palpable sense of the term construction.
The AAR Gujarat held in the case of Sh. Dipesh Anil Kumar Naik, Surat, dated 19.05.2020 that GST is applicable on sale of plot of land for which primary amenities such as, Drainage line, Waterline, Electricity line, Land leveling etc. are provided by the developer, as per the requirements of the Municipal Authority.
Applicant, the owner of land, wanted to develop the land with infrastructure and sell such sites to end customers who may construct independent houses/villas in the plots.
Sale price includes the cost of the land as well as the cost of common amenities on a proportionate basis. The rate charged is on super built- up area basis and not the actual measure of the plot.
As per Para 5 of Schedule III of the CGST Act, transaction of sale of Land shall be out of GST net only if the activity involves dealing with transfer of title/ transfer of ownership of land, which is of an immovable property.
Sale of developed plot is said to be not the exact equivalent of sale of land as per Para 5 of Schedule III and is tantamount to rendering of service, in view of the SC decision in the case of Narne Construction P Ltd. [CIVIL APPEAL NOS. 4432-4450 OF 2012, Order dated 10th May 2012] although it is an old judgment and much water had flown since then.
Clause 5(b) of the Schedule-II of the CGST Act, 2017, which includes construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer as a ‘Supply of service’ was found to be the nearest match to the above described development activity, carried out by the applicant on the land by the AAR.
Sale of developed plots was therefore held by the AAR to come under the above referred clause 5(b) of Schedule II, namely ‘construction of a complex intended for sale to a buyer’ hence liable to GST.
The activities done on the land in real time to have a first-hand idea are described hereunder:
Leveling of the land, construction of boundary wall, construction of roads, laying of underground cables and water pipelines, laying of underground sewerage lines with sewer treatment plant, development of landscaped gardens, drainage system, water harvesting system, demarcation of individual plots, construction of overhead tanks, other infrastructure works.
When these activities are carried out on a vacant plot by a third party developer, either before consideration is received or even after, then also it would not be a taxable supply under GST, is the Author’s view for a long time.
As all of it is part and parcel of the land, which is an immovable property and even if sold as developed plots either by the Landowner or by the developer, is rightly excludible under Para 5 of Schedule III to the Act, as it is neither a supply of goods nor services.
The above transaction in land would in normal course can at best attract Article  268(1) (b) read with Article 246(3) under Schedule VII for taxation under the Stamp Act/s falling squarely within the field of taxation of the State/s [Entry 63 of List II refers, in so far as levy and collection of tax in the form of stamp duty is concerned, which is vested with the states]
Last but not the least, the AAR held the entire value of developed land to be taxable, left with no mechanism to abate the value of the land from the transaction cost to arrive at the actual value of development of the plots.
It is so provided in the case of construction of complex service under N.No.11/2017-CTR dated 28/6/2017 i.e 1/3rd of total cost of construction of the Project is allowed to be abated from the sale consideration as representing land cost, even if you assume the aforesaid activities to be taxable for an argument.
Thus the said ruling did not provide any abatement for the content of land, as it was done in taxation of construction of complex service.
Apparently, even after having held it as taxable under GST, no notification or guidelines were set out by the Government so far in the case of valuation of developed plots, similar to reduction in value equivalent to 1/3 towards land portion of the total value, to be charged effectively to taxation as in the case of construction of complex service.
Hence, the AAR/AAAR’s were forced to simply gross up the total value of developed plots by summarily applying perhaps Sec 15 of the Act and pass their rulings that GST is chargeable@18% on the total value of the developed plots.
This has definitely landed the entire taxing public in a big controversy of taxing sale of developed plots as a taxable supply under GST, which made all heads go up in utter amazement.
The Karnataka AAR’s order in the case of Maarq Spaces Pvt. Ltd., Bengaluru dated 30.09.2019 – 2019-TIOL-454-AAR-GST [upheld in – 2020-TIOL-28-AAAR-GST] and the M.P AAR’s order in the case of M/s Vidit Builders, Jabalpur dated 06.01.2020 – 2020-TIOL-47-AAR-GST, would at least stand some chances of survival, in respect of a joint development agreement where it has been decided that the consideration received by the developer as his share, under a JDA will be taxable.
Another question that still arises in the above AAR BLR & M.P rulings is, whether Notification No. 4/2018-CTR will apply ubiquitously to joint development agreements of land also, as this notification is related to taxing of development rights in respect of construction service of complex, building or civil structure only?
The AAR (Gujarat), in another case of M/s Satyaja Infratech dated 20/9/2019 – 2020-TIOL-80-AAR-GST had decided recently that the entire sale consideration, i.e. 100% of the plot value would be taxable.
Therefore, what will be the taxable value remains a being question mark there as well?
But both AAR’s Gujarat have simply forced themselves ironically, into equating the sale of developed plots to a taxable supply under Clause 5(b) of the Schedule-II of the CGST Act, 2017, which includes construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer as a Supply of service, besides choosing not to extend any benefit of abatement under the said N.No.4/2018-CTR either.
Whether development of plots amounts to works contract service chargeable to GST@18%?
To overcome the above discordance of holding development of plots as construction of complex service, the AAR has chosen this time an alternate taxing route in a recent ruling that seeks to equate development of plots to a works contract service and letting go of the sale of developed plots, either during development or after completion (CC), by the owners or the developers of their share.
Advance Ruling by Haryana Authority in the case of Informage Realty Private Ltd vide ORDER NO.HAR/HAAR/R/2018-19/15 dated 05.10.2018 held as follows;
No GST on sale of plots (whether before completion of development or after)
In case of JDA, GST @ 18% shall be applicable on the development services offered by the Developer to the landowner. Value of such service, shall be equal to the value of share of land received by the Developer in return.
Whether development of plot amounts to works contract service?
The definition of works contract needs to be traced to Sec 2(119) to understand its purport, which is excerpted below for a ready reference;
‘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’.
Thus, from the above it can be seen that the term works contract has been restricted to contract for building construction, fabrication and so on of any immovable property only.
As per Para 6 (a) of Schedule II to the CGST Act, 2017, works contracts is a composite supply and for a definition of it we must turn to Section 2(119) of the CGST Act, 2017 again, which shall be treated as a supply of services. Thus, there is a clear-cut demarcation of a works contract as a Composite supply of service under GST.
Works contract and some useful old Precedents from the Past tax regimes
The expression ‘works contract’ would not mean any transaction which would involve work besides the supply or use of materials is amply borne out by the judgment delivered by the Supreme Court in Rainbow Colour Lab v. State of M.P.
In this case the issue was whether the job rendered by a photographer in taking photographs, developing and printing films would amount to a works contract as contemplated by Article 366(29-A)(b) read with Section 2(m) of the M.P. General Sales Tax Act.
The High Court relying on Builders’ Assn. case held that to the extent of the photo paper used in the printing of positive prints there was transfer of property in goods. Therefore the job done by the appellant was a works contract.
In Asstt. STO v. B.C. Kame the Supreme Court had held that the contract to take photograph, develop the negative, or to do other photographic work and thereafter supply the prints to the client was a contract for use of a specialized kill and labor to bring about a desired result.
The said judgment having been rendered prior to the 46th Amendment of the Constitution the Supreme Court had to consider whether the said amendment had brought about any change so as to doubt the legal position enunciated in that (Kame) case. The Supreme Court observed: (SCC pp. 388-89)
‘All that has happened in law after the 46th Amendment and the judgment of this Court in Builders’ case is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction: (i) contract for sale of goods involved in the said works contract, and (ii) for supply of labor and service’.
This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not by contracts where the transfer in property takes place as an incident of contract of service.
The amendment, referred to above, has not empowered the State to indulge in a microscopic division of contracts involving the value of materials used incidentally in such contracts.
What is pertinent to ascertain in this connection is what the dominant intention of the contract was?
Every contract, be it a service contract or otherwise, may involve the use of some material or the other in execution of the said contract. The State is not empowered by the amended law to impose sales tax on such incidental materials used in such contracts as a deemed sale on that score without understanding the full tenor of the 46th Amendment.
Returning to our discussion of development of plots, the said activity involves the following;
Leveling of the land, construction of boundary wall, construction of roads, laying of underground cables and water pipelines, laying of underground sewerage lines with sewer treatment plant, development of landscaped gardens, drainage system, water harvesting system, demarcation of individual plots, construction of overhead tanks, other infrastructure works.
Performing on the land the said activities, some of which are as required by the Municipal Plan sanctioning Authorities while rest of them are as per one’s own scheme to find a ready market for the Plots, by which action as soon as completion of construction, one could move, plug in and use the plots readily as one liked.
Going by the dominant intention test, development of a plot is largely a contract with a domain expert for employing a specialized skill and Labor and the transfer of property in goods (whether as goods or in any other form) involved in the execution of such contracts would clearly look a happening by accretion or accession and not by a contract for the primary transfer of those materials involved in the development of the plots which are incidental.
What is ‘works contract’?
The above interpretation of sub-clause (b) of Article 366(29-A) whose mirror image is the definition of works contract adopted in Sec 2(119) of the GST Act, gets full support from the law explained by the West Bengal Taxation Tribunal in Studio Kamalalaya v. CTO.
In Para 46 the Tribunal has observed that only those transactions where vesting of property occurs not by contract but on the theory of accretion and accession are covered by the constitutional amendment in question.
Article 366(29-A)(b) envisages those works contracts where the contractor works on the property of the Contractee and affixes his own materials to that property in the execution of the said contract and in the process passing of property in such materials takes place resulting in deemed sale.
The above interpretation is in conformity with the history of the jurisprudence before the constitutional amendment which was concerned with deciding whether the transactions were sales or non-sales wherein property had passed on accretion or accession, which was so in most of the reported cases, as regards moveable as well as immovable properties.
Development of plots being a Labor contract and materials/ property in goods transferred ( in whatever form)in the execution of the contract of development will be composite supply of Labor and hence the same would be a job work and not works contract chargeable to tax under that logic.
Further, it fails to fulfill the criterion of Sec 2(119) of the CGST Act by which property in goods (or in any other form) used in the execution of the contract does not transfer by that contract but by a process of accretion or accession by which it gets transformed into the property of the plot owner in the instant case.
Accordingly, it fails to qualify as a works contract but a mere labor work/job work which stands merged in the property in goods and in turn in the developed plot which results in transfer of land with certain amenities but stands excluded from the scope of supply and tax under GST by virtue of being part and parcel of land.
Land whether exempted supply?
Under section 2 (47) exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.
Plotted development involves two activities, development activity land and sale of plots. Sale of land is not supply in terms of schedule III entry 5. Activity of sale of land cannot be considered as exempt supply for the reason it is not at all supply hence the question of exemption under section 11 does not apply.
Plotted development, is it composite supply?
In terms of definition under CGST, the analysis show that the activity of development of land and sale of sites does not fit in to the definition of composite supply because land is not a supply under GST, much less a taxable supply.
Two or more taxable supplies are to be involved to make it fit in to the definition. Leading an argument that land is predominant supply in plotted development and sale of plots is bound to fail on that count.
Section 2(30) composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
The plotted land sold to customers is in the nature of composite supply, the main component being land and the development services are only incidental to the same.
Land being not with in ambit of GST (neither goods nor services) the related services fall outside the definition and stand isolated. The issue arises whether such services are taxable.
Land is not exempted under section 11 of CGST Act. By virtue of inclusion under schedule III, it is outside GST. In such a situation the composite supply concept fails to save the development services from being taxed.
GST liability on land owner
The land owner is not liable under GST under any circumstances. There is no construction of building is involved. Unless building construction is involved entry no. 5(b) under schedule II does not come in to picture in the case of land owner.
The construction may be out of own funds or may be out of advance money received and used in development. Schedule III entry 5 mention Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building- is neither supply of goods nor services.
Absence of building abundantly covers the transaction falling under schedule III entry 5 as not supply under GST.
GST liability on contractor/Promoter/developer
Developer is rendering services in terms of the agreement. The consideration may be in the form of money or a portion of developed land.
Irrespective of the fact whether the materials used are part of facilities to be vested with the local authority or the owner, there is only a rendering of a development /labor work there.
Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, exempts services of ‘pure labor contract’ from GST which may be also tested against the whet stone of GST for claiming the below exemptions as it is essentially a composite supply of Labor.
[Services of construction / erection / commissioning / installation / completion / fitting out / repair / maintenance / renovation or alteration of a civil structure or any other original works pertaining to the beneficiary led individual house construction or enhancement under the housing for all (urban) mission or Pradhan Mantri Awas Yojana (Entry 10) Refers]
[Services of construction / erection / commissioning or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex (Entry 11). Refers]
Rights arising out of land are immovable property
The term ‘immovable property’ has not been defined under GST law. The General Clauses Act, 1987 defines “immovable property” as to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.
Section 2(6) of the Registration Act, 1908 defines “immovable property” to include land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass.
In order to further understand the meaning of the term ‘benefits to arise out of land’, the observations and interpretations of the Hon’ble Supreme Court on the various judicial rulings must be read as under:
1. Shantabai V. State of Bombay AIR 1958 SC 532.
2. Bibi Sayeeda v. State of Bihar (1996) 9 SCC 516.
Further, Hon’ble Mumbai High Court in a case of Chhada Housing Development Corporation v. Bibijan Shaikh Farid reported in 2007 (3) Mah. L.J.P. 402 had laid down that “the expression TDR, is transfer of development rights, which enables the FSI to be used on any other plot of land generated from some other plot and can be used in terms of DC Regulations in force. It is the benefit arising out of land and is immovable property.
On an understanding of the law laid down by various Courts, of the term ‘immovable property, it can be safely stated that Development rights are the benefits arising out of the land and the same is an immovable property. However, immovable properties are not liable for GST, as supply of service under GST Law.
Title and ownership
The expression ‘title’ in the general proposition means that, when equities are equal that he has the legal title will be preferred, includes in its broadest sense all rights capable of being enjoyed and secured under the law (As per Ramanatha Aiyar’s Law Dictionary)
It conveys different forms of a right to a property which can include right to possess such property. One holding a legal title of lands is certainly included but rights amounting to less than the full legal title are equally included with it.
Title to land is the evidence of his right or the extent of his interest. The apex Court in the case of Sunil Siddhartha Bhai v. CIT – AIR 1986 SC 368 observed that in its general sense, the expression ‘transfer of property’ connotes passing of the entire bundle of rights from the transferor to the transferee.
In Syndicate Bank vs Estate Officer – AIR 2007 SC 3169, the Supreme Court held that a jurisprudential title to a property may not be title of an owner.
A title which is subordinate to an owner and which need not be created by reason of a registered deed of conveyance may at times create title.
As per Section 3(a) of Land Acquisition Act, 1894, the expression ‘land’ includes benefits that arise out of land and things attached to earth or permanently fastened to anything attached to the earth.
Conclusion:
1. Contractor/Promoter/developer is not liable for tax under GST.
2. Land owner is not liable for GST.
3. Buyers of plotted land are not liable for GST.
Author’s End Note
The development of land into fully developed plots fails to qualify neither as construction of complex service nor as works contract service. Transfer of development rights involved if any in the above transactions of development, being in the nature of immovable property, is also squarely outside the purview of GST.
But, the services rendered by the contractor/developer to the Land owner results in the composite supply of materials dominantly into which job work/labor gets enfolded in fully developed plots on their transfer back from the developer to the Municipal Authority/ owner and thus falls outside the scope of supply and consequently not taxable under GST, is the considered view of the Author.
K.Srinivasan (IRS)
Februaary, 1, 2021.
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