The taxable event is ‘Supply’ under GST, Section 7 deals with the Scope of Supply and ‘Supply’ includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Supply also includes activities specified in Schedule I and certain transaction specified in Schedule II of the CGST Act, 2017.
The moot question arises, whether supply or sale of developed or plotted land is liable to GST? Before proceeding to discuss about GST liability of developed land, it is better to discuss taxability of land in pre-GST regime.
Taxability of sale of developed land under Service Tax regime:
“Service” was taxable event under service tax regime and ‘service was defined in clause (44) of Section 65B of Finance Act, 1994, and service means any activity carried out by a person for another for consideration, and includes a declared service.
Section 66E prescribes declared services, namely-
(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 is received after issuance of completion certificate by the competent authority.
(h) service portion in the execution of a works contract;”
The Supreme Court in the case of Raheja Development Corporation v. State of Karnataka reported in 2005 (5) SCC, 162 held that the consideration received towards sale of flats even though on ownership basis are also liable to tax for the reason that such transactions of construction and sales of individual flats are in the nature of ‘works contract’ and thus liable to tax under the provisions of the said 1957 Act.
The taxability of works contract service was brought under the scope of service tax net with effect from 1.6.2007 vide Notification No.23/2007-S.T dated 22.5.2007 in terms of Section 65(105) (zzzza) of the Finance Act and read with the Finance Act, 2007.
With the introduction of Negative list of services with effect from 1’st July’2012, the definition of works contract was defined under section 65B(44) of the Act as a contract wherein transfer of property in goods involved in the execution of such contract was leviable to tax as sale of goods and such contract was for the purpose of carrying out construction, erection, commissioning, installation, completion, filing out, repair, maintenance, renovation, alternation of any moveable or immoveable property or for carrying out any other similar activity or a part thereof in relation to such property. By virtue of Section 66E of Finance Act, 1994, the service portion involved in the execution of works contract was a declared service. Hence, the service tax was leviable only on the service element of the works contract.
The Supreme Court in the case of Naren construction (p) Ltd, v. Union of India, reported in 2013(29) S.T.R. 3 (S.C.), held that “when a person applies for allotment of building site or for a flat constructed by development authority and enters into an agreement with the developer or a contractor, the nature of the transaction is covered by the expression ‘service’ of any description. The housing construction or building activity carried on by a private or statutory body was, therefore, held to be ‘service’ within the meaning of Clause (o) of Section 2(1) of the Act as it stood prior to the inclusion of the expression ‘housing construction’ in the definition of ‘service’ by Ordinance No. 24 of 1993 and further held that the activities of the appellant-company in the present case involving offer of plots for sale to its customers/members with an assurance of development of infrastructure/amenities, lay-out approvals etc. was a ‘service’ within the meaning of Clause (o) of Section 2(1) of the Act and would, therefore, be amenable to the jurisdiction of the fora established under the statute. Having regard to the nature of the transaction between the appellant-company and its customers which involved much more than a simple transfer of a piece of immovable property it is clear that the same constituted ‘service’ within the meaning of the Act.”(Para 6&7).
Section 2(102) of the CGST Act, defines ‘services’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
Explanation.––For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities;
Section 2(119) of the CGST Act,2017 defines “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.”
As per entry No.5 (b) of schedule II to the CGST Act, 2017, 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 issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
Thus it is ample clear that works contract in relation to civil construction of building, complex or any civil structure is treated as supply of service if it is sold before completion of construction. However, if entire consideration on works contract has been received after issuance of completion certificate issued by the competent authority or before its first occupation, whichever is earlier then no GST is leviable on such supply as this become immovable property and GST can’t be levied on sale of immovable property.
Further, as per Schedule III to the CGST Act, 2017, “Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services” and entry No.5 prescribes-
“Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
As per the cited provisions, it is very much clear that Sale of land is not liable to GST in terms of Schedule II 5(b) and Schedule III of the CGST Act, 2017.
It is pertinent to mention that there are several Advance Rulings Authorities across the country held that development of land and selling such plots with providing common facilities in the colony, consideration received by the developer is taxable under GST. The brief of such Advance Rulings are summarized as under:
(A) The Authority for Advance Ruling, Karnataka, In Re- Maarq Spaces Pvt. Ltd., reported in 2019 (31) G.S.T.L. 554 (A.A.R.-GST). The applicant is a Private Limited Company, engaged in the business of property development. The applicant has entered into a Joint Development Agreement on 8-11-2017 with land owners for development of land into residential layout along with specifications and amenities. The consideration was agreed on revenue sharing basis in the ratio of 75% for landowner and Agreement Holder and 25% for applicant. Cost of the development shall be borne by applicant. Pursuant to JDA, applicant had entered into an agreement with customers for sale of developed plots for consideration. The applicant has sought Advance Ruling in respect of the following questions:
The above view is affirmed by the Appellate Authority for Advance Ruling in In Re- Maarq Spaces Pvt. Ltd., reported in 2020(37) G.S.T.L.109 (App. A.A.R-GST, Karnataka).
(B) The Authority for Advance Ruling, Karnataka, In Re- Durga Projects & Infrastructure Pvt. Ltd,reported in 2019(29) G.S.T.L.132 (A.A.R-GST). The Applicant is a company incorporated under the Companies Act, 1956 and is registered under the Goods and Services Tax Act, 2017. The Applicant has sought advance ruling in respect of the following question:
Whether Applicant is liable for GST towards work executed under JDA on land owner’s portion where work commenced during pre-GST and continued under GST Law. If tax is applicable the valuation for payment of tax?
The Applicant is liable to pay GST towards work executed under Joint Development Agreement on Land owner’s portion, on the value to be arrived at in terms of para 2 of the Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 at the time of transfer of possession of the land owners’ portion of the flats.
(C) The Authority for Advance Ruling, Madhya Pradesh, In Re- Vidit Builders, reported in 2020(35) G.S.T.L. 235-A.A.R.-GST). The applicant is a partnership firm, engaged in the business of real estate development. It is developing a colony by executing joint development agreement with the land owner. There is revenue sharing arrangement of 60% (land owner) & 40% (applicant). In this project developer will develop and provide the following common facilities in the colony.
(1) Construction of concrete roads and compound walls.
(2) Development of garden.
(3) Construction of drain and water supply system.
(4) Erection of electric poles and transformers etc.
The applicant has sought in respect of the following question.
1. Whether it is covered in Para 5 of Schedule III (Sale of Land) or classified under works contract.
2. If it is covered under works contract, how the valuation would be done.
3. Residual Rules i.e. Rule 30/31 provided under GST Valuation Rules can be considered or not.
1. The activities performed/to be performed by the applicant cannot be classified under Para 5 of Schedule III. It amounts to supply of services under works contract and is liable to be taxed under GST Act.
2. Rule 31 applies in the instant case and the value of supply is equal to the amount received/receivable by the applicant which is equal to 40% of the amount on which the plots are sold.
3. This ruling is valid subject to the provisions under Section 103(2) until and unless declared void under Section 104(1) of the GST Act.
(D) The Authority for Advance Ruling, Gujarat, In Re- Shree Dipesh Anilkumar Naik, vide Advance Ruling No. GUJ/GAAR/R/2020/11 dated 19.05.2020. The applicant having vacant land and as the seller of land is required to develop the primary amenities like Sewerage and drainage line, Water line, Electricity line, Land levelling for road, Pipe line facilities for drinking water, Street lights, Telephone line etc,. They will sell the individual plots to different buyers without any construction on the same but providing the primary amenities. The applicant has sought for an advance ruling in respect of the following question:
Whether GST is applicable on sale of plot of land for which, as per the requirement of approved by the respective authority (i.e. Jilla Panchayat), Primary amenities such as, Drainage line, Water line, Electricity line, Land levelling etc, are to be provided by the applicant?
Ruling: Answer in the affirmative, as per Schedule II of the CGST Act, 2017 pertains to activities or transactions to be treated as “Supply of goods or Supply of services”. As per 5(b) of the Schedule II of the CGST Act, 2017, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer is a “Supply of service” and, hence, is liable to GST. Further, the activity of the sale of developed plots would be covered under the clause ‘construction of a complex intended for sale to a buyer’. Thus, the said activity is covered under ‘construction services’ and GST is payable on the sale of developed plots in terms of CGST Act / Rules and relevant Notification issued time to time.
Conclusion: In light of the cited analysis of the various Rulings, it is observed that the taxability of plotted land depends upon two factors i.e. only sale of land and sale of developed land with amenities. If the developer of land selling land after development of all other primary amenities then GST is liable. Sale of land without common amenities is nothing but a segregation of a big piece of land into small pieces; the same is not liable to GST as per entry 5 of Schedule III of CGST Act. The developer has to arrange two agreements with purchaser of land i.e. One agreement for sale of land and another agreement for sale of land with development of primary amenities and with this two agreements the purchaser have to pay GST only on development charges for amenities and no liability to pay GST on sale of land as per entry 5(b) of Schedule III of the CGST Act,2017.