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Construction Contract and Land Appraisal for GST Liability
The issue of taxation of the real estate sector under GST is always fraught with controversy and lawsuits. According to Annex III of the CGST Act, the sale of land is not a sale of goods or a supply of services. The sale of land therefore does not fall under the jurisdiction of GST and cannot be charged under GST. But when it comes to the supply of land as part of the composite offer, problems begin to arise regarding the valuation of land, that is, in the case of construction services. As a result, Notice No. 11/20017 was issued to clarify the matter.
The notification No. 11/2017-CTR dated June 28, 2017 stated that in case of provision of construction services, involving transfer of ownership in land or undivided share of land, the value of the provision of services and goods is part of such delivery is equal to the total amount charged for that delivery, less the value of the land or the undivided portion of the land, as the case may be, and the value of the land or the undivided portion of the land, as the case may be, such delivery shall be deemed to be one third of the total amount charged for such delivery. Such a service would attract 18% VAT. But considering the fiction of 1/3rd deduction for land seems vague, because in many cases the value of land would exceed 1/3rd of the total consideration.
In a recent judgment of Munjaal Manishbhai Bhatt vs. UOI, the Gujarat High Court has ruled that a mandatory flat rate deduction of 1/3 of the total consideration for the value of land is not tenable in the case where the value of the land is clearly identifiable or where the value of construction service can be derived using valuation rules. It also ruled that such a mandatory deduction is in accordance with the provision and scheme of the GST Act and that its application would be discriminatory, arbitrary and contrary to Article 14 of the Constitution of India.
Mr Bhatt provided the following illustrations to demonstrate the stand:
“If the fee for the sale of land is Rs.85/- and for construction it is Rs.15/- (approximately as in the present case)
According to the provisions of the law:
At Rs.85/- GST would not apply and on the construction consideration of Rs.15/, 18% GST would come out at Rs.2.70/-
Rs.85 + Rs.15 = Rs.100 Less Rs.33 (1/3 treated as assumed value of land) = Rs.67 GST @ 18% = Rs.12.06.”
It has been argued that the tax liability under the designation of fiction through delegated law is much higher than the tax liability as calculated in accordance with the provisions of the law, which is otherwise inadmissible.
The brief conclusion of the above statements can be summarized as under:
If the value of the land can be determined in construction contracts, this value is regarded as the value of the land. However, if the value of the land cannot be determined, 1/3 of the total compensation is deemed to be the value of the land.
Certainly, the above judgment will prove to be a great relief to all buyers where the value of the land is considerably high compared to the estimated value of 1/3rd. However, the matter is decided by Gujarat High Court and other High Courts may differ in such cases.