Mandatory 1/3rd deduction of land in GST is ultra vires


Under the GST law in India, GST applies to the purchase of property under construction.

It should be noted that the GST is charged on the entire contract value minus the value of the land. However, there is a mandatory fiction that states that 1/3rd of the total amount will be charged as attributable to the sale of land, regardless of the real value of the land.

The constitutional validity of this alleged fiction has been challenged in multiple High Courts. Finally, the Gujarat High Court (HC) has passed the first judgment in favor of the taxpayers in this regard. Gujarat High Court ruled that the provision granting a mandatory one-third deduction from the value of land for calculating the value liable to GST in case of purchase of property under construction as unconstitutional. It considers that such a mandatory deduction is not tenable in cases where the value of land can be clearly determined or where the value of the construction service can be derived using valuation rules. If such values ​​are not available, such a mandatory deduction of one third from the value of the land can still be used.

These are the main remarks/conclusions from this judgment.

1) The court has ruled that it is both the provisions and the scheme of the GST law

2) It appears that the parties to the agreement have agreed on a separate and separate consideration for (i) the sale of land and (ii) the construction of a bungalow on the land.

3) As a result of the disputed GST notification, the full consideration for the sale of land is not excluded from the calculation of the tax liability under the GST laws.

4) 1/3 of the total compensation is deemed to be land value within the meaning of paragraph 2.

5) In the circumstances mentioned above, the applicant was filed with the Gujarat High Court with the following allegation:
a) Provided the following illustrations to show how the disputed notice can be said to violate the provisions of the GST Laws: “If the consideration for the sale of land is Rs.85/- and for the build is Rs.15/- (approximately as in the present case);

b) According to the provisions of the law
On Rs.85/- GST would not apply and the construction fee of Rs.15/- would be 18% GST at Rs.2.70/-.

c) However, according to the notification, the operation would be as under:
Rs.85 + Rs.15 = Rs.100, less Rs.33 (1/3 treated as assumed value of land) = Rs.67 GST @ 18% = Rs.12.06.

d) It was argued that the tax liability based on the designation of fiction through delegated legislation is much higher than the tax liability as calculated in accordance with the provisions of the statute, which is otherwise inadmissible.

6) The court ruled that the provision is ultravires with respect to both the provisions and the structure of the GST Act.

7) Hon’ble HC, Gujarat has the Sl. No. 2 from NN. 11/2017- CT (R) dt. 28.06.2017 (“Service Rate Notice”) to consider that mandatory 1/3rd deduction of land as ultra vires, stating that such standard deduction can only be optional and not mandatory.

8) It ruled that it will only be available at the option of a taxpayer when the true value of land / undivided share of land is not available.

9) In Shot, the Gujarat HC ruled that when the actual land portion of the value is determinable, the 1/3 deduction is not enforceable. The biggest problem could be going through the division to the Supreme Court or else making a retroactive change.

10) The court allowed the refund of differentiated taxes and interest to the petitioner, who received services and paid the VAT.

The copy of the order is as below:

VAT by country (2)



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