1/3rd deduction for land value under GST is optional and can be permitted at the option of a taxable person, particularly in cases where the value of land or undivided share of land is not ascertainable- MUNJAAL MANISHBHAI BHATT Versus UNION OF INDIA (Gujarat High Court)
Sale of land is included in the Entry No. 5 of the Schedule III to the GST Acts. Thus, the sale of land is neither supply of goods nor services.
However, in case of composite supply i.e. land and construction service, the GST law provides 1/3rd deduction in transaction value towards land value. However, in different nature of transactions, the actual land value is different and hence, 1/3rd standard deduction towards value of land for computing GST on composite transaction value is not justifiable.
It appears that, the entire consideration towards the sale of land has not been excluded for the purpose of computing tax liability under the GST Acts. 1/3rd of the total consideration has been deemed to be land value as per paragraph 2 of the impugned notification.
Illustration
Following illustrations to demonstrate how the impugned notification could be said to be ultra-vires the provisions of the GST Acts:
“If the consideration for sale of land is Rs.85/- and for construction is Rs.15/- (approximately as in the present case);
- As per Notification Rs.85 + Rs.15 = Rs.100 Less Rs.33 (1/3rd treated as deemed value of land) = Rs.67 GST @ 18% = Rs.12.06.”
- As per the provisions of the Act on Rs.85/- towards land value hence, GST would not be applicable and on the consideration for construction of Rs.15/-, 18% GST would come to Rs.2.70/-.
The above issue has been considered by the Gujarat High Court in case of MUNJAAL MANISHBHAI BHATT v. UOI [R/SCA 1350 of 2021 dt. 06.05.2022]
Fact of case
- In the above case separate and distinct consideration was agreed upon between the parties to the agreement for (i) the sale of land and (ii) construction of a bungalow on the land.
- Main contention of applicant was that the entire amount of consideration relating to land should be outside the scope and purview of the GST Acts.
- It was argued out that the tax liability by virtue of deeming fiction by way of delegated legislation far exceeds the tax liability as computed in accordance with the provisions of the statute which is otherwise impermissible.
Following are the key points submitted on behalf of Writ Applicant
- The minutes of the 14th GST Council meeting to demonstrate that before the issuance of the impugned Notification, deliberations were made only with regard to sale of Apartments/ Flats wherein the undivided interest in the land would also be passed on to the purchaser. It was pointed out that in fact, in respect of the proposed abatement for the land value, the Deputy Chief Minister of Gujarat had also expressed apprehension. It was discussed that for all intent and purpose, the abatement of 1/3rd value towards the land was thought of only in respect of sale of Flats / Apartments and not in respect of the transactions where land was separately sold, and separate value of land was specifically so available. However, the entry of the notification was couched in wide terms so as to even include the sale of plots of land along with the construction of bungalows which is arbitrary and contrary to the object sought to be achieved by the deeming fiction.
- The legislative history of tax on construction contracts which has culminated into incorporation of the GST Acts is required to be looked into closely for understanding the true scope and purport of the statutory provisions of the GST Acts.
Conclusion
- The reliance placed by the revenue on the decision of the Apex Court in the case of Narne Construction Private Ltd is completely misplaced. The said judgement was in the context of the Consumer Protection Act, 1986 and is thus as such inapplicable while interpreting a taxing statute.
- Application of such mandatory uniform rate of deduction is discriminatory, arbitrary, and violative of Article 14 of the Constitution of India.
- In Gujarat High court considered view, while maintaining the mandatory deduction of 1/3rd for value of land is not sustainable in cases where the value of land is clearly ascertainable or where the value of construction service can be derived with the aid of valuation rules, such deduction can be permitted at the option of a taxable person particularly in cases where the value of land or undivided share of land is not ascertainable.
- Hon’ble High court have directed concerned GST authority to refund the excess amount of tax along with the interest at the rate of 6% per annum which is to be calculated from the date of excess payment of tax till the date of refund to the writ applicant which has been collected by the respondent and deposited with the Government treasury within 12 weeks from the date of receipt of this order.
RMPS comments
This is welcome judgment as now option will be available with the taxpayer as The Court held that such standard deduction can only be optional and not mandatory. Deduction can be claimed of (I) actual value of Land or (II) value of construction service can be ascertained as per valuation Rules.
Also, for the taxability of sale of developed plots as there is always value of the land is more than value of development there on. In such case this judgment will be welcome judgment.
However, in case of building there is difficult to justify undivided share of land in terms of value if corresponding unit having varied value based on the stamp value of land. Also, cases where land is used for multiple projects, it’s very difficult to drive value of land for deduction. FSI/TDR purchased would be consider as a Land deduction or service provision is still unanswered question.
Disclaimer: This Article is only a knowledge sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update etc if any.
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