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November 1, 2020

In case of construction where the builder charges an amount, which is inclusive of land, the land value is deemed to be one third of the total amount – Gujarat AAR

by CA Shivam Jaiswal in GST

In case of construction where the builder charges an amount, which is inclusive of land, the land value is deemed to be one third of the total amount – Gujarat AAR

Introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, multiplicity of taxes, classification issues, taxable event, and etc., and leading to a common national market.

The Central Government, on the recommendations of the GST Council has notified that the GST rate, on the intra-State supply of certain services in Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017. In Sl No 3 of the said notification, construction services which are mentioned below shall be charged at 18% GST:

  1. 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.
  2. composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017.
  3. construction services other than the one’s mentioned above

Services mentioned in point (i) above shall be valued with the help of paragraph 2 of this notification

As per Paragraph 2 of Notification No. 11/2017-CT (Rate) dated 28.06.2017, in case of supply of service, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, and the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.

The said Paragraph 2 of Notification No. 11/2017-CT (Rate) was amended vide Notification No.1/2018-C.T. (Rate), dated 25-1-2018, where Paragraph 2 was substituted.

As per Notification No.1/2018-C.T. (Rate), dated 25-1-2018, in case of supply of service involving transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.

Let us refer to the case of Karma Buildcon (GST AAR Gujarat), wherethe applicant’s contention was that cost of land that was being transferred to the buyers on inclusive of land or undivided share of land basis needed to be allowed to be deducted as a whole and not as provided in Notification No. 11/2017-CT (Rate) and 08/2017-I.T (Rate) both dated 28.06.2017 as one third (33.33%) of the value as the cost of Land was distinctly determinable and was more than one third (33.33%) of the consideration value of sale of property.

Facts of the Case:

  • The applicant was engaged in the business of construction. For the purpose of the business they bought land and developed residential/ commercial property on that land.
  • They engaged Architects, consultants, structural engineers to prepare plan for the development of residential/commercial property.
  • Prescribed approvals from various authorities were procured to develop residential/commercial property on such land.
  • On the basis of such plan and approvals they entered into the agreement with prospective buyers for such residential /commercial property.
  • The agreements entered into were for inclusive of land or undivided share of land basis. The applicant constructs such residential / commercial property by engaging labour machinery for the purpose and transfers such property to the buyers.

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Applicant sought the Advance Ruling on the following questions:

  • What will be the value of supply for the transaction of sale of residential/ commercial property with undivided rights of land?
  • In the case of construction of residential/commercial complex, the builder charges an amount which is inclusive of land or undivided share of land. As per Notification No. 11/2017-CT (Rate) and 08/2017-IT (Rate) both dated 28.06.2017 the land value is deemed to be one third (33.33%) of the total amount (i.e. value including land value) and GST is payable on balance amount. But in applicant’s case the value of Land is clearly ascertainable. In that case actual cost of Land can be deducted for the for the purpose of arriving at the taxable value of supply?

Discussion and Finding

  • The applicant’s contention was that cost of land that was being transferred to the buyers on inclusive of land or undivided share of land basis needed to be allowed to be deducted as a whole and not as provided in Notification No. 11/2017-CT (Rate) and 08/2017-I.T (Rate) both dated 28.06.2017 as one third (33.33%) of the value.
  • This was because in applicant’s case the cost of Land was distinctly determinable and was more than one third (33.33%) of the consideration value of sale of property.
  • The applicant in their support referred to Rule 18(A)(A) of the Gujarat Value Added Tax Rules, 2006, wherein it was provided that if at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract, the value shall be determined by deducting the amounts paid by way of price for sub-contract made with a registered dealer, if any, pertaining to the said work contract.
  • The applicant had further contented that in their case, actual value of land was ascertainable and value of land varied from place to place and even at different location in same city/town, a uniform deduction for land @33% as prescribed by the notification was contrary to the ground realities.
  • More so, when in their case, cost of land was distinctly ascertainable and was much more than 33% of the total value to be realized of the constructed residential/commercial property, actual amount of land needed to be allowed to be deducted.
  • AAR found that the applicant’s grounds of contention, to allow the deduction of actual value of land from the transaction value instead of deduction, as defined in the Notification No. 11/2017-CT (Rate) dated 28.06.2017, was not tenable and beyond the purview of legality.
  • In para 2 of the Notification No. 11/2017-Ct (Rate) dated 2017, as amended by Notification No. 01/2018-CT (Rate), the value of land or undivided share of land required to be deducted from the total amount charged for the subject supply has been clearly provided.
  • In para 2 of Notification No. 11/2017-CT (Rate) dated 28.06.2017, as amended vide Notification No. 1/2018-C.T. (Rate), dated 25-1-2018, there is a deemed provision that the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.
  • Accordingly, the applicant’s contention to allow the deduction of actual value of land from the sale value on the grounds that their land value was ascertainable was not legal in terms of para 2 of Notification No. 11/2017-CT (Rate) dated 28.06.2017 as amended vide Notification No. 1/2018-C.T. (Rate), dated 25-1-2018.
  • Further, reliance on Rule 18(A) (A) of the erstwhile Gujarat Value Added Tax Rules, 2006 was not warranted in the instant case since the Value Added Tax Act was no more in existence.
  • The Value Added Tax Act did not have any legal value in determination of GST liability since the value of supply was to be arrived in terms of the provisions of the GST Act.
  • Therefore, AAR ruled that applicant was required to deduct one third value of land or undivided shares from the total value charged for the subject supply in terms of Para 2 of 11/2017-CT (Rate) dated 28.06.2017, as amended vide Notification No. 1/2018-C.T. (Rate), dated 25-1-2018.

In conclusion, the value of supply for the transaction of sale of residential/ commercial property with undivided rights of land shall be arrived in terms of deeming provision of Para 2 of Notification no. 11/2017-CT (Rate) dated 28.06.2017, as amended by Not. No. 1/2018-C.T. (Rate), dated 25-1-2018. In case of construction of residential/commercial complex, the builder charges an amount which is inclusive of land or undivided share of land, the land value is deemed to be one third (33.33%) of the total amount (i.e. value including land value) and GST is payable on balance amount.

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