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March 12, 2021

Plea Challenging Provisions regarding Deemed Value of Land Instead of Actual Cost accepted by HC

by CA Jessica Nagaonkar in GST

Plea Challenging Provisions regarding Deemed Value of Land Instead of Actual Cost accepted by HC

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

Explanation 2 of the said Notification states that in case of supply of service against serial no. 3, 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. “Total amount” means the sum total of,- (a) consideration charged for aforesaid service; and (b) amount charged for transfer of land or undivided share of land, as the case may be.

Let us refer to the case of Munjaal Manishbhai Bhatt Vs Union of India (Gujarat High Court), where the subject matter of challenge in the present writ application was to the Entry No.3(if) of the Notification No.11/2017 -Central Tax (Rate) dated 28th June, 217 read with Para-2 of the said notification.

Facts of the Case:

  • The writ applicant had entered into an agreement with a developer with respect to a purchase of plot of land.
  • The said agreement also encompassed construction of a bungalow on the said plot of land by the developer.
  • It was pointed out that separate consideration was agreed upon between the parties to the agreement, i.e. (i) sale of land and (ii) construction of bungalow on the land.
  • The notification was being challenged as the writ applicant was liable to pay tax at the rate of 9% CGST plus 9% SGST under the GST on the entire consideration payable for land as well as construction of bungalow after payment of 1/3rd value towards the land.
  • It appeared that the developer had raised an invoice on the writ applicant to collect an amount of Rs.42 Lakh towards the tax.
  • The amendment was that because of the impugned notification, the entire consideration towards the sale of land was not excluded for the purpose of computing the tax liability under the GST Act.
  • In other words, only 1/3rd of the total consideration was deemed to be the value of the land as per para-2 of the impugned notification.
  • The learned senior counsel has argued that the impugned entry referred to above in the notification was ultra vires section 7(2) of the GST read with Entry No.5 of the Schedule-III to the GST Act.
  • It was also argued that the deeming fiction introduced under para-2 of the impugned notification is contrary to Section 15 of the GST Act.

Observations of the High Court (HC)

  • HC was of the view that the writ applicant was able to make out a strong prima facie case to have an interim order in his favour in terms of para-27(F) of the writ application.
  • HC, accordingly, granted such relief.
  • HC permitted the writ applicant to deposit the amount of tax as raised under the invoice without prejudice to his rights and contentions as raised in this writ application.

Therefore, HC accepted the plea challenging provisions regarding deemed value of land instead of actual cost

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