Ever since the rate of GST applicable for real estate sector was revamped from April 1, 2019, the industry has been struggling to cope up with the new regime which has to forgo the input tax credit and fulfil various conditions.
One of the contentious issues faced by the sector was exclusion of the value of land/undivided share of land (UDS land) transferred to a buyer when a house or an apartment is purchased, for the purpose of levy of GST. When a buyer buys a house or when an apartment is purchased from a builder, the land on which the house or apartment sits, is also transferred to the buyer; no GST is levied on sale of land / UDS land. The notification issued by the Government in this regard allows a uniform deduction of one third of the total purchase price towards the value of Land / UDS land and GST is levied on the remaining two third value.
In many situations, such as construction in prime locations or construction of bungalows on a vast stretch of land, the actual value of the land is typically more than one third of the total price. This means that GST is unduly levied on a part of the land.
This condition in the notification was challenged before the Gujarat High Court, which recently held that such mandatory uniform deduction of one third of the total price is discriminatory and if the actual value of the land is available, the same can be excluded or the value of construction service, which is leviable to GST can be arrived at as per the valuation rules.
The judgment has some interesting implications.
(i) Where the value of the Land/UDS land being transferred in favor of the buyer is separately available, GST will be payable on the total value minus the actual value of land / UDS land, as per the registration documents. This would benefit the buyers of apartments in prime areas, where the actual value of the land / UDS land is more than one third of the total price.
(ii) When the actual value of the land/UDS land is less than one third of the total price, only the actual value of the land/UDS land can be deducted and not one third of the total price. Thus, this judgement would be prejudicial to the buyers of apartments in areas, where the actual value of the land/UDS land is less than one third of the total price. Going by the judgement, it would be difficult to claim one third deduction when separate value of land/UDS land is available.
(iii) When the value of the land/UDS land is not separately available (the sale deed is for the total price without any break up in value), the builder has the option of determining the value for levy of GST either after excluding one third of the total price from the total price or by determining the value of construction (ideally cost of construction plus 10 per cent).
With the stamp duty rates being at variance in different States, proper tax planning is required to optimize the tax liability, within the legal framework and the ratio of the Gujarat High Court judgement.
Though the judgement is by and large beneficial for the real estate sector, still there is uncertainty as to whether the Government will take it before the Supreme Court or not. If better sense prevails, the Government may well accept the judgement as the relevant condition has only been “read down” by the High Court in appropriate circumstances and not completely quashed.
(The author is an advocate based at Chennai, practicing in the field of taxation and can be reached at firstname.lastname@example.org)