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Gujarat High Court has ruled that the deeming fiction of 1/3rd deduction towards land cost in construction contracts not mandatory.
The Court held that and not mandatory. The deduction can be claimed of actual value of land or value of construction service can be ascertained as per valuation rules.
According to the division bench of Justices J B Pardiwala and Nisha M Thakore, the court, 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.
“Notification is read down to the effect that the deeming fiction of 1/3rd will not be mandatory in nature. It will only be available at the option of the taxable person in cases where the actual value of land or undivided share in land is not ascertainable,” it said.
The bench also said that the impugned Paragraph 2 of the Notification No. 11/2017-Central Tax (Rate) dated June 28, 2017, and identical notification under the Gujarat Goods and Services Tax Act, 2017, which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts. “Application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India,” it said.
According to Abhishek A Rastogi, Partner at Khaitan and Co, who is arguing various writs in different courts on GST, it must be understood that there is no GST on transfer of land and building and hence the actual value of land must be excluded when GST is made applicable on such contracts. In light of this logic, article 14 of the Indian Constitution comes into play to ensure that the higher deduction towards the value of land is available and it is not restricted to just one third deduction
“While similar issue is pending in different states, Gujarat High Court decision will set the trend and the excess tax paid would be refunded at some stage, perhaps after the matter is completely settled by the apex court,” added Rastogi.
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