The taxation of actual property sector has been a topic of dispute since a few years. The controversy with respect to taxability of development contracts first erupted with the choice of the Supreme Court within the case of Gannon Dunkerley & Co. (Madras) Ltd again in 1958, which led to the forty sixth Constitutional modification inserting Article 366(29A)(b) whereby the switch of property in items concerned in the midst of execution of a works contract was deemed to be a sale of products. Thereafter, the Apex Court as soon as once more answered the query of valuation of products in case of indivisible works contract within the second Gannon Dunkerley case.
Therefore, earlier than the arrival of GST regime, the under-construction properties usually attracted service tax at efficient price of 4.50% and State VAT @ 1%. An abatement of 1/third in the direction of land / undivided share of land was allowed for the aim of calculating the tax legal responsibility.
However, w.e.f. 1 July 2017, a better GST price of 12% (efficient price) was imposed on the actual property sector with availability of enter tax credit score (ITC). This price was subsequently reconsidered through the thirty third and thirty fourth GST Council conferences, whereby a brand new efficient price of 5% for residential and industrial models was made obtainable w.e.f. 1 April 2019 topic to fulfilment of assorted circumstances. These circumstances included inter alia fee of GST in money, non-availment of ITC, 80% procurements from registered distributors, and allied circumstances.
It could also be pertinent to notice that even underneath the brand new regime, the deemed deduction of 33% in the direction of land / undivided share of land from the full quantity was continued, vide Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017.
This posed a problem to the business as there was no deduction for land worth obtainable on precise foundation. Many taxpayers thought-about such obligatory deeming fiction arbitrary and unreasonable in as a lot because the precise land worth might fluctuate relying on its location, measurement, and many others. Consequently, the constitutional validity of such deemed valuation was challenged in a number of High Courts, together with earlier than the Gujarat High Court within the case of Munjaal Manishbhai Bhatt vs. Union of India & Ors.
Recently, the Gujarat High Court handed an order in favor of the taxpayers whereas directing the refund of extra fee of GST to the writ applicant.
The temporary info of the case and the important thing observations of the High Court Bench comprising of Justice J. B. Pardiwala and Justice Nisha M. Thakore are captured hereunder.
Facts
1) The writ applicant, a practising advocate, had entered into an settlement with a landowner / developer for the acquisition of a plot of land together with development of bungalow thereon.
2) Separate and distinct consideration was agreed upon between the events to the settlement for – (a) the sale of land and (b) development of bungalow on the land.
3) The writ applicant was underneath a bona fide perception that he was liable to pay GST on the consideration payable in the direction of development of bungalow. However, the landowner / developer relied on Sr. No. 2 of Notification No. 11/2017-Central Tax (Rate) to gather GST at 18% on the complete consideration payable for land in addition to development of bungalow after deducting 1/third of the worth in the direction of land.
4) In such circumstances, the writ applicant approached the High Court assailing the imposition of tax on consideration in the direction of the sale of developed land by advantage of delegated laws as extremely vires the provisions of Sections 7 and 9 of the CGST Act, 2017 learn with Entry No. 5 of Schedule III thereto, and Article 14 of the Constitution.
5) The writ applicant relied inter alia upon the minutes of the 14th GST Council assembly to display that the intent of abatement of 1/third worth in the direction of the land was thought solely in respect of sale of flats / flats and never in respect of transactions the place land was individually bought, and the worth of land was particularly obtainable.
6) On the opposite hand, the respondent Revenue argued that the Central Government is empowered to determine the speed with circumstances as relevant, in public curiosity on the premise of advice of GST Council and GST Council is properly inside its energy to suggest such discount with restrictions as relevant.
7) The respondents additionally emphasised on the truth that the settlement worth of land and development is determined inter se the events and the identical may not mirror the precise worth of the land concerned. Acceptance of the writ applicant’s competition might result in absurd outcomes whereby in an try to save lots of tax, the developer and purchaser might mutually determine that 99% of the full consideration can be the worth of land and the steadiness can be development.
Observations
1) Perusing the legislative and judicial historical past of taxation of development actions, together with the Apex Court selections within the circumstances of Okay Raheja Development Corporation and Larsen and Toubro Limited, the High Court famous that when the Notifications got here to be conceptualized by the GST Council, the choice of the Supreme Court in Larsen and Toubro Limited was particularly referred to.
Hence, the development carried out by the developer which was earlier taxable underneath VAT / Service Tax legislation was now sought to be taxed underneath the CGST Act, 2017 and due to this fact, deduction was given on the market of land.
2) If a tripartite settlement is entered into after the land is already developed by the developer, then such growth exercise was not undertaken for the potential purchaser and due to this fact, there isn’t a query of imposition of GST on the developed land.
3) Referring to the provisions of Section 15 of the CGST Act, 2017, the High Court noticed that when the statutory provision requires valuation in accordance with the precise value paid and payable for the service and the place such precise value is out there, then tax needs to be imposed on such precise worth. Deeming fiction might be utilized solely the place the precise worth just isn’t ascertainable.
4) In this regard, reliance was positioned on the second Gannon Dunkerley case the place the query of deducting precise worth of labour had been thought-about by the Apex Court, in addition to the judgement within the case of Wipro Ltd6 rendered within the context of addition of loading / unloading prices for the aim of valuation underneath the Customs Act, 1962.
5) Since the deeming fiction is uniformly utilized regardless of the scale of the plot of land and development therein, identical results in arbitrary and discriminatory penalties that are clearly violative of Article 14 of the Constitution.
6) Such arbitrary deeming fiction by means of delegated laws has led to a state of affairs whereby the measure of tax imposed has no nexus with the cost of tax, which is provide of development service.
7) Even whether it is presumed that the Government had the competence to repair a deemed worth for provides, if the deeming fiction is discovered arbitrary and opposite to the scheme of the statute, then it could actually undoubtedly be held to be extremely vires.
8) When an in depth statutory mechanism for willpower of worth is out there, then the deeming fiction can’t be justified on the premise that it’s meant to curb avoidance of tax.
9) Moreover, Schedule II just isn’t meant to outline or develop the scope of provide however solely to make clear whether or not a transaction can be provide of products or service if such transaction qualifies as provide.
10) As regards the believable arbitrary valuation of land, the High Court clarified, if in a given case it’s discovered that the worth of development service which is asserted by the provider just isn’t the right worth inasmuch as different consideration has been not directly acquired, the Revenue just isn’t remediless.
Where it’s established that such worth was not the only real consideration for the service, then resort might be needed to the valuation guidelines and worth might be derived by making use of the cost-plus revenue methodology or an affordable worth according to the ideas and provisions of the Statute.
11) Consequently, the High Court learn down para 2 of Notification No. 11/2017-Central Tax (Rate) and the parallel State Tax Notification to the impact that the deeming fiction of 1/third is not going to be obligatory in nature; it can solely be obtainable on the choice of the taxable particular person in circumstances the place the precise worth of land or undivided shared in land just isn’t ascertainable.
12) Accordingly, it directed the refund of extra tax deposited with the Government treasury on to the writ applicant as he had borne the burden of tax as a recipient. The High Court additionally quashed the advance ruling appellate order which was primarily based on the impugned Notification.
Comments
Under the benediction of the Prime Minister’s imaginative and prescient which seeks to clear a backlog of land circumstances and unleash funding to spice up native manufacturing and generate tens of millions of jobs to raise an economic system set for its largest annual contraction since 1952, this High Court judgement comes as a respite to the actual property sector which has been topic to different levies of taxes, in addition to complexities in valuation because of divergent views by advance rulings.
The deduction of the particular price of land, wherever it’s ascertainable, will assist scale back the efficient price of acquisition of property for the consumers, significantly in Tier I & II cities the place the worth of land is on the upper facet. This in flip might assist enhance the demand for actual property through the current inflationary instances.
However, one can not rule out the potential of matter being taken up earlier than the Apex Court or introduction of a retrospective modification to the laws to deal with the anomaly so identified. Similarly, we might witness a rise in litigation difficult the valuation of land and development price, and the business might anticipate notices difficult the bottom valuation.
Accordingly, the business might take a notice of this side whereas performing upon the ratio of the judgment, i.e., evaluate of previous, current or future agreements to take abatement foundation the worth of land / undivided share of land from the full consideration the place the identical might be established, and / or in search of refund of GST already paid proportionate to precise worth.
By Sanjay Chhabria (Director, Nexdigm) and Aditya Nadkarni (Senior Manager, Nexdigm)
Disclaimer: This is the non-public view of the authors.
Source: www.financialexpress.com”