Construction Contract and Valuation of Land for GST liability 

 

The issue of taxation of the real estate sector for the purpose of GST is always full of controversy and litigation. As per schedule III of the CGST Act sale of land is neither a sale of goods nor a supply of services. Hence sale of land does not come under the purview of GST and is not liable to be charged under GST. But when it comes to supply of land as a part of composite supply, problems start to arise relating to valuation of land i.e., in case of construction services. As a consequence, Notification No. 11/20017 was issued to clarify the matter.

The Notification No. 11/2017- CTR dated June 28, 2017 stated that in case of supply of construction services, 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. Such supply of service would attract GST at the rate of 18%. But deeming fiction of 1/3rd deduction towards land seems hazy as in many cases the value of land would surpass 1/3rd of total consideration.

In recent verdict of Munjaal Manishbhai Bhatt vs. UOI, Gujarat High Court has held that mandatory fixed rate of deduction of 1/3rd of the total consideration towards value of land is not sustainable in case where the value of land is clearly ascertainable or where the value of construction service can be derived with the aid of valuation rules. It also held that such mandatory deduction is ultra vires the provision as well as scheme of the GST Act and its application would be discriminatory, arbitrary and violative of Article 14 of the Constitution of India.
Mr. Bhatt gave the following illustrations to demonstrate the stand:

“If the consideration for sale of land is Rs.85/- and for construction is Rs.15/- (approximately as in the present case)

As per the provisions of the Act:
On Rs.85/- GST would not be applicable and on the consideration for construction of Rs.15/, 18% GST would come to Rs.2.70/-

As per Notification:
Rs.85 + Rs.15 = Rs.100 Less Rs.33 (1/3rd treated as deemed value of land) = Rs.67 GST @ 18% = Rs.12.06.”
It was argued that the tax liability by virtue of deeming fiction by way of delegated legislation far exceeds the tax liability as computed in accordance with the provisions of the statute which is otherwise impermissible.

The short Conclusion of above pronouncements may be summarized as under:

• If the value of the land is determinable in construction contracts then such value shall be considered to be the value of land.
• However, if the value of land is not determinable then the 1/3 of the total consideration shall be deemed to be the value of the land.

Certainly, the above judgement will prove to be a big relief to all the buyers where the value of land is considerably high as compared to the deemed value of 1/3rd. However, the issue is decided by Gujarat High Court and other High Courts may differ in such cases.