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GST: Land development & Sale attracts GST?
M/s. Maarq Spaces Pvt. Ltd. [AAR No. KAR ADRG 119/2019 decided on September 30, 2019] is a landmark judgment as far as the real estate companies is concerned. In the judgment, it is held that the activities envisaged under the Joint Development Agreement amounts to supply of service and it is liable to be taxed under GST.
Visiting the background, it may be noted that M/s. Maarq Spaces Pvt. Ltd is engaged in the business of property development. The Applicant entered into JDA on November 8, 2017 with landowners for development of land into residential layout along with specifications and amenities. Pursuant to terms of the agreement, Applicant undertook the development of plots & also constructed roads, lays sanitary pipes and drains, etc., and bifurcated the land into sites and amenities.
Consideration was agreed on revenue sharing basis in the ratio of 75% for landowner and agreement holder 25% for the Applicant. Cost of the development was to be borne by Applicant. The Applicant was entitled to recover these costs from the purchasers of the plots. The cost payable for obtaining the licences and approvals was to be borne by the landowners.
After developing the land and formation of developed plots, the amenities like roads, etc., are handed over to the Authorities as per the statutory requirement. Pursuant to JDA, Applicant had entered into an agreement with customers for sale of developed plots for consideration.
The question arisen in the case was whether the activity of development and sale of land attract tax under GST? And If yes, whether provision of Rule 31 of the Central Goods and Services Tax Rules, 2017 can be made applicable in ascertaining the value of land and supply of service? An applicant was of the view that they are primarily engaged in the sale of land and the said activity is not liable to be taxed in terms of the provisions contained in Serial Number 5 of Schedule III of the Central Goods and Services Tax Act, 2017. The activity of development work carried out in respect of the land is an activity incidental to the sale of land. It is naturally bundled with the sale of land, constituting a composite supply. And the predominant supply, being sale of land, is not liable to be taxed and consequently they are not liable to pay any tax on the entire activity. Further, the Applicant contended that in the event their activity is liable to be considered as a supply and is held taxable, then the taxable value of their supply cannot be determined in terms of Rules 27 to 30 of the CGST Rules and shall consequently be determined by Residual method under Rule 31 of the CGST Rules.
Before we visit on the observation of the AAR, let us have a look at the relevant provision of the GST law.
Serial Number 5 to Schedule III of the CGST Act
“5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
Paragraph 5(b) of Schedule II of the CGST Act
“(b) 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.
Explanation. -For the purposes of this clause-
(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely: –
(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; (20 of 1972.) or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;”
Rule 31 of CGST Rules
“31. Residual method for determination of value of supply of goods or services or both.-
Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:
Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.”
On the issue, Karnataka AAR in AAR No. KAR ADRG 119/2019 decided on September 30, 2019 has made following categorical observation:
- The Authority rejected the contention of the Applicant that they are engaged in the sale of land. The sine qua non for any sale of land is the ownership of the land sold. The seller can claim that he is engaged in the supply of land by way of sale only if he himself enjoys the title of the land. Anyone who does not possess any title of the land cannot be considered as the seller. Such a person may have a role in the activity of sale but he cannot claim himself to be the seller.
- The core competence of the Applicant lies in the field of converting a raw piece of land into a well-developed residential layout by engaging themselves extensively in activities such as survey of the land, preparing a detailed map of the proposed layout, clearing/ levelling the site, carrying out the construction of roads, laying of sewage/ water pipelines, designing and creating common amenities etc.
- The activities to be undertaken by the Applicant are in the nature of development of land into residential layout. The agreement provides that the Applicant can enter into sale agreements. However, this activity is incidental to the main activity of development of land. The sale is entrusted to the Applicant as the Applicant has invested huge sums in the development of the land and it is a measure to protect his financial exposure in the matter. Here it becomes evident that the core competence and the activity actually carried out by the Applicant is that of development of land and not the sale of land.
- The Applicant has no right over the land and consequently the Applicant cannot claim to be engaged in the activity of sale of land as envisaged in the provisions of entry at Serial Number 5 of said Schedule III of the CGST Act. The provisions of this entry will apply only to those persons who are the owners of the land and not to persons who are incidental to the sale of land. Thus, the activities undertaken by the Applicant amount to a supply of service to the landowners and is liable to be taxed appropriately under the provisions of the CGST Act.
- Consideration for a service is the total value that the service provider gets in the deal and not what the service provider expends for the provisioning of the service. The total gain to the Applicant or the total amount accruing to the Applicant for the services is 25% of the amount at which the plots are sold. It has already been emphasised and held that the Applicant has no right in the title of the land and therefore the Applicant cannot be considered as the sellers of the plots. Therefore, the entire amount received by them is liable to be taxed.
- Rule 31 of the CGST Rules applies in the instant case and the value of the supply is equal to the total amount received by the Applicant, which is equal to 25% of the market value of each plot.