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GST On Sale of Developed Plots–– Gujarat AAR Opens “A Big Pandora Box” for Indian Real Estate Industry

Jul 16, 2020 by CA Ankit Gulgulia in GST Compliances

Table of Contents

GST On Sale of Developed Plots–– Gujarat AAR Opens “A Big Pandora Box” for Indian Real Estate Industry

Recently the Gujarat AAR – GST in case of surprisingly has held that i.e. the sale of land/plot after developing with common facilities like water line, telephone line, electricity line, Garden, common areas, water harvesting, system drainage, water pipelines, length of underground cables, demarcation of individual plots and other facilities as required by the development authority Shri Dipesh Anil Kumar Nayak In re Advance Ruling No. GUJ/ GAAR /R / 2020/ 11 dated 19-05- 2020] sale of the developed plot is not equivalent to the mere sale of land under GS T but shall tantamount to the rendering of services and would be subject to levy of GST.

Now you would think that whether this is binding on all taxpayers or not. the ruling that is issued by AAR shall be only binding on the applicant Technically not because as per section 103 of the CGST Act, 2017 but in my view no doubt about this that department will issues how Cause Notice to all developers who are engaged in the sale of developed plots based on this advance ruling itself.

None the less first let’s discuss the issue and then try to see what can be the best upcoming Strategies for the developers to handle the Situation.

If You would remember that in the earlier 2013 there was one case law that came of Supreme Court in case of where the was referred to and it was held that M/ s Narne Construction Private Limited consumer protection act the sale of developed plot tantamount to the rendering of services.

Even back then in the service tax Regime of negative list, it was a matter of Hue and cry, and now even in the present advance ruling, this is the major case law that has been referred to by the authorities to suggest that the sale of the developed plot is rendering of services and thereby liable to GST.

A. Summary of the Case

Brief Facts of Applicant

The applicant has submitted that he is having a vacant land outside the municipal area of the town on which he has some proposed business activity. The applicant is having all the necessary approvals for the proposed project from the Plan Passing Authority (i.e. Zilla Panchayat).

The applicant has further submitted that as per the Plan Passing Authority, the seller of land is required to develop the primary amenities like Sewerage and drainage line, Waterline, Electricity line, Land levelling for road, Pipeline facilities for drinking water, Street lights, Telephone line etc..

The applicant further submitted that they will sell the individual plots to different buyers without any construction on the same but by providing the primary amenities as mentioned above, which are a mandatory requirement of the approved Plan Passing Authority (i.e. Zilla Panchayat)

Question Asked by Applicant

Whether GST is applicable on sale of a plot of land for which, as per the requirement of approved by the respective authority (i.e. Zilla Panchayat), Primary amenities such as Drainage line, Waterline, Electricity line, Land levelling etc. are to be provided by the applicant?

Findings by AAR

i. The sellers charge the rates on the super built-up basis and not the actual measure of the plot. The super built-up area includes the area used for common amenities, roads, the water tank and other infrastructure on a proportionate basis.

Thus, in effect, the seller is collecting charges towards the land as well as the common amenities, roads, water tank and other infrastructure on a proportionate basis. In other words, such common amenities, roads, the water tank and other infrastructure is an intrinsic part of the plot allotted to the buyer.

ii. The above indicates that the sale of the developed plot is not equivalent to the sale of land but is a different transaction. Sale of such plotted development tantamount to the rendering of service. This view has also been taken by the Supreme Court in the case of M/s Narne Construction P Ltd. reported at 2013 (29) STR 3 (SC).

iii. We find that the activity of the sale of developed plots would be covered under the clause ‘construction of a complex intended for sale to a buyer’. Thus, the said activity is covered under ‘construction services’ and GST is payable on the sale of developed plots in terms of CGST Act / Rules and relevant Notification issued time to time

B. Now coming to why this in my view is not the right interpretation that it is Case of Construction of Complex Service

AAR has held that it is nothing but the case of construction of complex under the GST, now this is an argument which has a lot of Counter arguments which needs to be explained at the higher forums for some example of them are as under

Firstly the trade parlance theory – It is well settled that any commercial term has to be understood as per ‘trade parlance’. The word used in taxing statutes in respect of items should be interpreted in the way in which it is understood by people conversant with the subject matter of the statute unless statute prescribes a specific definition. Scientific and technical meaning should not be applied but the popular meaning should be applied as the legislature does not suppose the merchants to be geologists, botanists or naturalists. –

Supporting Judgements :– CCE v. Krishna Carbon Paper Co. – (1989) 72 STC 280 (SC) = 37 ELT 480 = (1989) 1 SCC 150 = AIR 1988 SC 2223 *Mukesh Kumar Aggarwal v. State of MP – (1988) 68 STC 324 (SC) = 178 ELT}

2. Second as already discussed previously also the other at definition including the consumer protection act cannot be referred to either in service tax on GST Regime since both the Acts are not in parimateria (Relating to the same person or thing)

a. There a plethora of judgement which is actually very clearly saying all this effect – Hari Khemu Gawali v. Dy. Commissioner of Police, Bombay – AIR 1956 SC 559 * Board of Muslim Wakfs, Rajasthan v. RadheKishan – AIR 1979 SC 289 = (1979) 2 SCC 468

b. In MS Company (P.) Ltd. v. UOI – AIR 1985 SC 76 = (1985) 1 SCC 51 = 19 ELT 15 (SC), it was observed: “While construing a word which occurs in a statute, in the absence of any definition given in the very document, it must be given in the same meaning which it receives in ordinary parlance or understood in the sense in which people conversant with the subject matter of statute understand it. It is hazardous to interpret a word in accordance with its definition in another statute and more so when such statute is not dealing with any cognate subject.”

3. Whenever there is any ambiguity in the law it is assumed that it will be resolved in the favour of the taxpayer itself

4. In case of sale of the developed plot, there is no requirement of any completion certificate as prescribed in case of construction services under GST Regime this is a clear-cut example of why the sale of developed plots cannot be treated status ko the construction services under GST

Note:- Taking plea of Unconstitionality shall not be correct Since ‘Taxes on lands and buildings’ is a State subject as per entry 49 of List II, but GST can be imposed as Article 246A in Constitution of India, as inserted w.e.f. 16-9-2016 overrides Article both Article 246 & Article 254.

C. Sale of Developed Plot is Composite Supply of Sale of Land

It is clear that it is nothing but a case of composite supply of land where the ultimate intent of the buyer is the to obtain the principal supply of the land it is not the principal supply of the road or of any facility but the principal supply is of land so it should be a case of composite supply

D. Why MAARQ Spaces and this AAR are Contextually Different

Coming to the earlier case of MAARQ Spaces wherein Karnataka AAR held that revenue share received by the developer shall be subject to levy of GST being a supply of services to the landowner, we believe that that case is separate from this case because in that case it was decided by the authorities that that activity of development in itself shall be liable to GST so in my personal view also if there is the separate activity of development that is being billed then is there is no doubt about that that is liable to GST.

But when the development is done along with the sale of land that the sale of land is principally the major Activity the principal supply and in that case the development should always be treated as a part of the major principles applied thereby not attracting any GST on sale of developed plots

E. What Should Developer Do?

1. 1. No Doubt, more litigation will appear if Department Pursues against Developers.
  2. Commercial Real Estate Associations viz CREDAI and NAREDCO shall immediately seek clarifications from CBIC and MoF.
  3. All Existing Transaction for sake of safety shall include a Resort to Clause in Agreement with Customers.
  4. GST Clauses in Plot Sales shall be drafted in a Similar way to Sale of Flats etc to at least keep the space of collection open later if Judicial Precedents decides in revenues favour.
  5. Care should be taken in drafting agreements for sale of a plot by (a) not showing development charges separately and (b) not offering other services like gym, clubhouse, swimming pool, security services etc.

Conclusions

This will have a lot of negative impact on all the developers and industries of real estate across the country. Further at Higher forums, it is a high probability that this can get overruled in the favour of the industry because essentially sale of the developed plot is nothing but the sale of land. Don’t Forget, All along with the history of Indian Stamp Act and Registration Act, sale of the plot has been treated as a sale of land for purposes of stamp duty and Registration.

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