Indirect tax in construction industry is an age old concept which has deep roots thereby testing it applicability at regular intervals. Accordingly, it can be established that VAT was payable on transfer of property during handover of flats, service tax was payable for rendition of the construction activity, central excise was not payable because it results into emergence of an immovable property on which no excise is leviable. However, under GST, all the concepts are subsumed leading to payment of single tax on establishment of one common principle i.e. supply1. Accordingly, any transfer, lease, barter, sale of flats under construction and such other transactions would be qualified as supply and accordingly GST becomes applicable on the same. Further, sale of land & sale of building/flats [after Occupancy Certificate (OC), Building Completion Certificate (BCC) etc.] are not liable2 for payment of GST.
Accordingly, with conceptual clarity w.r.t. taxability of GST on subjects relating to immovable property, few other questions popped up w.r.t. taxability which becomes critical. With the changing law, the manner of structuring the transaction also underwent a drastic change. It is crystal clear that if a person wants to enjoy privilege of non-payment of GST on transactions relating to immovable property then the transaction should be certainly of either sale of land or sale of flats/buildings after OC, BCC etc. Apart from these two situations all the transactions carry good risk of applicability of GST which can only be resolved by courts in coming years.
To avoid litigations, transactions were structured in such a manner so as to qualify it as "Sale of land" thereby excluding it from the clutches of GST. Recently, such a transaction was tested before the advance ruling authorities3 wherein it was held that the plot sold after developing the land with basic amenities alongwith demarcating the land into several small plot of land by creating appropriate fencing is a transaction qualified for taxability under the clause "Construction of complex intended for sale to buyer" and accordingly GST becomes payable on the entire sale of such plot.
Facts of the Case:
The applicant floated schemes of sale of plotted developed land. The scheme which involves forming land into layout after obtaining necessary plan approval from the Development Authority, get all other permission required to take up, commence and complete what would be the layout, comprised of individual sites. In the activity of plot development, the following are done-levelling the land, construction of boundary wall, construction of roads, laying of underground cables and water pipelines, laying of underground sewerage lines with sewer treatments plant, development of landscaped gardens, drainage system, water harvesting system, demarcation of individual plots, construction of overhead tanks, other infrastructure works. Further common amenities like garden, community hall, etc. are also offered in some schemes. Sale of such sites is done to end customers who may construct houses/villas in the plots.
The sellers charge the rates on super built-up basis and not the actual measure of the plot which is defined under Real Estate (Regulation and Development) Act, 2016 [RERA]. The charges of super built-up area are slightly higher which includes the cost incurred towards area used for common amenities, roads, 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, super built-up cost includes such common amenities, roads, water tank and other infrastructure is an intrinsic part of the plot allotted to any buyer.
The instant AAR held that GST is payable by treating the same as "service" by relying on the ratio of the judgment of the Supreme Court4. The underlying assumption was perfectly justified in holding that the activities of the applicant in the present case involving offer of plots for sale to its customers/members with an assurance of development of infrastructure/amenities, lay-out approvals etc. was a 'service' and would and accordingly would qualify as supply.
Having regard to the nature of the transaction between the applicant and its customers which involved much more than a simple transfer of a piece of immovable property it is clear that the same constituted 'service' within the meaning of the Act. It was not a case where the applicant was selling the given property on "as is where is" basis, but was being sold with some assurance. It is a case where a clear cut assurance was made to the purchasers as to the nature and the extent of development that would be carried out by the applicant as a part of the package under which sale of fully developed plots with assured facilities was to be made in favour of the purchasers for valuable consideration. To the extent the transfer of the site with developments in the manner and to the extent indicated earlier was a part of the transaction, the applicant had indeed undertaken to provide a service. Any deficiency or defect in such service would make applicant accountable before the court of law. Therefore, the judgment rightly stated that the instant transaction is liable for payment of GST.
The view taken by the Hon'ble advance ruling authority is one school of thought which has good merits. In our opinion, the instant judgment has merely assumed that "sale of plot of land" is "sale of complex" without justifying the same. Without prejudice to above, assuming that the same is not qualified as complex, there is another view which states that it would still be covered under Entry 5 under Schedule III thereby excluding the entire transaction from the purview of GST.
From supra, it can be substantiated that the instant transaction is a contract which will materialise only on happening of specific conditions as set out in the sale agreement thereby classifying such contracts as "an agreement of sale of land". The important point of contention is that the substance of the transaction involves transfer of ownership/title in the land, which would be passed once all the conditions listed in such contract are fulfilled, until then the applicant can do anything with that piece of land. So this is an agreement of sale of land at a future date for which Entry (b) of Schedule II fails to provide room for incorporating such transaction which means that the intention of the legislature is not to tax such transactions. Accordingly the scope of Entry 5 of Schedule III is enlarged so as to include such transaction within its ambit. Accordingly, all such transaction which classify as "an agreement of sale of land" and which adopts such structuring would be subject to dispute unless it is clarified. Therefore, in our opinion the battle is still not over.
1. Section 7 of the CGST Act, 2017
2. Entry 5 of Schedule III to Section 7 of the CGST Act, 2017
3. Shi Dipesh Anilkumar Naik GUJ/GAAR/R/2020/11 dated 19.05.2020
4. M/s Narne Construction P Ltd. Vs. UOI [2013 (29) STR 3 (SC)]
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