Taxability of sale of plotted land under GST

– Shailesh Sheth, Advocate

SPS Legal

It is, indeed, quite strange and may even appear ludicrous that the issue of leviability of GST on the sale of the plotted land or developed plots can become so contentious that the GST Council had to take note of it and intervene in the matter.

At the recently concluded 47^th Meeting of the GST Council at Chandigarh, one of the issues that apparently was discussed related to the ‘taxability of the sale of plotted land’ (though the exact details are not forthcoming).  Subsequently, vide the Press Release issued by the CBIC post-conclusion of the meeting, the stakeholders have been advised about the proposed issue of the clarification on this issue to the effect that ‘sale of land after leveling, laying down of drainage lines, etc. is sale of land and does not attract GST’ [refer Sr. No. 11 of para E2 of the Press Release].

Yet another contentious issue involving the entire Real Estate Sector has been the validity of the deemed deduction of 1/3^rd value of land while determining the taxable value of the construction service provided by the Builder/developer. This issue has also frequently arisen in case of sale of developed plots.

Against the above backdrop, in this article, the following two issues have been briefly analysed and discussed:

a. Taxability of sale of plotted land with or without development/amenities under a single agreement and

b. Sale of plotted land under one agreement and development activities under a separate agreement.

The author may, at the outset, clarify that for the sake of simplicity and ease of understanding, the references to the Constitutional provisions and the provisions of the CGST Act/Rules have been avoided, as far as possible, though, it goes without saying that the views are based on the author’s reading, understanding and interpretation of the said provisions.

I.       Issue of taxability of plotted land/developed plot:

The views of the author are briefly summarized as under:

1. The sale of plotted land with or without amenities remains a sale of land and outside the purview of the levy of GST being a transaction in immovable property. GST is a tax leviable only on the supply of goods or services or both and cannot be levied upon the supply of immovable property like land.

• The inclusion of ‘sale of land’ in Schedule III declaring it as ‘neither a supply of goods nor a supply of service’ further accentuates the legal position that sale of land is outside the purview of the levy of GST .
  
  At the same time, the author is of the view that without specific inclusion under Schedule III also, GST could not have been levied on the sale of land (plotted land with or without amenities). The inclusion is more by way of abundant caution i.e. Abundans Cautela Non Nocet. The wide definition of ‘service’ cannot be understood or interpreted in a manner so as to cover even a transaction in immovable property within the scope thereof. The context in which the term is defined as well as the constitutional framework and fundamentals of levy of GST need to be taken into account while interpreting the definition or any provisions of the CGST Act. If the inclusion of sale of land in Schedule III is considered as the sole basis for non-levy of GST on sale of land, will the levy of GST stand automatically attracted as ‘supply of service’ without any need for the constitutional amendment if the entry 5 is omitted from Schedule III,?In view of the author, the answer is an emphatic ‘NO’. (The views expressed till now also apply in case of sale of completed building).

• The reliance placed by AAR in Dipesh Anil Kumar Naik’s case [2020-TIOL-134-AAR-GST] on the Hon’ble Supreme Court’s  judgement in case  Narne Construction Pvt. Ltd’s case [2013(29) STR 3 (SC)]  with due respect, is  entirely misplaced. In this case, the Hon’ble Supreme Court was interpreting the definition of ‘service’ in the context of the Consumer protection Act and accordingly, had extended a wide meaning to it. The definition of the term as given in the Consumer Protection Act is also entirely different from the one given in the CGST Act. The judgement had no relevance for the consideration of the issue on hand and had been improperly and unjustifiably relied upon.

In MSCO Pvt. Ltd vs. UOI – 1985 (19) ELT 15 (SC), it was held that reference to another statute is impermissible especially where the statute is not dealing with any cognate subject.

In Essar Steel Ltd. vs. UOI – 2010 (249) ELT 3 (Guj.), it was held that a definition given under an Act cannot be displaced by a definition of the same term given in another enactment, more so, when the provisions of the first Act are being invoked. It was further held that even in the absence of a definition of the term in the subject statute, a definition contained in another statute cannot be adopted since a word may mean different things depending on the setting and context.

• In any event, the binding effect of the rulings of the AAR is confined to the parties thereto as per Section 103 (1) of the CGST Act and the author does not want to dwell at length on the AAR Rulings on this issue which have upheld the levy of GST on the sale of developed plots.

• Sale of developed plots, by no stretch of imagination be considered even a composite supply so as to look for what is principal supply and what is incidental or ancillary supply and subject an element of the transaction to levy of GST. The ‘composite supply’ defined in Section 2 (30) itself mandates the existence of two or more taxable supplies of goods or services or both or any combination thereof. In case of the sale of developed plotted land, no such two or more taxable supplies can be said to be existing and the matter ends there.

• So far as the sale of land under one agreement and the development  activity/creation of various amenities are undertaken in terms of an independent agreement, the sale of land will remain outside the purview of levy of GST. The development activities, if undertaken by the developer for the buyer of the plot to whom the plot is already sold, or by an independent contractor may attract the levy of GST depending upon the nature of the transaction or activity undertaken and the contractual arrangement. In a given case, more than one contractor may be engaged by the plot buyer. Even in case of sale of developed plots, the developer may engage one or more contractors to undertake various development activities. In all such cases, the levy of GST would stand attracted for the contractor/s depending upon the nature of the activity/transaction undertaken by the developer as a contractor or the  independent contractor/s. Whether a particular activity is in the nature of ‘works contract’ or not would again depend upon whether the activity is in the nature of pure service or involves the supply of goods and services both with transfer of property taking place in goods involved in the execution of such contract. This would revolve around the facts in each case.

• The author may further add that the sale of plotted land with or without amenities cannot come within the scope of ‘construction of complex’ by any stretch of imagination. Entry 5(b) of Schedule II is irrelevant and has no applicability in such cases. It does not apply even when the sale of land and development thereon are undertaken under two distinct contracts.

1. It should also be noted that Schedule II is not a deeming fiction nor should be read as such, an error commonly committed by majority and unerringly, by AAR. Unless a transaction or activity comes within the scope of ‘supply’ as per Section 7(1)(a) and is taxable as per the charging section 9 read with other provisions of the Act, the question of applying any entry in Schedule II does not arise. Fortunately, the Board realised the fallacy in understanding all around and particularly of the  AAR in applying Schedule II entries as deeming fiction even when the transaction was not a ‘supply’ and retrospectively amended Section 7 w.e.f. 01.07.2017. However, even in the absence of such amendment, any entry in Schedule II could not have been applied as a deeming fiction so as to create the levy.

• Independently examining, it is also viewed that the Entry 5(b) of Schedule II is itself a species of the ‘works contract’ which is a genus.

• Further, the very prescription of ‘works contract’ as ‘composite supply’ and further as ‘supply of service’ vide Entry 6(a) of Schedule II is invalid and the GST cannot be levied even on the works contract as defined under Section 2 (119) of the Act. The terms ‘composite’ and ‘indivisible’ are not synonymous. Similarly, the word ‘both’ does not nor can mean ‘composite’ or ‘indivisible’. Every works contract as defined is an indivisible contract, integral in nature and cannot be vivisected. The author is also of the view that the very levy of GST on the supply of under construction units is open to serious challenge on the ground of constitutional validity and maintainability.

Analysing as above, the author is of the view that GST cannot be levied on the sale of plotted land/developed plot, whether with or without amenities as it remains a ‘sale of land’ and outside the purview of the levy.   

It will, nevertheless, be interesting to await the proposed clarification from the Board as declared post-conclusion of the 47^th Meeting of the GST Council.

II.      Valuation of plotted land:

a)        Since the author is  of the view that the sale of plotted land, with or without amenities thereon, does not attract the levy of GST at all, there is no need to  venture into the relevance and scope of notification no. 3/2019-CT (R) and other related notifications effective from 01.04.2019 for the real estate sector. Suffice to say that the author is strongly of the view that almost all major provisions of these notifications are highly susceptible to the challenge on the ground of its constitutional validity and maintainability.

b)      For the same reason, the author does not think it necessary to get into the valuation aspects relating to the sale of developed plots. It is suffice to state that independently speaking, the provision granting the deduction of one third value towards land (in case of supply of under construction units) on notional basis and also applied in case of sale of developed plots is arbitrary and subject to challenge. Indirectly, this amounts to the levy of GST on value of land in excess of one third which is unconstitutional.

[Author’s note: This article was written much before the judgement of the Hon’ble Gujarat High Court in the case of Munjal Manishbhai Bhatt vs. UOI – 2022-TIOL-663-HC-AHM-GST was delivered on May 06, 2022.]

c)        Another related aspect is the impact of the transaction involving sale of developed plots on the availment of ITC by the supplier (i.e.  the seller of developed plot) who also might be simultaneously engaged in other taxable supplies and availing the ITC. In such a case, sale of land having specifically been included for the purpose of computing the value of exempt supply for the purposes of the   reversal of proportionate credit under Section 17(3) of the CGST Act, such proportionate reversal will follow in terms of the said provision and other provisions of the CGST Rules.  However, the deeming inclusion of ‘sale of land’ for the purpose of determining the value of exempt supply in terms of Section 17(3) of the Act is highly debatable and can be susceptible to a constitutional challenge.

In the end….

My final word of caution is that one need not and should not read too much into a statutory provision while applying it in a fact of the given case nor should create imaginary or hypothetical issues. One should not also get unnecessarily bogged down or influenced or dominated by what the departmental authorities say or might say or by the rulings of AAR or even by the popular views. They may be kept in mind but they should not be allowed to influence one’s independent thinking. More often than not, it may become necessary to take a particular issue head on and fight for its judicious resolution irrespective of the prevalent contrary views, howsoever strong they may be!

[Concluded]