Table of Contents

GST on Sale of Plots

It is a common notion that the sale of land is out of the purview of GST. However recent rulings held by different AAR holding the levy of GST on sale of plots have sparked a row amongst tax professionals and Builder’s association about the legal tenability of such rulings. While trade bodies fear of opening a Pandora Box of litigations and huge demands, the tax professionals are busy in understanding the fine lines of these rulings.

The AAR authorities of Karnataka, Gujarat & Madhya Pradesh are unanimous in holding that development of land, and selling it as plots is essentially a supply of service and hence these transactions are taxable. This has been held in the following cases:

1. M/s Satyaja Infratech, Ahemdabad (AAR Gujrat dated 20.09.2019)

2. Maarq Spaces Pvt. Ltd., Bengaluru ( AAR Karnataka dated 30.09.2019)

3. M/s Vidit Builders, Jabalpur ((AAR Madhya Pradesh dated 06.01.2020)

4. Sh. Dipesh Anil Kumar Naik, Surat (AAR Gujrat dated 19.05.2020)

Since the AAR Madhya Pradesh has also held the ruling which is pro revenue, hence in all likelihood, local GST authorities may draw reference from this AAR. Hence it becomes important to understand the underlying facts & issues of the matter of M/s Vidit Builders, Jabalpur.

AAR (M.P.)-M/s Vidit Builders, Jabalpur

M/s Vidit Builders, Jabalpur (Applicant )is a partnership firm. It is engaged in the business of real estate development. It is developing a colony by executing a joint development agreement with the landowner M/s Star Construction. There is a revenue-sharing arrangement of 60% (Land Owner) & 40% (Applicant )

In this project, the developer will develop and provide the following common facilities in the colony.

1. Construction of concrete roads and compound walls.

2. Development of a garden.

3. Construction of the drain and water supply system.

4. Erection of electric poles and transformers etc.

After taking permission from the local municipal corporation., the developer will sale vacant plots to individual buyers and will not do any construction activities on these plots. No common facilities developed like road, garden, electric poles, water drainage, etc. will be transferred/sold to buyers. After the development of all the above-mentioned common facilities, the local municipal corporations will review and provide completion certificates to the developer and the developer will hand over the colony to the municipal corporation for further maintenance.

The developer will also market the plot, issue the allotment letters, enter into the sale agreement, collect the sale proceeds & will also execute the sale deeds along with the landowner company.

Questions Raised Before The AAR

In view of the above, the applicant has sought the ruling in respect of the following questions.

1. Whether the sale of developed plots is covered in para 5 of Schedule III, i.e., Sale of Land?

2. Whether the sale of the developed plot is akin to the sale of land?

3. Whether the activity of the developer ( applicant ) can be classified under a works contract?

4. If the activity of the applicant is covered under the works contract, how the valuation would be done?

5. If there is difficulty in valuing the services then whether Rule 30/ 31 can be applied in the given transaction?

Findings of AAR

1. The applicant’s claim is incorrect that he is engaged in the supply of land as he himself does not enjoy the title of the land. Such a person may have a role in the activity of sale but he cannot claim himself to be the seller.

2. The agreement provides that the applicant can enter into sale agreements. However, this activity is incidental to the main activity of the development of land. The core competence and the activity actually carried out by the applicant is that of the development of land and not the sale of land. The landowner still remains the landowner till the property is transferred in the name of the purchaser.

3. The agreement also states that the landowner authorizes the applicant to prepare the necessary plans drawing designs and get it approved by the concerned authority. The authorization clause clearly shows that the activities are to be done by the applicant on behalf of the landowner. The applicant doesn’t become the landowner himself.

4. Since the applicant has no right over the land hence consequently the applicant cannot claim to be engaged in the activity of the sale of land as envisaged in the provisions of entry at Serial number 5 of said Schedule III. 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 to be performed by the applicable amount to a supply of service.

5. From the agreement submitted it is observed that that the applicant receives consideration equal to 40% of the value at which each of the plots is sold. This amount constitutes the consideration for the services provided by the applicant.

6. Section 15 of the CGST Act, 2017 provides that the value of a supply of goods or services or both shall be the transaction value which is the price actually paid or payable for the said supply where the supplier and the recipient are not related and the price is the sole consideration. The applicant gets 40% of the amount collected from the plot purchasers. This amount constitutes their consideration for their services rendered to the landowners. 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.

Ruling

1. The activities performed/to be performed by the applicant cannot be classified under Para 5 of Schedule III.

2. It amounts to the supply of services under works contract and is liable to be taxed under the GST Act.

3. The value of supply is equal to the amount received/receivable by the applicant which is equal to 40% of the amount on which the plots are sold.

Thus as per the ruling laid down by this AAR (M.P.) the 40% of the sale value of the plot, representing the share of the value of the developer has been treated as taxable.

Issues Arising Out of These AARs.

Certain issues arise on the perusal of all these four AARs which are discussed as below:

a) The issue, for the purpose of para 5 of Schedule III, that Sale of land & Sale of the developed plot is different or of same in nature, this can be decided now only by the Court of Law.

b) In respect of the joint development agreement, the AAR (M.P) has decided that the consideration received by the developer (i.e. 40% of the sale value) will be taxable.However AAR (Gujarat), in the matter of M/s Satyaja Infratech & Sh. Dipesh Anil Kumar Naik, Surat, has decided that the entire sale consideration, i.e. 100% of the plot value will be taxable. Therefore what will be the taxable value, that remains a being question?

c) Whether Notification No.4/2018 will apply in respect of joint development agreements of land also, as this notification is related to taxing of development rights in respect of construction service of complex, building or civil structure only?

d) Whether the rulings given in these AAR will be effective retrospectively or prospectively?

There are more such issues but for the time being everybody seems to be deliberating on the different dimensions of this legal tango.

Rule 30: Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Rule 31: Residual method for determination of the value of supply of goods or services or both. If the reference rate is not available, then it will be 1% of the gross amount of the Indian Rupees provided or received by the person changing the money

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CA Manoj P Gupta

GST on Sale of Plots