Since the overhaul of the GST rate applicable to the real estate sector as of April 1, 2019, the industry has struggled to cope with the new regime which must waive the input tax credit and meet various conditions.
One of the contentious issues facing the industry was the exclusion of the value of the land/undivided share of land (UDS land) transferred to a purchaser when purchasing a house or apartment, for the purposes the GST levy. When a buyer buys a house or when an apartment is bought from a builder, the land on which the house or apartment is located is also transferred to the buyer; no GST is levied on the sale of UDS land/land. The notification issued by the government in this regard allows a uniform deduction of one third of the total purchase price towards the value of the UDS land/land and GST is levied on the value of the remaining two thirds.
In many situations, such as building in prime locations or building bungalows on a large tract of land, the actual value of the land is usually more than a third of the total price. This means that the GST is improperly levied on part of the land.
This condition in the notification was challenged in the High Court of Gujarat, which recently ruled that such mandatory uniform deduction of one-third of the total price is discriminatory and that if the real value of the land is available, it can be excluded or the value of the construction service, which is subject to GST, can be determined in accordance with the valuation rules.
The judgment has interesting implications.
(i) Where the value of the land/UDS land transferred to the purchaser is separately available, GST will be payable on the total value less the actual value of the land/UDS land, as per the registration documents. This would benefit buyers of apartments located in prime areas, where the real value of the land/UDS land is more than a third of the total price.
(ii) Where the actual value of the land/UDS land is less than one-third of the total price, only the actual value of the land/UDS land can be deducted and not one-third of the total price. Thus, this stop would be detrimental to apartment buyers in areas where the actual value of the land/UDS land is less than one third of the total price. According to the judgment, it would be difficult to claim one-third deduction when the separate value of UDS land/land is available.
(iii) Where the value of the land/UDS land is not separately available (the bill of sale is for the full price with no break in value), the builder has the option of determining the value for the GST levy either after excluding a third of the total price from the total price or determining the value of the construction (ideally the cost of construction plus 10%).
Since stamp duty rates are different in different states, proper tax planning is required to optimize tax liability, within the legal framework and Gujarat High Court judgment ratio.
Although the judgment is overall beneficial for the real estate sector, there remains uncertainty whether the government will take it to the Supreme Court or not. If common sense prevails, the government may well accept the judgment as the relevant condition has only been ‘read down’ by the High Court in appropriate circumstances and has not been completely overturned.
( The author is a Chennai-based attorney practicing in the area of taxation and can be contacted at [email protected])
May 15, 2022