Relief to Homebuyers, Gujarat HC Reduces GST Burden on Construction of Flats

Gujarat High Court ruling that the real value of the land must be deducted prior to imposing the GST on the flats which are under construction will diminish the tax outgo for the homebuyers, given that the contractual arrangements clearly show the value of the land.

In the present times, GST is imposed on the under-construction flats sale in which the whole flat value along with the land is to be taxed post to providing the Ad Hoc deduction of 1/3 of the value of flat/unit towards land whatever be the actual value of the land.

In the urban areas where the cost of land is higher than the ⅓rd value of the flat and the application of the 1/3rd is arbitrary in nature as the same would be applied constantly irrespective of the area, size, and location of the land.

In its decision, the Gujarat High Court in the case of Munjaal Manishbhai Bhatt vs Union of India has read down paragraph 2 of Notification No. 11/2017 mandating 1/3rd deduction of Land as ultra-vires.

“This is indirectly levying tax on land which is beyond the legislative competence of the Union to levy GST on land. This (Gujarat HC) decision will squarely apply where the sale agreement clearly specifies the value of land and also construction services. This is a well reasoned and fair decision, if followed, the tax incidence on individuals buying under-construction flats will reduce substantially, N.A. Shah Associates Partner Naresh Sheth said.”

Moreover, the court sees that the essential deduction of 1/3 rd towards the value of the land is not sustainable for the case in which the land value is to be computed along with the construction value through rules of valuation. This 1/3rd deduction would be allowed at the choice of the person who comes beneath the taxes in cases where the land value of the undivided share of the land is not able to compute.

A tax expert mentioned whose flat buyers have already seen the difficult situation of the excess GST because of the standard 1/3rd deduction may move to claim for the tax refund with the jurisdictional GST authority of the developer.

Tax experts said, who were opposing the administration mentioned, it urged that now the government would arrive at the valuation rules as it has done before in the service tax compliance.

The same judgment is essential because of the impact the same on real estate arrangements and the development agreement in India.

The tax experts mentioned that the same is a win for the real estate sector with respect to the tax imposition on arbitrarily calculated taxable value. The same ruling would draw relief to the writ petitioners and will pose high value towards the assessee, but the same shall hold only a persuasive value for the rest of India.

The same ruling will give the directions for the clarificatory circular by the department that shall draw smiles to the whole ecosystem.