Prior to this judgement, the developers/builders were required to assume one-third of the contract value as ‘Value of Land’ and GST was being paid on the balance two-third as construction value. Post this judgement, the actual value of the land (if mentioned in the contract) will now be deducted and GST will be calculated on the balance amount. This judgement will offer huge benefits to home buyers buying an under-construction property, especially where land value exceeds one-third amount as stated under the GST law. It is important to note that the ‘sale of land’ is out of the GST net, hence tax is not levied on it.
To explain how property buyers will benefit from this judgment, one can take the reference of the below-mentioned comparative table:
| SI. No. | Particulars | GST amount pre-judgement | GST amount post judgement |
| a) | Area of constructed flat (sq. yards) | 100 sq.yards | 100 sq.yards |
| b) | Land value (given in the contract) (Rs.) | 70 lakh | 70 lakh |
| c) | Construction Value (Rs.) | 20 lakh | 20 lakh |
| d) | Total Value (c+d) (Rs.) | 90 lakh | 90 lakh |
| e) | Permissible deduction for the value of land (Rs.) | 30 lakh | 70 lakhs |
| f) | Value on which GST is to be paid (e-f) (Rs.) | 60 lakh | 20 lakh |
| g) | GST (say @5%) (Rs.) | 3 lakh | 1 lakh |
As it can be seen from the table, the GST to be paid on construction services would be less in the scenario where the actual value of land is allowed to be excluded from the total value. The deduction on an actual basis would always be beneficial whenever the value of land in percentage is more than 33.33% of the total value.
Notably, where ‘Value of Land’ is not mentioned in the contract, then value of land will be assumed as ‘One-third’, which the law already states.
What law says about GST on under-construction flats
The GST is levied on the supply of goods or services or both. However, the sale of land and ready to move buildings/flats are not taxable under GST. If the consideration (partly or fully) relating to the construction/development of such land/building is received by the developer before the issuance of the completion/occupancy certificate (as applicable), then GST is payable on the construction services provided by the developer to the buyer.
Therefore, if the flats are sold by the developers to customers before the occupancy/completion certificate (as applicable) is issued by the relevant authority, then GST will be levied on the sale amount.
The sale consideration of flats/houses/buildings constitutes two components:
(a) Construction services for constructing a building/house/flat
(b) Supply of land
As discussed above, the supply of land is out of the GST net. Therefore, the value of the construction services involving the sale is determined as under:
Value of Construction Services = Total amount charged for such sale of flats/buildings/house (-) value of land
Prior to this judgement, a government’s notification deems the value of land sold as one-third of the total amount charged by the developer for the sale of flats/buildings/houses.
The developer is required to pay the GST on the balance two third value of the contract. This is irrespective of the actual value of land and whether such actual value is given separately in the construction contracts.
What High Court said about government’s notification
These days, in many cities, one may note that the value of land in the construction contracts goes up to 70-80 percent of the total price charged by the developer. However, the government notification allows deduction towards land only to the extent of 33.33 percent. This would mean that the government is indirectly charging GST on the differential value of land (i.e., the actual value of land less 33.33 percent of the value of the contract) by treating the same as construction services.
The home buyers are compelled to pay extra GST on the value of land in excess of the deemed one third portion.
A house constructed by utilising the entire land is getting the same deduction when we compare it with a bungalow buyer where property is constructed on a much smaller portion. In the latter case, the value of land in the construction contract is very substantive. Further, in many cases as already discussed, the value of land constitutes a very high percentage of the total amount charged by the developer.
The judiciary has taken note that the said impugned deeming fiction is arbitrary as the same is uniformly applied irrespective of the size of the plot of land, value and construction therein.
Given the above, the High Court has held that such deemed land value is arbitrary, discriminatory and thus invalid where the actual value of land is separately available under the contracts. The developer can pay GST after deducting the actual value of the land given under the contract/arrived from the valuation rules. They may use such deemed ratio as an option available to them. In other words, it would not be mandatory to adopt such deemed percentage for calculating GST to be levied on home buyers on the construction services.
The High Court has held that such deeming fiction in the government’s notification is contrary to the scheme of the GST Act and has thus read it down to be only an optional method for discharging GST liability.
High Court’s view on sale of developed plots
In the case of a tri-party arrangement relating to the development of plots, the developer and landowner enter into an arrangement whereby the developer develops the land into plots, along with various amenities like roads, gardens, lighting, etc.
The land after development is sold by the developer and revenue generated out of such sale is shared with the landowner in a pre-agreed specified percentage.
The High Court held that the sale of such developed land by the developer to the ultimate customer cannot be subject to GST. It was held that ‘sale of land’ is out of the GST net. Thus, neither the supply of a plain piece of land nor the supply of developed land would be exigible to GST. In both these cases, there is a sale of land which cannot be subjected to GST.
Impact on judgement on home buyers
It is highly likely that the government would challenge the judgment before the Apex Court. However, the judgement immediately brings benefits to home buyers as they are likely to pay less GST amount where value of land is higher than one third of property price. Property buyers can explore the option of claiming refund of GST earlier recovered in excess from the GST authorities.
Note: The article is authored by Poonam Harjani (Leader, Taxmann’s Advisory and Research Division) and Co-Authored by Sunil Kumar (Manager) and Assisted by Yamini Goel (Assistant Manager).
