GST and Sale of developed plots

Background

In the recent circular no. 177/09/2022-TRU it has been clarified that sale of land after leveling, laying down of drainage lines etc. is sale of land and does not attract GST. This clarification issued post 47th GST Council meeting, has led to lot of debate on whether GST would be leviable or not on development and sale of plots. It has further added to the confusion which was arising due to multiple Advance Rulings under GST wherein held that GST would be applicable on plotted development transactions. It is significant to note that these advance rulings would have binding effect on the applicant and to their set of facts and need not be followed by other assesseesand more so when these rulingsare not in line with the intention of the law.Also these adverse advance rulings seem to have come to conclusion without proper analysis of the provisions of law, its intention and by ignoring the past judicial precedents totally.

In this article the paperwriter has examined the latest clarification and implications of development and sale of plots.

Analysis of the clarification on sale of land as given in Circular

As per the circular no. 177/09/2022-TRU it has clarified as under:

14. Whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST

14.1. Representation has been received requesting for clarification regarding applicability of GST on sale of land after levelling, laying down of drainage lines etc.

14.2. As per Sl no. (5) of Schedule III of the Central Goods and Services Tax Act, 2017, 'sale of land' is neither a supply of goods nor a supply of services, therefore, sale of land does not attract GST.

14.3. Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and is covered by Sr. No. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST.

14.4. However, it may be noted that any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services.

Comments on the circular

• The circular clarifies that sale of land either as such orafter development, is covered as sale of land [entry 5 Schedule III] and not leviable to GST
• In the Transfer of Property Act, 1882 Section 54. "Sale" is defined. ''Sale" is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.The transaction shall be out of GST net only if the activity is transfer of title or transfer of ownership of land.
• Howeverany service for development of land, like levelling, laying of drainage lines shall attract GST.
• The circular has not made clear on tax implications of agreement of sale of land entered by developer with end buyer in course of/during development.
• In other words, what happens when land is sold in course of development workssuch as compound wall, drainage, water, electricity line?
• If the clarification is made applicable to development of plots intended for sale, then developer may not be required to pay GST even if plots were booked before completion and the said transaction would get covered within the meaning of 'sale of land' and excluded from the purview of GST. However, the circular is not clear on this aspect.

Way ahead for sale of plots in course of infrastructure development works and post completion of works

• Agreement to sell land entered prior to completion of infrastructure works:
• Where the site is not complete, a single agreement for sale of plot in future with specified facilities such as roads, park, club house….[There maybe clear recital to this effect in agreement for sale]. Once complete do the registration of the plot.
• Based on documentary evidence to prove what was transferred was immoveable property of developed land, it would not be liable to GST
• It is possible to claim not taxable to GST by citing that the intention of developer is to deliver developed land to customer and not to provide development services.
• The department's view could be that once agreement is in the course of development of plot, it would be a works contract.GST could be demanded on sums received after entering agreement.Similarlythe L&T decision (2013-TIOL-46-SC-CT-LB), has held even an agreement to sell an immovable property would be treated as a 'works contract' as long as, amounts are received from the prospective buyer prior to the completion of the construction. This was decision under erstwhile VAT laws and could have pursuasive value in GST as well.
• We can recollect the decision of Narne constructions [2013 (29) S.T.R. 3 (S.C.)] a company was engaged in the promotion of ventures for the development of lands into house-plots and invited the intending purchasers through paper publication and brochures to join as members. The Court held that when a person applies for allotment of building plot or for a flat constructed by development authority and enters into an agreement with the developer or a contractor, the nature of the transaction is covered by the expression "service" of any description. Though this was a decision under Consumer Protection Law, this could be relevant to GST as well.
• Erring on caution, whenDeveloper seeks to avoid disputes with dept,could take call to pay GST to the extent the consideration received by developer is towards the development service.
• In paper writer view, GST would be levied only on value of development charges and not on land value, even if single lump sum amount is collected.
• When the agreement to sell provides that the consideration is collected separately towards plot and separately towards infrastructure development, maintenanceand other charges then GST should be paid only on these recoveries made separately and not on the value of land as land is outside GST. This view is supported by the recent ruling pronounced by the Gujarat High Court in the case of MunjaalManishbhai Bhatt Vs UOI [R/SPECIAL CIVIL APPLICATION NO. 1350 of 2021].
• Further, developer could avail proportionate eligible credit attributable to such taxable supplies.
• No GST on sale of plots post completion of development works. Developer is not liable to GST on the sale of plots after development is done. Corresponding ITC cannot be availed either.

Conclusion

In this article the paperwriter has examined the GST implications of sale of developed lands.

The author can also be reached at roopa@hiregange.com