Reduction of tax outgo for Home Buyers

In a recent decision of Gujarat High Court in case of Munjaal Manishbhai Bhatt vs UoI & Ors. High Court held that value of land can be excluded from levy of GST if contractual arrangement specifically states the land value. Thereby no requirement to apply deeming 1/3 value exclusion from the sale consideration and charge tax only on the actual consideration for construction services. Brief summary of the decision is as follows:

A. Brief Facts

• Munjaal Manishbhai Bhatt (Petitioner) entered into an agreement with NavratnaOrganisers& Developers Pvt. Ltd. (Developer) for purchase of plot of land admeasuring about 1021 square meters. The petitioner submitted that while the plot size is 1021 sq. mts. the built up area (constructed area) amounted to 160 sq. mts.
• Separate and distinct consideration was agreed upon between the parties for the sale of land and construction of a bungalow on the land. 
• The Petitioner was of the view that GST was supposed to be payable only on the consideration payable for construction service. 
• However, developer, on relying upon entry 3(if) of Notification No. 11/2017 CT (Rate) (impugned notification) read with para 2 of the said notification, was of the view that GST was payable on entire consideration payable for land and construction service after deducting 1/3^rdvalue of land in accordance with para 2 of the impugned notification. 
• Hence the petitioner filed a Writ Petition before the Hon’ble Gujarat High Court.

B. Question before High Court

• Whether the mandatory deeming fiction as provided under para 2 of the impugned notification, presuming land value to be 1/3^rdof the actual consideration charges irrespective of availability of actual value of land is ultra vires the GST Act?

C. Observation of the Court

• Hon’ble Gujarat High Court observed that in terms of Section 15 of the CGST Act, ordinarily value of supply shall be the actual price paid or payable. 
• In the present case there is a specific/ distinct consideration agreed for sale of land and construction service. 
• Deeming fiction can only be applied in case where actual price of land is not ascertainable. 
• The Hon’ble Gujarat High Court took into account the decision of Hon’ble Supreme Court in Gannon Dunkerley, which held that if the actual value is available then the same was to be deducted and if the actual value is not ascertainable then the deeming fiction could be applied to. 
• Thus, the Hon’ble Gujarat High Court observed that mandatory application of deeming fiction of 1/3rd of total agreement value towards land even though the actual value of land is ascertainable is clearly contrary to the provisions and scheme of the CGST Act and therefore ultra-vires the statutory provisions.

D. The Way Forward

• For the past transactions home owners could apply for refund for excess payment of tax.
• In case the incidence of tax is not passed on to the home owners, developer/ builder can claim refund
• Builder could pay tax on deemed value i.e 1/3 value under protest.

This is welcome judgment at the cusp when inflation and rising real cost could be balanced with reduction of tax cost.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncements.