Albeit GST in real estate is welcome move, however, lack of its effective implementation in true essence and spirit as provided under the scheme of the GST Act, due to certain notifications (which devise a new set of mechanism for calculations of GST liability completely overriding the scheme as provided in the Parent Act) has left a huge financial impact deep inside the pockets of real estate developers and the ultimate purchasers.
1. Broad legal position:
I. As per GST law:
i) GST is levied on supply of goods and/or services;
ii) As per section 15 of CGST Act, The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
II. Constitutional position:
i) The land is state subject and this is also clear from a perusal of Entry 5 of Schedule III of the CGST Act which expressly excludes “sale of land” from the ambit of GST. This means that GST is only on the supply of construction service (which includes both materials & services).
ii) The Article 265 of the Constitution of India, specifically states that, “No tax shall be levied or collected except by authority of law”
2. Implications of Notifications No. 8/2017-Integrated Tax (Rate) & 11/2017-Central Tax (Rate) [say`Notifications’]
As per notifications in case of supply of service involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, and the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply. For above purposes “total amount” means the sum total of (a) Consideration charged for aforesaid service; and (b) amount charged for transfer of land or undivided share of land, as the case may be.
3. Cumulative effect of the GST law and notifications:
Notifications provide method of valuation by way of deduction of 1/3 (being deemed land value) of total consideration, which is contrary to section 15(1) of CGST Act since the same provides the transaction value of supply of goods and/or services as the basis for calculation.
4. Blatant anomalies
i) Since the land is state subject and the circle rates for land are determined by the state government after exercise of valuation and therefore such valuation should not at least be contradicted and/or disputed by the Union Government, as the same would tantamount to transgressing upon the federal structure of the Constitution of India. The limit may not be transgressed even under a pretense or disguise of doing something that is permissible; such transgression may in substance and reality would be an attempt to achieve something that is prohibited and tantamount to achieving desired result in an indirect and circuitous manner.
ii) The determination of value of land as fixed 1/3rd in all the cases throughout India hypothetically in a mechanical manner without any basis, logic, scientific study, ground realities, the nature of construction, the purpose for which it is used, its situation, its capacity for profitable user and other relevant circumstances etc. is against the law and judicial pronouncements; As a matter of fact the value of land varies from place to place even in same locality and by no means it can be determined as the same (that is 1/3rd) throughout India; The value of land depends on various factors including its usage (that is residential/ commercial), location, FAR permissible, etc. This proposition of law had also been clearly established by the Hon’ble Delhi high court in the case of “Amit Gupta V. GNCTD & Others” WP (C) 3591/2014;
a) Let us take an example: In Delhi, the Circle Rates of Lands in various Categories are different and the highest being the `A’ Category priced at Rs. 7,74,000/- Per Sq. Mtrs. And the Lowest being `H’ Category priced at Rs. 23,280/- Per Sq. Mtrs. Based on these calculations, for a plot of land of 1000 Sq. Mtrs. In A category, like Prithvi Raj Road, New Delhi, (say `PLOT A’) price would be Rs. 77,40,00,000/- while that of H category like Aya Nagar Village (say `PLOT B’) would be Rs. 2,32,80,000/-, therefore land value of land in A category is about 3300% than the value of land in H category. This distinction in valuation of two different plots is as per Delhi Government Rules/ Circle Rates Policy. Likewise, the construction rates in A category are Rs. 21960/- Per Sq. Mtrs. And that in H Category are Rs. 3480/- Per Sq. Mtrs. Assuming covered area in both buildings (since of same size) is 1400 Sq. Mtrs. And the construction costs are same as per circle rates, the construction value on Plot A would be Rs. 3,07,44,000/- while that on Plot B would be Rs. 48,72,000/-. In case these plots are being sold at under construction stage to prospective buyers then Juxta positioning the impact of GST on these two transactions pre and post situations would make viz-a-viz the said Notifications:
From the above example it is amply clear that the land has been taxed indirectly by way of the Notifications;
Further, if we breakdown the per sq. Mtrs. cost of construction comes to about Rs. 5,67,498/- Per Sq. Mtrs. in A category colony. These figures can get even more interesting in case of commercial property, at approx. Rs. 17,02,491 Per Sq. Mtrs. since land rates in such cases are three times the value of residential land; It is noteworthy that the above rates of Per Sq. Mtrs. construction costs, itself reveals that the method of calculations is absurd and needs to be rectified.
The most interesting part of these deemed valuations is that they have no direct relation to actual costs incurred and irrespective of usage, nature and quality of construction, the methodology of determining the costs remain the same.
Various tenders floated /contracts awarded by Union Government from time to time may be checked and verified to ascertain per sq. Mtrs. Cost of construction of any residential / commercial project;
b) The courts have time and again resorted to the application of maxim `what cannot be done directly cannot be done indirectly’. Further, the said notifications are an indirect invasion on federal structure of the Constitution.
c) There cannot be two different valuations for same piece of land that is one for payment of stamp duty to state government and the other for payment of GST to the Union;
5. Impact of these notifications qua concerned matters on foreign investments and Ease of Doing Business;
i) Foreign investments are directly related to the transparency and clarity of law and ease of doing business in any country;
ii) These notifications if not amended/ rectified will seriously shake the trust of the foreign and domestic real estate developers and investors. And at the same time, it will adversely affect the local home buyers and a genuine home buyer will end up paying much more than he deserves to pay. This will adversely affect the salary class and the middle class of the society making homes expensive and thus further harboring inflation.