The Gujarat Authority of Advance Ruling (AAR) has its recent ruling on the application of M/s Karma Buildcon has ruled that the builder is required to deduct one-third value of land or undivided shares from the total value charged for the supply of residential / commercial property.
Facts of the case:
- The applicant, M/s Karma Buildcon is engaged in the business of construction. For the purpose of the business, they buy land and develop residential/ commercial property on that land.
- For the purpose, they engaged Architects, consultants, structural engineers to prepare a plan for the development of residential/commercial property.
- The prescribed approval from various authorities are procured to develop residential / commercial property on such land.
- The applicant submitted that on the basis of such plan and approvals they enter into the agreement with prospective buyers for such residential /commercial property. The agreements entered into are for inclusive of land or undivided share of land basis.
- The applicant constructs such residential or commercial property by engaging labor machinery for the purpose and transfers such property to the buyers.
Issue on which ruling was sought:
The applicant sought the Advance Ruling on the following questions:
- What will be the value of supply for the transaction of sale of residential/ commercial property with undivided rights of land?
- In the case of construction of residential/commercial complex, the builder charges an amount which is inclusive of land or undivided share of land. As per Not No. 11/2017-CT (Rate) and 08/2017-I.T (Rate) both dated 28.06.2017 the land value is deemed to be one third (33.33%) of the total amount (i.e. value including land value) and GST is payable on balance amount. But in applicant’s case the value of Land is clearly ascertainable. In that case actual cost of Land can be deducted for the for the purpose of arriving at the taxable value of supply?
Contention of the Applicant:
- The applicant submitted that cost of land that is being transferred to the buyers on inclusive of land or undivided share of land basis need to be allowed to be deducted as a whole and not as provided in Notification No. 11/2017-CT (Rate) and 08/2017-I.T (Rate) both dated June 28, 2017 as one third (33.33%) of the value, because in applicant’s case the cost of Land is distinctly determinable and is more than one third (33.33%) of the consideration value of the sale of the property.
- The applicant further submitted that value of land cannot be same at all places. It varies from place to place and even at different location in same city/town. In view of that, a uniform deduction for land @33% as prescribed by the notification is contrary to the ground realities. More so, when in applicant’s case cost of land is distinctly ascertainable and much more than 33% of the total value to be realized of the constructed residential/commercial property, actual amount of land need to be allowed to be deducted.
- The applicant further submitted that even otherwise, if actual cost of land is allowed to be deducted, assessee shall get encouragement to disc actual cost of land, that will eventually led towards white economy that is more transparent and compliant of law
Gujarat AAR: Deliberation and Ruling
- In para 2 of Notification No. 11/2017-CT (Rate) dated 28.06.2017, as amended vide Notification No. 1/2018-C.T. (Rate), dated 25-1-2018, there is deemed provisions that the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer 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.
- Accordingly, the applicant contention to allow the deduction of actual value of land from the sale value on the grounds that their land value is ascertainable and other grounds is not legal in terms of para 2 of Not. No. 11/2017-CT (Rate) dated 28.06.2017 as amended vide Notification No. 1/2018-C.T. (Rate), dated 25-1-2018.
In view of above deliberations, the two-member bench of Sanjay Saxena and Mohit Agarwal ruled that applicant is required to deduct one third value of land or undivided shares from the total value charged for the subject supply in terms of Para 2 of 11/2017-CT (Rate) dated 28.06.2017, as amended vide Not. No. 1/2018-C.T. (Rate), dated 25-1-2018.
READ / DOWNLOAD ORDER:
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
