The Gujarat High Court has struck down a portion of a GST notification mandating the deduction of a one-third of the value of land towards construction services, deeming it “arbitrary”.
The ad hoc deduction of one-third towards value of land in case of construction services has been a subject of debate and impacts homebuyers severely in various cases. The Gujarat High Court held that land value deduction to the extent of one-third is arbitrary, deeming that a fiction of such deduction is not mandatory to compute GST on construction services to home buyers.
This decision will have a major impact in cases where land value is more than one-third. As per the court ruling, deduction can be higher than one-third, thereby reducing GST brunt on homebuyers. The deeming fiction leads to arbitrariness and results in violation of constitutional provisions and fundamental right to equality. Based on Constitution provisions, a one-third deduction is held by Gujarat High Court to be ultra vires the GST Act and the overall scheme governing applicability of GST on construction services/sale of land.
It must be noted that there is no GST on transfer of land and building, and the actual value of land must be excluded when GST is made applicable on construction services. Article 14 of the Indian Constitution comes into play to ensure that the higher deduction towards the value of land is available without any restriction.
Further, while the valuation provisions prescribe an open market value as a guiding principle, creation of ad-hoc deeming provision to determine value of services, through a notification certainly raises questions on validity. The transactions will be interesting going forward for flats where ascertaining value of undivided share of land may become contentious and a standard rate of deduction may not withstand judicial scrutiny.
Gujarat High Court unequivocally spells out that even without going to Schedule III, the only service which is supplied to home buyers is the construction service and it is such supply alone which can be taxed. Hence, that the land is not a plain parcel, but developed, cannot be grounds for imposing tax on the sale of such land. Consequently, builders may consider filing refund of excess tax paid and pass on benefits to homebuyers. The builders must carefully and correctly quantify the benefit of reduction of taxes so that there are no complexities with respect to Anti Profiteering in the days ahead.
— The author, Abhishek A Rastogi, is a partner with Khaitan & Co. The views expressed here are personal. Source