This article has been written by Somanka Ghosh pursuing the Certificate Course in Real Estate Laws from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Zigishu Singh (Associate, LawSikho).

Introduction

The Goods and Services Tax (GST) is an indirect tax paid by consumers on the supply of goods and services. GST came into effect on 1^st July 2017, under the “one nation, one tax” reform which was introduced by the Government of India. The goal of the reform was to integrate varied types of taxes under the purview of a single tax system. 

In simple terms, a land transaction is simply the process whereby the rights are transferred between two or more parties. “A land transaction occurs when someone acquires a chargeable interest in land.” Land transactions play a pivotal role by providing land access to those who are high-yielding, but who own negligible or no land at all. It is also important in a situation where  the land can be used as “collateral to access credit markets where the conditions for doing so exist.”

Tax liability on land transactions

GST is not applied on land transactions because the land is an immovable property. According to Schedule III of the Central Goods and Service Tax (CGST), land transactions are not treated as a supply of goods or services. Only stamp duty is applicable on land transactions. Stamp duty is the tax levied on property purchase documents to register the transaction between two or more parties. However, it is not uniform and varies for different states. “The amount of the stamp duty at the time of registration” is based on the value of the property.

So as not to be held accountable for paying GST in regard to immovable property, the land transaction should have occurred under the fabrication of the ‘sale of land’ agreement or sale of flats after obtaining the ‘Building Completion Certificate or the Occupancy Certificate.’ A judgment by the Gujarat Authority for Advance Ruling (AAR) has stated that GST is inapplicable, “on the sale of land transaction only when it exclusively relates to the transfer of ownership of land.” To put it in a nutshell, any land transaction which exclusively and solely deals with the transfer of ownership of land (immovable property attached to the earth) or transfer of title falls out of the scope of the GST realm.

Schedule III of GST is suitably applied to plot development and not plotted development. The difference between plot development and plotted development changes the scenario about the applicability of GST. When an individual sells a piece of land that only entails the transfer of ownership or transfer of title to the buyer, then it is cited as a plot. A plotted development involves basic amenities or added services such as drainage system, water line, electricity line, overhead tanks, boundary walls, demarcation of each plot, land leveling and etc., along with the land. Therefore, GST is applicable on the plotted developments as such structure inevitably falls under the “Schedule II Para 5 clause (b) definition of the CGST Act,” which states that any “construction of a building complex, civil infrastructure or part thereof, comprising of a building or complex” aimed to be sold to a buyer is the supply of service and thus, will attract GST. In such a case, the seller can charge GST on the consideration amount for providing the added amenities.
However, there is an exception to it. If the entire consideration has been received after obtaining the completion certificate, “where required by the competent authority or after its first occupation, whichever is earlier” then GST will not be applied.

Circumstances which attract GST on land transactions  

In accordance with the provisions of Section 12 (3) of CGST Act, 2017, “the place of supply is the recipient’s location.” Thus, for any services in reference to the immovable property, the location of the property is considered as the place of supply.
This is only applied when developed plots affixed with water pipelines, electricity systems, land-leveling for roads, etc., are taken into the picture.  The Gujarat Authorities for Advance Ruling (AAR) has affirmed on collecting GST on the sale of such developed plots. It has further ruled that “sale of developed plots would be covered under the clause ‘construction of a complex intended for sale to a buyer’ suitable for GST.
The GST applied on such developed plots affixed with basic amenities is charged at 18% and if there is the absence of basic amenities or any construction on the land, then there is no or 0% GST. The time of supply shall be determined by “the date of issue of the invoice or the date of receipt of payment, whichever is earlier.” In case the invoice remains unissued within the stipulated time period under Section 31(2), then either the date of provision of services or the date of receipt of payment can be referred to, again, whichever is earlier and lastly, one can refer to “the date on which the recipient accounts for the receipt of services in his book of accounts.” 

Whether plotted lands are seen as composite supply?

As per Section 2(30) of CGST Act, 2017, a composite supply shall comprise of “two or more taxable supplies of goods or services or both” and though the plotted land is viewed of consisting the same criteria and the development services are subsidiary to the land, it cannot be wholly termed as ’composite supply’ because land does not fall within the range of GST and thus, the related services fall outside of it. The land is included under Section 11 of the CGST Act and by virtue of inclusion under Schedule III, it is independent of GST. As a result,” composite supply concept fails to save the development services from being taxed.”

Implications of GST

Before GST came into effect on 1^st July 2017, the nature of duty that used to be imposed on the buyers are VAT, service tax, registration charges, and stamp duty charges. On sale of under-construction properties, VAT would be charged @1 to 4%, service tax @ 4.5%, registration charges @ 0.5 to 1% and stamp duty charges @ 5 to 7%. After the implementation of GST, on purchase of under-construction property, whether commercial or residential, certainly involves undivided share to the property or the transfer of property to the buyer, which shall be ‘12% with full Input Tax Credit (ITC).’
On purchase of completed flats in a second-hand transaction from the builder, GST would not be applicable. One is liable to pay GST if the builder provides services of construction. Thus, where the purchase of completed or used flats comes into question, there will be no GST, as construction service does not originate. 

Effect of GST on renting and leasing of land

As we have stated earlier, only purchasing land from a seller without any services attached to it, does not fall under the domain of GST. Nevertheless, the sale, lease, barter, exchange, or rental of any land in exchange for consideration, either for an increase in income or at some instance, might be the sole income source of an individual. In this matter, GST is applied since “supply includes all types of supply of goods and services or both.”Thus, it can be concluded that renting and leasing of land is observed as a supply under GST and hence taxable. In accordance with Schedule II of the CGST Act, Para 2(a), “any lease, tenancy or license to occupy land is treated as a supply of service.”

In the case of “Enfield Apparels, a garment manufacturer” before the West Bengal AAR, the liquidator desired to know, “whether an assignment of lease rights to a third party could attract GST.” The liquidator was of the opinion that such transactions do not fall within the ambit of GST. Hence, it should not attract GST. The AAR dismissed the argument put forth by the liquidator and decided to abide by the definition of ’lease’ as given in the provisions of the Transfer Property Act. So, the AAR ruled on accruing GST based on the differentiation between a sale and a lease transaction. 

Now, lease falls into two kinds of categories:

1) Long-term lease – The Bombay High Court has ruled that “one-time premium payable for long-term lease (30 years or more) of land” would attract GST @18%

2) Short-term lease – It is less than 30 years or more and falls within the purview of GST @18%.
Exceptions from GST on matters of lease – Under a few circumstances, an individual can be exempt from paying tax under GST if:
– the renting or lease is provided to an unoccupied land without any structure fastened to it.
– the renting or lease of agro-machinery.
– if a pre-decided amount is paid in terms of long-lease for developing industrial plots provided by the Central or State Government having 20% or more ownership.

Liability of developers/owners and promoters on the matter of GST/GST matters

Before the enactment of GST, the developers had to endure multiple taxes like VAT, customs duty, labour charges, legal fees, etc. Eventually, this used to be transferred to the buyer. Post the enactment of GST, the multiple taxes have been consumed under one threshold with the benefit of an input tax credit. 

When a Joint Development Agreement situation arises, then who shall bear the GST? Let us discuss various situations as to when and upon whom GST is applicable. In the situation that  the landowner supplies land to the promoter, then citing the Schedule III of GST Act, 2017, only the “transfer of development rights shall be regarded as supply.”

In the case of a supply of constructed flats by the promoter to the landowner, then it is considered as a supply of service to the latter. Hence, if during the construction phase, the landowner sells any flats, then he shall be liable to get GST registration and if on the other hand, he does not sell any flat during construction, then he is not liable to pay tax. 

If the promoter supplies constructed flats to outsiders, then during the construction phase or “if there are unsold flats lying with the promoter after issuance of completion certificate” the outsiders acquire the liability of GST @1%, 5%, and 12%. However, at the time of the sale of flats by the promoter, there is no GST. 

Conclusion

Real estate is one of the most important sources of revenue for the Indian economy. This sector has endured the imposition of any taxes, ranging from VAT to service tax, etc., thus imposing a burden on the developers, promoters, and buyers. As the law evolved over time, the structure of imposing a tax on the real estate field underwent a beneficial and preferential change. Eventually, with the incorporation of the GST Act, 2017, the “sale of land” was excluded from the grip of GST. In conjunction with this, the transactions with constructed or under-construction buildings qualified under the purview of GST in special circumstances with applicable rates. Thus, while purchasing any land or any transactions related to it, both the buyer and the developer should be aware of their liability in accordance with GST.

References

• https://www.business-standard.com/about/what-is-goods-and-services-tax
• https://economictimes.indiatimes.com/definition/Indirect-tax
• https://static.pib.gov.in/WriteReadData/userfiles/GST%20E.pdf
• https://www.lawinsider.com/dictionary/land-transaction
• https://documents1.worldbank.org/curated/ar/485171468309336484/310436360_20050007003224/additional/multi0page.pdf
• https://cbic-gst.gov.in/CGST-bill-e.html
• https://cleartax.in/g/terms/stamp-duty
• https://economictimes.indiatimes.com/definition/agreement-of-sale
• https://cleartax.in/s/gst-on-land-developed-plots
• https://facelesscompliance.com/tag/clause-5b-of-the-schedule-ii-of-the-cgst-act-2017
• https://homecapital.in/blog/applicability-of-gst-on-plots-and-plotted-development
• https://taxguru.in/goods-and-service-tax/section-12-time-of-supply-of-goods-cgst-act-2017.html
• http://dcac.du.ac.in/documents/E-Resource/2020/Metrial/23anujain1.pdf
• https://taxguru.in/goods-and-service-tax/section-11-cgst-act-2017-power-grant-exemption-tax.html
• https://www.bloombergquint.com/law-and-policy/long-term-leases-will-attract-gst-says-authority-for-advance-ruling
• https://taxguru.in/goods-and-service-tax/gst-sale-leasing-land.html

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