– Raghavan Ramabadran and Rahul Jain
Recently, the Gujarat High Court in its decision in Munjlaal Manishbhai Bhatt Vs. Union of India has held that the fiction created under the GST Rate Notification deeming 1/3 of the total consideration as value of land for computing the GST liability is clearly ultra vires to the provisions and scheme of the CGST Act. Such Fixation of a deeming rate is arbitrary, discriminatory, and violative of Article 14 of the Constitution of India.
The Court at the same time held that it would be optional for the Developers to choose this fiction if value of land/ undivided share is not available. The Court also observed that there is no legislative intent to impose tax on supply of land in any form under GST. The intent of the legislature was to only impose tax on the construction activity undertaken by a supplier at the behest or pursuant to contract with the recipient.
The judgment is extremely beneficial to Developers who are developing properties within the city limits as in most cases, the value of the land involved in the project is much higher than 1/3 of the total consideration for the land + UDS. At the same time, in cases involving construction of projects in remote areas where the value of land is much lower than the construction cost, the Developers can continue to choose to enjoy the 1/3 abatement provided under the Rate Notification.
At the same time, this decision also has profound implications for ongoing projects and nearing completion. In such cases, many Developers would have already paid tax under the deeming fiction. It is possible that some of the buyers would now like the Developers to recompute the tax liability and pass on any reduction of tax rates to them. It would be a daunting task for the Developers to obtain a refund from the Department and pass on the benefits of lower rate of tax to the home buyers. It would be equally difficult to ward off buyers considering the sensational nature of the decision.
Considering the revenue implications and the past trends for other eminent issues, it is highly likely for the Department to challenge this order before the Supreme Court. Any developer opting to pay tax only on the actual construction portion without including the value of the land must tread carefully and keep themselves abreast of the developments in the Supreme Court. Any change in the position laid down by the High Court may lead to higher demands at a future point, which the developer may not be able to collect from the customer.
Hence, it is essential for the Developers to take stock of the positions they wish to employ for on-going and future contracts before jumping into the bandwagon and claim the benefits arising from the Gujarat High Court decision.
(Raghavan Ramabadran is Executive Partner and Rahul Jain is Director at Lakshmikumaran & Sridharan Attorneys)