Deemed value of land under GST is unconstitutional

The supply of works contract for construction of a building is deemed supply of service as provided in schedule ii para 5(b) of CGST Act. Therefore, the WC for construction of a building is to be classified in chapter 99 of the HSN because this chapter has made a provision for classification of all the services. On further examination, it is clear that the supply of WC for construction of a building is classifiable under chapter heading 9954 attracting tariff rate 18%, provided the consideration has been received before the issuance of completion certificate or before the first occupancy of the building.

It is also evident that in the sale of building, element of cost of land is also involved and its title is required to be passed on to the buyer of the building. The law provides that sale of land or building is neither supply of goods nor supply of service (schedule iii, para 5 of CGST Act) and therefore, the sale of land or building is not taxable under the GST law. Further, the taxing of land/building falls under the State List of the 7th Schedule of the Constitution and therefore, the parliament is not competent to enact law in relation to taxing of sale of land/building.

It is also established law that what cannot be done directly cannot be done indirectly. It would mean that if the parliament is not competent to enact law taxing directly land/building, the same cannot be done by the parliament indirectly also. Any such attempt would be colored legislation and the courts are likely to strike down such legislation.

The legislature has provided the mechanism in section 15 of CGST Act to compute the value for the purpose of charging GST. However, it is seen that the Central Govt. through delegated legislation, by way of notification no. 11/2017-CGST (RATE) dated 28.06.2017, has provided additional mechanism for arriving at deemed value of land in the sale of building for the purpose of charging GST. Para 2 of the notification is reproduced below:

'2. In case of supply of service specified in column (3) of the entry at item (i) against serial no. 3 of the Table above, 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, in such supply shall be deemed to be one third of the total amount charged for such supply.

Explanation. - For the purposes of paragraph 2, '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.'

From the above deeming provision, it is seen that the Central Govt. has prescribed the deemed value of land as 1/3 of the total consideration. This amount is to be deducted from the total consideration to arrive at the value of WC service for charging GST.

However, this method of deemed valuation of land is totally arbitrary and unjustified. There is nothing in the public domain that provides the manner as to how the govt. has arrived at the formula of 1/3 deduction. This also appears to be unjustified, since the value of land in metro cities is much more than 1/3 of total consideration of the building. It is common knowledge that the cost of land in Delhi, on an average is 75% and the cost of construction is merely 25%. If so, the deemed value of land should be ¾ and not 1/3 of total consideration. This should be true with regard to other big cities like Mumbai, Bangalore, Chennai, Hyderabad etc. Hence, the govt. is indirectly charging GST over the cost of land, since deduction at the rate of 1/3 as the deemed value of land, is not justified in metro cities.

There is no dispute that taxing land/building falls within the competence of states and parliament cannot encroach into this division of subjects between center and states laid down in schedule VII of the Constitution. In fact, that is the reason, the CGST Act provides for deduction @1/3 as deemed value of land out of total amount of consideration. This is a plain act of colored legislation by the govt., by which land is being tax through CGST Act, since the value of land, as mentioned above, is much higher than deemed deduction of only 1/3 amount of total consideration.

The doctrine of colorable legislation has been examined by hon'ble SC in several cases and such attempts have been thwarted. In this regard, the judgement of SC in the case of K.C. Gajapati Narayana Deo And Other v. The State Of Orissa, AIR 1953 SC 375 has explained the doctrine of colored legislation as below:

'if the constitution of a state distributes the legislative spheres marked out by specific legislative entries or if there are limitations on the legislative authority in the shape of fundamental rights, questions do arise as to whether the legislature in a particular case in respect to the subject matter of the statute or in the method of enacting it, transgressed the limits of the constitutional power or not. Such transgression may be patent , manifest and direct, but may also be distinguished, covered and indirect and it is the latter class of cases that the expression ‘colourable legislation' has been applied in certain judicial pronouncements.'

In view of the above, the author is of the view that the Govt. has transgressed its powers by incorporating the method of arriving at deemed value of land in notification no.11/2017-CGST (Rate). Through this overstepping into the jurisdiction of states, the Central Govt. has taxed the land indirectly.

The respective states do not seem to be bothered about this intrusion by the Central Govt., since the states too would be beneficiaries of higher tax collection under the aforesaid mechanism being partners of equal sharing. I am of the view that a writ can be filed under article 226 of the constitution in the Hon'ble High Court, for seeking remedy to dislodge this artificial mechanism. The law should provide realistic mechanism so that correct value of land is deducted from the total consideration for taxing the supply of WC for construction. Either the circle rates prescribed by respective states or value of land for the purpose of stamp duty or value shown in books of account may be considered as the parameter for arriving at the value for taxing the supply of WC service for construction of a building.

Disclaimer: The views expressed in this article are strictly personal. The content of this document are solely for informational purpose. It doesn't constitute professional advice or recommendation. The Author does not accept any liabilities for any loss or damage of any kind arising out of information in this article and for any actions taken in reliance thereon.

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on 11 October 2017
Published in GST
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