Demystifying GST on developed plots

1. Introduction

In India, Real Estate Sector is the second largest employer after agriculture. In GST regime, there is no concept of manufacture, sale or service etc. There is only one concept i.e. "Supply". All the Supplies are categorized as either 'Supply of Goods' or 'Supply of Services'. GST shall be levied on every Supply of Goods or Services as per Section 7 read with Section 9 of CGST Act' 2017 (hereinafter "CGST Act"). As per Section 7(d) of CGST Act, Schedule II shall apply for classification of a supply of goods or supply of services for certain transactions. 

GST cannot be levied upon the land which is a property of state and is an immovable asset. The Schedule III of CGST Act'2017 note implies that sale of Land or Buildings is neither goods nor services. 

Serial no. 5 to schedule III of the GST Act dealing with "Activities or transactions which shall be treated neither as supply of goods nor a supply of services" provided for "sale of land and, subject to clause (b) of paragraph 5 of Schedule II, Sale of building".

Thus, by virtue of the above sale of land is fully excluded from the ambit of GST law as it neither a supply of goods nor a supply of services.

Further, sale of building is also excluded subject however to Paragraph 5b of schedule II. Paragraph 5b of schedule II provides for

"construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.

Explanation. - For the purposes of this clause-

1. the expression "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely: -

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;"

2. Construction of Complex - Schedule II of CGST Act

The activity should be construction of complex, building, civil structure or part structure thereof. It will include the activity of construction of complex or building intended for sale to buyer whether wholly or partly. The activity of additions, alterations, replacements or remodelling of any existing civil structure will also be covered.

3. GST Implications on Sale of Plot

3.1. GUJARAT AAR IN SHREE DIPESH ANIL KUMAR NAIK

Gujarat AAR ruling in case of Shree Dipesh Anilkumar Naik [GUJ/GAAR/R/2020/11 dated 19-May-2020] came as a huge blow to the real estate sector, especially to the landowners who engage in sale of developed plots. In this ruling Gujarat AAR ordered that GST would be applicable on sale of Developed Plots. 

3.1.1. BRIEF FACTS OF THE CASE

a. The applicant has submitted that he is having a vacant land outside the municipal area of town on which he has some proposed business activity. The applicant is having all the necessary approvals for the proposed project from the Plan Passing Authority (i.e. Jilla Panchayat).

b. The applicant has further submitted that as per the Plan Passing Authority, the seller of land is required to develop the primary amenities like Sewerage and drainage line, Water line, Electricity line, Land levelling for road, Pipe line facilities for drinking water, Street lights, Telephone line etc..

c. The applicant further submitted that they would sell the individual plots to different buyers without any construction on the same but by providing the primary amenities as mentioned above, which are mandatory requirement of the approved Plan Passing Authority (i.e. Jilla Panchayat).

d. The sellers proposes to charge the rates on super built-up basis and not the actual measure of the plot. The super built-up area includes the area used for common amenities, roads, water tank and other infrastructure on a proportionate basis.

3.1.2. ORDER OF GUJARAT AAR IN THIS CASE

The sellers charge the rates on super built-up basis and not the actual measure of the plot. The super built-up area includes the area used for common amenities, roads, water tank and other infrastructure on a proportionate basis. Thus, in effect the seller is collecting charges towards the land as well as the common amenities, roads, water tank and other infrastructure on a proportionate basis. In other words, such common amenities, roads, water tank and other infrastructure is an intrinsic part of the plot allotted to the buyer. This indicates that sale of developed plot is not equivalent to sale of land but is a different transaction. Sale of such plotted development tantamount to rendering of service. We find that the activity of the sale of developed plots would be covered under the clause 'construction of a complex intended for sale to a buyer'. Thus, the said activity is covered under 'construction services' and GST is payable on the sale of developed plots in terms of CGST Act/Rules and relevant Notification issued time to time.

3.2. GUJARAT AAAR IN SHREE DIPESH ANIL KUMAR NAIK

Against the Order of Gujarat AAR [GUJ/GAAR/R/2020/11 dated 19-May-2020], appeal was filed before AAAR. Gujarat AAAR [GUJ/GAAAR/APPEAL/2021/35 dated 22-Dec-2021] upheld the ruling of AAR in case of Shree Dipesh Anilkumar Naik and ordered that GST would be applicable on sale of Developed Plots because developer is charging amount on basis of the super built-up area that includes the area used for common amenities, roads, water tank and other infrastructure on a proportionate basis.

3.2.1. BRIEF FACTS OF THE CASE

• Appellant is the owner of land & develops the same with infrastructure as per requirement of the approved Plan Passing Authority. After this development of the land, the applicant sells developed land as plots.
• The sale price includes the cost of the land as well as the cost of common amenities, Drainage line, Water line, Electricity line, Land levelling charges, on a proportionate basis. AAR held that a s per clause 5(b) of the Schedule-II of the CGST Act, 2017 , construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer is a "Supply of service" and, hence, is liable to GST; that, therefore, the activity of sale of developed plots would be covered under the clause 'construction of a complex intended for sale to a buyer' and hence GST is payable on the sale of developed plots.
• Aggrieved with the Order of Gujarat AAR, appellant (applicant before AAR now Appellant) filed appeal before Gujarat AAAR.
• Appellant is the owner of the land, who develops the land/gets the land developed with an infrastructure such as Drainage line, Water line, Electricity line, Land leveling etc. as per the requirement of the approved Plan Passing Authority (Jilla Panchayat) and thereafter, sells such developed land as plots.
• Sale of such sites is done to end customers who may construct houses/villas in the plot on the basis of super built-up basis. 
• The sellers charge the rate on super built-up basis and not the actual measure of the plot. The super built-up area includes the area used for common amenities, roads, water tank and other infrastructure on a proportionate basis.

 3.2.2. ORDER OF GUJARAT AAR IN THIS CASE

The appellant charges the rate on super built-up basis and not the actual measure of the plot. Thus, in effect, the seller is collecting charges towards the land as well as the common amenities, roads, water tank and other infrastructure on a proportionate basis and all these are an intrinsic part of the plot allotted to the buyer. The above facts clearly indicate that sale of developed plot is not equivalent to sale of land but is a different transaction. Sale of such plotted development tantamount to supply/rendering of service. The appellant's sales price includes the cost of the land as well as the cost of common amenities, on a proportionate basis. The activity of sale of developed plots would be covered under the clause 'construction of civil structure or a part thereof, intended for sale to a buyer'. The order passed by the AAR is upheld to the extent it has been appealed against and the Appeal is rejected.

Appellant in this case cited orders of other AAR's in its favour but as the Advance Ruling pronounced by the AAR or the AAAR shall be binding only on the applicant/appellant who had sought it in respect of any matter referred to in sub-section (2) of s.97 and the officer or the jurisdictional officer concerned in respect of the said applicant therefore they could not be used in this case.

3.3. KARNATAKA AAR & AAAR IN MAARQ SPACES (P.) LTD

Karnataka AAR ruling in case of Maarq Spaces (P.) Ltd. [KAR ADRG 119/2019, dated 30-Sep-2019] is an important one. Applicant (Maarq Spaces) was engaged in property development. It approached AAR to determine whether such development of and sale of land attracts GST? AAR held that the Development of land for residential dwellings with amenities as per JDA with land-owners is a service, liable to GST.

3.3.1. BRIEF FACTS OF THE CASE

a. Applicant (Maarq Spaces) was engaged in property development. It has entered into Joint Development Agreement (JDA) with landowners for development of land into residential layout with specifications and amenities.
b. As per the agreement the applicant can enter into sale agreements. The sale is entrusted to the applicant as it has invested huge amount in the development of land and to protect its financial exposure.
c. However, the activity actually carried out is that of development of land and not sale of land.

3.3.2. ORDER OF KARNATAKA AAR IN THIS CASE

As per the agreement, the applicant has no right over the land and cannot be considered as sellers of property as owners. Hence, it cannot be involved in the sale of land. Therefore, the said activity for development of land is a supply of service, liable to GST.

3.3.3. ORDER OF KARNATAKA AAAR IN THIS CASE

Aggrieved with Order of Karnataka AAR, Maarq Spaces appealed with Karnataka AAAR [KAR/AAAR-19/2020-21 dated 4-May-2020]. Appellant (Maarq Spaces) said that they are engaged in business of property development has entered into a joint development agreement with landowners for development of land into residential layout. Cost of development is to be borne by appellant. Revenue accruing from sale of plots is to be shared in ratio of 75 per cent for landowners and 25 per cent for appellant. 

Karnataka AAAR held that, it is found that joint development agreement is entered into for two parties to jointly reap benefits of sale. There is a clear rendering of a service by developer to landowner in developing land which belonged to landowner. Therefore, lower authorities were right in holding that activities undertaken by appellant amount to a supply of service to landowners of land to customers. For purpose of taxable value, Rule 31 of CGST Rules'2017 applies in instant case and value of supply is equal to total amount received by appellant. 

3.4. HARYANA AAR IN INFORMAGE REALTY PVT LTD

Haryana AAR ruling in case of M/s Informage Realty Pvt. Ltd. [HAR/HAAR/R/2018-19/15, dated 5-Oct-2018] is an important one. Applicant (Informage Realty) and land owners enters into agreement. Booking/selling of plots to be done by the Applicants and Land owners during the development (before completion of the development work of the township) of the township. Issue was applicability of GST on the booking/sale of plots done by the applicants and Land owners during the development phase i.e. before completion of the development work. Whether GST is applicable on the 20% share of licensed plotted area agreed to be provided by the land Owners to the Applicant-developer? Held that the transaction of booking/sale of developed plots by the applicant and the land owners amounts to sale of land and as per the conjoint reading of Section 7 and Paragraph 5 of Schedule III of CGST Act, any activity or transaction in the nature of "Sale of Land" is not covered with in the preview of GST, hence no GST is payable on the transaction resulting in the sale of lands. It is immaterial whether the said booking / sale is done before completion or after completion of the development work. As for the transaction of transferring 20% share of plots by the landowners to the Applicant, the transfer value of the plots will be considered as consideration paid by the land owners for the services rendered by the Applicant for development of their land and will be regarded as 'works contract, services attracting 18% GST

3.5. MADHYA PRADESH AAR IN BHOPAL SMART CITY DEVELOPMENT CORPORATION LTD

Madhya Pradesh AAR in case of M/s Bhopal Smart City Development Corporation Ltd. [05/2021/AAR/R-28/34, the Order number is 16/2021, dated 22-Nov-2021] held that GST is not payable on Sale of Developed Land where Development Work is limited to providing common amenities and no development work after sale.
The Applicant, Bhopal Smart City Development Corporation Ltd is a Public Sector Undertaking. The company is jointly owned by the Government of MP and is equally managed by Madhya Pradesh Urban Development Company Limited (MPUDCL) and Bhopal Municipal corporation (BMC). The sole objective of the Applicant is Planning and implementing the "Smart City Project" in Bhopal. Smart City Bhopal Mission and values: The smart city mission of the Government of India seeks to address the issue of urbanization through the transformation of selected cities. The intent is to create sustainable cities that can provide a good quality life to its citizens.

Madhya Pradesh AAR held that regarding applicability of GST on sale of developed land (the applicant has declared that no completion certificate is required for the project), the sale of developed land, by the applicant as per the facts provided by him where the development work is limited to providing common amenities ( common drainage, water line, electricity line, land levelling, road and street light) and no development work will be done by the applicant after the sale of the developed land and if no advance from the customer for undertaking development activities is taken then it does not constitute a supply within the meaning of Section 7 of the GST Laws and therefore GST is not applicable on such sale.

3.6. GOA AAR IN SHANTILAL REAL ESTATE SERVICES

Goa AAR ruling in Shantilal Real Estate Services [GOA/GAAR/02 of 2020-21/340 dated 18-May-2021] is contrary to above mentioned Gujarat AAR ruling. In this case Goa AAR held that "Sale of Developed Plot" is not Sale. Let's go through brief facts of this case and understand why the answer is different then Gujarat AAR?

3.6.1. BRIEF FACTS OF THE CASE

1. The Applicant is a real estate developer carrying on the business of construction of residential apartments, shops and development of plots. The applicant has acquired by sale deeds certain parcels of Land and the applicant is currently undertaking certain plotting schemes on these parcels of lands. There were two projects but for discussion purposes we are discussing them together.
2. The applicant has by way of sale deeds acquired the parcels of land intended for development. As such the applicant is the owner of the land. The applicant is proposing to sub divide the larger parcel of land into smaller plots for sale to buyers.
3. The project comprises a parcel of land which will be sub-divided into plots as per sub-division plan. There is already an existing road and as such no road development work will be undertaken. Further, drainage and electricity lines are already pre-existing which would be used as it is or may be marginally improved. There would be no development of amenities or open areas. New roads and drains will be constructed in line with the sub-division plan approved. No construction of building or structures will be done. In respect of both the projects in line with the development permission granted by the Authorities the roads, open spaces etc. are being transferred to the Authority being the nature of public utility.
4. Further in both the projects the sale is only of the plots of land the applicant being the owner. The price charged is based on the actual area of the plot and there is no built-up area, super built-up area or constructed structure which is being sold.
5. The term "Real Estate Project (REP)" shall have the same meaning as assigned to it in section 2(zn) of the Real Estate (Regulation and Development) Act, 2016 [RERA]. As per section 2(zn) of the Real Estate (Regulation and development Act, 2016 [RERA], "Real estate project" means the development of a building or a building consisting of apartments, or converting an existing building or a part thereof into apartments, or the development of land into plots or apartments, as the case may be, for the purpose of selling all or some of the said apartments or plots or building, as the case may be, and includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto." In the project of the applicant there is no construction of any buildings or structures.

3.6.2. ORDER OF GOA AAR IN THIS CASE

Thus, the sale being merely of a plot of land, sold based on its actual measurement and not on the basis of any built-up area/super built up area or carpet area and without any construction of any buildings or structure would fail within the purview of land as per para 5 of Schedule III. It will be important to note, firstly, that the roads, poles or drainages constructed by seller of land are at no time transferred to the purchaser of sub divided developed plot. These amenities will be available for use to every plot holder without any title to it. Further, these amenities in turn will be gifted to the local authority as mentioned by applicant and thereafter, the local authority will be the owner of such road and/ or electricity poles. Moreover, this can be better understood from position that no plot owner or collectively all plot owners will be in a position to sell these polls or roads or drainages nor they will be in a position to sell only plots without having these poles or roads on it. Here probable plot buyer cannot opt to buy only plot without these amenities. The findings further indicate that no structure is being erected nor construction of facilities such as gyms, clubhouse etc. in the nature of complex, building, civil structure or part thereof are being undertaken. So, from above discussion, it can be concluded that the object for sale is land.

3.7. SUPREME COURT IN NARNE CONSTRUCTION

Before reaching to any conclusion we should also refer to decision of Honourable Supreme Court in Narne Construction (P.) Ltd. vs Union of India [CIVIL APPEAL NOS. 4432-4450 OF 2012] where it was held that activity of assessee-company involving offer of plots for sale to its customers/members with an assurance of development of infrastructure/amenities, lay out approvals etc. amounts to 'service' and chargeable to Service Tax. This decision was in Service Tax (Indirect Taxes) regime.

4. BEST STRATEGIES FOR CORRECT TAX PAYMENT ON "SALE OF PLOTS"

After going through both cases AAR cases and decision of Supreme Court we could safely conclude that Sale of plot along with amenities like road and drainage not liable to GST. This, Goa AAR ruling, is a very nuanced and well-reasoned ruling. The entry relating to construction service cannot be applied as roads, poles and drainages are not for sale to probable buyers of plot. Principal transaction is sale of land and amenities do not change the nature of the transaction – one of sale of land.

This ruling could help us plan best tax strategies in case of "Sale of developed Plots" which are as follows:

i. If Price is charged on the basis of Super-Build up area, then this is always subject to GST as it is covered under "Construction" services whereas if the Price is charged on the basis of actual area of Plot then this might be out of ambit of GST subject to other conditions.

ii. Sale of pure Land is always out of ambit of GST Laws. One needs to prove that there is no construction on the Land and it's out of GST.

iii. In case Developer/Promoter is developing Roads, Drainage and Open Spaces and these are not for Sale i.e., these are transferred to the Authorities then the actual sale is of only Plot which is out of GST.

iv. GST Laws does not distinguish between "Undeveloped Plot" and "Developed Plot". Therefore, the agreement for Sale should be specific in this and should be drafted in the manner that the sale deed is executed for land itself and this will carve out it from GST Laws.

v. Sale of Plot is outside the definition of RERA Project and GST can only be levied when there is no construction this will be out of GST.

These are my pointers which I feel must be helpful to you while planning your taxes and drafting agreements.

Disclaimer: This article is the sole expression and opinion of the Author and does not constitute Professional Advice in any manner. Author is in no manner is liable and have no responsibility for loss caused to any individual or organization acting on or refraining from action as a result of the material in this article.