The levy of GST on development charges is a matter of dispute as sale of land per se is out of the ambit of GST law. When the sale of land is not liable to GST, then how can the development of land be chargeable to GST but the logic does not come to the rescue of the assessees. In the present update, we seek to discuss the decision pronounced by the Gujarat AAR in the case of M/s Satyaja Infratech wherein it was affirmed that the activity of purchase of land and selling the land by converting into residential plots with basic facility is liable to GST attracting 18% under serial no. 3 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.
In this decision, the AAR without discussing as to the implication of the entry no. 5 of the Schedule III to CGST Act, 2017, produced below, has ruled that GST is applicable on the sale of developed plots. The entry no. 5 of Schedule III reads as follows:-
5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
Paragraph 5(b) of Schedule II reads as follows:-
(b) 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 the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
The exception carved out in Schedule III is with respect to construction of complex, building, civil structure etc. and is not respect with developing of basic amenities on plot. Moreover, there is no completion certificate issued in case of plots and so the reference to paragraph 5(b) of Schedule II for levying tax on development of plots is totally fallacious. Therefore, in our opinion, the decision rendered by AAR is adhoc, without having legal backing of provisions of GST Law.
In our opinion, when a person develops land belonging to own and sells developed plots, the transaction is purely sale of land which is outside the ambit of GST. It is also relevant to note that stamp duty is paid on value of plot including development cost and so the transaction is purely that of sale of land. It is pertinent to mention here that the issue regarding levy of GST on transfer of development rights in case of Joint Development Agreements is being challenged before the Hon’ble Bombay High Court by real estate developers and the matter is sub-judice and awaited for final verdict. Accordingly, when the levy of GST on development rights itself is challenged, no GST should be leviable on development charges included in the sale of developed, particularly when the land is owned by person developing the land. In case of development of land by owner himself, no service is provided to third party so as to levy GST and the cost of development included in the cost of plot is sale of land which is not liable to GST.
Another dispute regarding this transaction is treatment of the said supply as composite or mixed supply. This is for the reason that the transaction involves supply of developed plot and the supply of development service. If the transaction is considered as composite supply, then the principal supply would become relevant, which in this case would be supply of plot and consequently no GST would be payable on the transaction. However, one may say that the transaction cannot be considered as composite supply because it consists of two or more taxable supplies but in the present case, supply of plot is covered under Schedule III, and is neither supply of goods nor supply of services. Sale of land is not taxable but GST is chargeable on development charges. On the other hand, if is considered that the transaction is mixed supply, then in that case, GST at the rate of 18% would be applicable on the entire consideration, including consideration for sale of plot which is not proper.
It is also pertinent to mention here that value of exempt supply includes sale of land as per Section 17(3) of CGST Act. Therefore, the developer would also be required to comply with the provisions of credit reversal if GST is paid on development charges and input tax credit is availed.
As we can foresee numerous points of dispute in the issue of taxability of sale of developed plots, a suitable clarification should be issued by the government as the recent advance ruling seeks to raise confusion as regards levy of GST on sale of developed plots by the owner himself.