Gujarat High Court’s last week’s ruling that the actual value of land should be deducted before levying GST on under-construction flats is likely to reduce the tax outgo for homebuyers, provided the contractual arrangement transparently denotes the land value.
Currently, GST is levied on the sale of under-construction flats/units wherein the entire value of flat or unit (including the value of underlying land) is taxed after giving an Ad Hoc deduction of 1/3 of the value of flat/unit towards land irrespective of the actual value of the land. However, in metro cities the land value is much higher than the 1/3 value of a flat and the application of the 1/3rd deduction is arbitrary as it is applied uniformly irrespective of the area, size, and location of the land. Gujarat HC decision will apply where the sale agreement specifies the value of land and also construction services.
The Gujarat High Court in the case of Munjaal Manishbhai Bhatt vs Union of India had observed that mandatory deduction of 1/3rd for the value of land is not sustainable in cases where the value of land is ascertainable or where the value of construction service can be derived with the aid of valuation rules. Such 1/3rd deduction can be permitted at the option of a taxable person, particularly in cases where the value of land or undivided share of land is not ascertainable.
While the ruling may bring immediate relief to the writ applicants and would have a high value for the taxpayers in Gujarat, this would hold only persuasive value for the rest of India. This ruling ideally shall pave the way for a clarificatory circular by the department that may help to remove confusions among all the stakeholders in the real estate industry.