Purchaser Of Flat Is Not Liable To Tax Even If He Sales Before Occupation Or Completion
The Purchaser of flat is not liable to tax even if he sales before occupation or completion, for two reasons –
- He is not supplying construction service, as deeming provision requires supply of construction service
- He is not in the business of sale of flats.
No Refund Of ITC Even If Input Tax Credit More Than GST Payable On Outward Supply
In case of inverted duty rates (i.e. input tax credit more that tax payable on outward supply), there is provision of refund of excess credit under section 54(3) of CGST and SGST Act.
However, in case of service of construction of complex [specified in Item 5(b) of Schedule II of CGST Act], refund of unutilized ITC will not be available – Notification No. 15/2017-CT (Rate) dated 28-6-2017.
Valuation of Flats Given Free To Land Owner, Transferor of TDR or Owners of Old Flats at Same Place
In many projects of construction of residential, commercial or industrial complexes, the owner of land gives development rights to the builder/developer. Similarly, in some cases, owner of TDR transfers TDR rights to builder/developer. In some cases, joint development agreement is entered into between builder/developer and land owner/transferor of TDR.
In all such cases, if payment is made by cheque/DD/cash by builder/developer to the land owner or transferor of TDR, question of valuation does not arise and GST @ 18% (9% CGST plus 9% SGST/UTGST) is payable on such amount by the recipient, if such supply is in course of his business.
However, often, instead of making cash payment to the owner of land or transferor of TDR, the builder/developer offers to give some flats/shops to the owner of land or transferor of TDR (so called) free of cost. Of course, the supply of flats is not ‘free’, it is only consideration given by builder/developer to land owner or transferor of TDR in form other than cash.
In case of old residential/commercial complexes, normal practice adopted by builder/developer is to re-locate the tenants or owners of such old complexes to another place for some time, demolish the earlier building and construct new residential/commercial complex. In that case, the earlier tenant or owner is often given equivalent built up area in new residential/commercial complex without any charge. Here also, there is no free supply but only consideration given by builder/developer to the earlier tenant or owner in form other than cash [If the earlier tenant or owner wants extra built up area, it is offered by builder/developer to him on payment of commercial price].
After giving such so called ‘free’ flats, remaining flats are sold by builder/developer to others for cash.
There is no doubt that the builder/developer is providing construction service to the land owner, transferor of TDR or earlier tenant/owner of flats/shops. The consideration is paid to them in form other than cash.
GST should be payable in respect of free flats/shops given to the land owner.
Departmental instructions to value these flats on basis of value of similar flats sold to others
- As per CBI&C circular dated 10-2-2012, the valuation of flats given free should be on basis of similar services.
The issue was again discussed by High Level Committee set up by Ministry of Finance. On basis of their opinion, it was clarified that valuation of flats given to land owner should be on basis of value of similar/identical flats or on basis of cost plus profit, as stated in circular dated 10-2-2012 – CBI&C Instruction No. 354/311/2015-TRU dated 20-1-2016.
In Southern Properties v. CCE (2015) 49 GST 695 = 54 taxmann.com 116 (CESTAT), a prima facie view has been held that valuation should on basis of value of similar flats and not on basis of value of land.
Is the value of construction of similar flats given to others comparable with flats given free to land owner etc.?
The issue is whether the value of similar flats/shops given to others is comparable with flats given free to land owner, transferor of TDR or earlier tenants/owners, i.e. whether that value closely or substantially resembles the value of construction of flats given ‘free’.
It is clear that GST is payable on value of supply of construction services. This value cannot include value of land, while open market value of similar flats includes value of land also.
It is obvious that value of land is recovered by builder/owner from buyers of flats who pay in cash. Thus, value of land is apportioned only on flats which are sold for cash and not on all flats. Thus, the value of land is included in the price charged to buyers. In fact, it is much higher than the average value of land, if such value was apportioned on all flats/shops.
Even a cursory glance of definition of ‘Open Market Value’ and ‘Supply of goods or services or both of like kind and quality’ is sufficient to establish that value of similar flat/shop sold to others cannot be considered as ‘open market value’ of flat/shop given ‘free’, as the first includes value of land while the second does not include value of land.
Can we apply ‘deeming provision’ to calculate value of construction service on basis of open market value of flats?
The general rate of GST on construction and works contract service is 18% (9% CGST plus 9% SGST/UTGST).
However, in case of construction of complex, the builder charges an amount which is inclusive of land or undivided share of land. In that case, as per para 2 of Notification No. 11/2017-CT (Rate) and No. 8/2017-IT (Rate) both dated 28-6-2017, the land value will be deemed to be one third (33.33%) of total amount (i.e. value including land value) and GST is payable on balance amount.
Thus, effectively GST rate is 12% (6% CGST plus 6% SGST/UTGST). Note that GST rate continues to be 18% only. The effective rate comes to 12% only because value of construction is reduced by deducting land value from total amount charged by builder/developer to buyer.
This is a ‘deeming provision’ only, which is similar to composition scheme i.e. an easy and hassle free way of calculating value of construction service.
However, in my view, such deeming provision cannot apply as the actual value of land as included in open market value of similar flats may be more than 33.33%.
Value in any case cannot exceed value as determined under section 15 :
Issue is ‘Can deemed value exceed value as calculated as per section 15 of CGST Act?’
In cases where value of land exceeds 33.33% of value, the value of construction will be less than 66.67%. However, goods and services tax will be payable on 66.67% of value.
This is obviously not permissible, as any deeming provision cannot prescribe a value which is higher than value as determined under section 15 of CGST Act.
Rules or Notifications cannot override provisions of Act:
It is well settled that Rules or Notifications cannot override provisions of Act.
Rules are made to carry out the purpose of Act. The rules cannot be so framed which do not carry out the purpose of the Act and cannot be in conflict with the same. – Laghu Udyog Bharati v. UOI 105 Taxman 630 = 1999 AIR SCW 2771 = AIR 1999 SC 2577 = 112 ELT 365 = 115 STC 616.
Rules cannot be framed so as to bring into existence substantive rights or obligations or disabilities not contemplated by the provisions of the Act itself.
- Kunj Behari Lal State of HP 2000 AIR SCW 543 = AIR 2000 SC 1069 = (2000) 3 SCC 40 (SC 3 member bench) – quoted with approval and followed in Wipro Ltd. v. ACC (2015) 319 ELT 177 (SC) * Petroleum and Natural Gas Regulatory Board v. Indraprastha Gas Ltd. (2015) 9 SCC 209.
Rules and Notifications cannot override the provisions of Act and cannot be derogatory to the object of the Act – UOI v. Jalyan Udyog – Para 34 – 1993 (68) ELT 9 (SC). A rule cannot override or be contrary to a section – CCE v. Ashok Arc 2005 (179) ELT 513 (SC 3 member bench).
Price of similar flats is not comparable:
As we saw above, price of similar flats or open market value is not comparable as that price includes value of land, which may be more than 33.33% of total amount charges for such flat and value of supply calculated on that basis will exceed value as permissible under section 15 of CGST and SGST Act. Thus, in my view, valuation on basis of (a) or (c) would be incorrect.
Value of supply of goods or services or both based on cost:
Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten per cent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services – Rule 30 of CGST and SGST Rules, 2017.
Residual method for determination of value of supply of goods or services or both:
Where the value of supply of goods or services or both cannot be determined under rules 27 to 30 of CGST and SGST Rules, the same shall be determined using reasonable means consistent with the principles and general provisions of section 15 of CGST Act and provisions of rules 27 to 30 of CGST Rules – rule 31 of CGST and SGST Rules, 2017.
Value of service can be on basis of rule 31 instead of on cost plus 10% basis:
In case of supply of services, the supplier may opt for rule 31 ignoring rule 30 – proviso to Rule 31 of CGST and SGST Rules, 2017.
How to value free flats/shops:
As per above, valuation can be on basis of rule 30 (cost plus 10%) or rule 31 (residual method).
In case of services, valuation can be done on basis of rule 31 without taking recourse of rule 30. Hence, in my view, the builder/developer has following choices –
- Value on basis of ‘deeming provision’ considering value of land as 33.33%, if the actual land value is around that figure or less than 33.33% [rule 31 i.e. ‘using reasonable means’ consistent with Acts and Rules].
- Value on basis of cost plus 10% under rule 30.
- Value on the basis of price of similar flats/shops after deducting value of land (if value of comparable land is available) as apportionable to that flat/shop [rule 31].
Liability of Tax Of Land Owner, Transferor Of TDR or Earlier Tenant/Owner
If the land owner or transferor of TDR is in the business of sale of land or transfer of TDR, he is supplying the service in the course of business and hence will be liable to pay tax @ 18%.
The builder/developer will be able to take Input Tax Credit of GST charged to him by the land owner or transferor of TDR.
Since it is exchange of services between land owner/transferor of TDR and the builder/developer, the value should be same as the value on which builder/developer is liable to pay tax.
If the land owner, transferor of TDR or earlier tenant/owner is not in business of such supply, he should not be liable to pay tax as such supply is not in the course of or furtherance of business.
ACCOMMODATION/RENT GIVEN TO EARLIER TENANTS/OWNERS DURING TRANSITION PERIOD
The builder/developer often offers alternate accommodation or compensates rent to earlier tenant/owners during transition period i.e. till new flats/shops are ready for occupation. This comes under ‘tolerating an act or situation’ which is a deemed service.
The supplier of service is the earlier tenant or owner. However, this activity is not in the course of or furtherance of business of the earlier tenant/owner and hence there should be no liability on the earlier tenant/owner.
At present there is no reverse charge under section 9(4) of CGST Act and hence the builder/developer is not presently liable. It is possible that the reverse charge may be re-introduced w.e.f. 1-10-2019.
In my view, even then, the builder/developer will not be liable under reverse charge. The reason is that under reverse charge, the recipient only discharges the tax liability of supplier of service.
Here, the supplier of service is not liable to GST at all as his supply is not in course or furtherance of business. Hence, a non-existent liability of tax cannot be shifted to recipient of service.
Of course, litigation cannot be ruled out.
Value of similar flats/shops charged to buyers who pay in cash is not comparable and hence cannot be accepted for valuation of free flats/shops given to land owner, transferor or TDR or earlier tenants/owners, as the value of similar flats includes value of land.
Hence, the builder/developer has following options
- to value the service on basis of rule 30 of CGST and SGST Rules, i.e. on basis of 110% of cost of provision of service or
- value of similar flats after deducting value of land on proportionate basis under rule 31
- take value of land as 33.33% if the actual value of apportioned land is around that figure, under rule 31 of CGST and SGST Rules.
Transferor of TDR or development rights to land to builder/developer will be liable to pay GST if such supply is in the course of his business.