Gujarat High Court holds mandatory deeming fiction of 1/3rd deduction for value of land in under-construction real estate transactions under GST as ultra vires and unconstitutional, ‘reads down’ holding it to be optional

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Statutory provisions under GST requires valuation in accordance with actual price (where available) and hence, “tax has to be imposed on such actual value”. Consequently, “Deeming fiction can be applied only where actual value is not ascertainable”

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“Sale of land” is excluded from levy of GST. The tax authorities contended that the “exclusion of sale of land will not be available since the land is a developed piece of land”- the Hon’ble Gujarat HC rejected this argument since GST cannot be imposed on developed land when development is done before entering into agreement with buyer, as such development activity was not undertaken for the prospective buyer.

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Notification cannot provide for a fixed deeming deduction towards value of land in a case where agreement clearly stipulates specific consideration for sale of land and for construction of bungalow. The statutory provision requires valuation in accordance with the actual price paid and payable for the service and where such actual price is available, then tax has to be imposed on such actual value. Deeming fiction can be applied only where actual value is not ascertainable. Reliance in this regard was placed on the Supreme Court judgement in the case of Gannon Dunkerley[1].

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Reference was made to Supreme Court judgement in the case of Wipro Ltd.[2] wherein, rule providing flat rate of 1% addition to value towards loading, unloading charges even in cases where actual value is ascertainable was held ultra-vires the Customs Act, 1961.

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The deeming fiction provided in the notification is arbitrary, as it is applied irrespective of the size of the plot of land and construction therein. Further, no distinction is made between a flat and a bungalow in the impugned notification.

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The minutes of the 14th GST Council Meeting clearly contemplates that the deduction was inserted only in the context of flats wherein value of undivided share of land was unascertainable.

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The arbitrary deeming fiction by way of delegated legislation has led to a situation whereby the measure of tax imposed has no nexus with the charge of tax which is on supply of construction service.

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Validity of a delegated legislation cannot be defended merely on the ground that the Government had competence to issue such delegated piece of legislation.

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Notification cannot be justified on the basis that it curbs avoidance of tax, as parties may inflate consideration of land in the agreement. Detailed statutory mechanism for determination of value is available in case Revenue wishes to challenge valuation.

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Entry 5(b) of Schedule II cannot be relied upon to justify the Notification, as the sole purpose of Schedule II is to clarify whether a supply will be a supply of goods or supply of services.

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Reviewing past/existing/future agreements to identify necessary amendments/additional documentation to take benefit of this judgment to enable a lesser purchasing cost for buyers on account of lower GST impact.

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Examining the possibility of claiming refund of excess GST that buyers may have borne on account of not factoring abatement of land value on actuals.