Central Tax Notification Paragraph mandating Fixed Deduction of 1/3rd of Total Consideration towards Value of Land is Ultra-Vires to Provisions of GST Act: Gujarat HC [Read Order]

A division bench of Justice J. B. Pardiwala and Nisha M. Thakore of Gujarat High Court declared that the impugned paragraph 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification under the Gujarat Goods and Services Tax Act, 2017 ultra vires to the provisions of Goods and Services Tax Act.

The bench noted that the central tax notification and identical notification issued under the Gujarat Goods and Services Tax Act, which both mandate a fixed rate of deduction of 1/3rd of the total consideration towards the value of land, are ultra-vires the provisions as well as the scheme of the GST Acts.

The writ applicant is a practicing advocate in the same High Court entered into an agreement dated 29th September 2020 with the Navratna Organisers & Developers Pvt. Ltd. It seemed that the parties to the agreement had agreed upon separate and different considerations for both the selling of the land and the construction of the bungalow on the land.

The writ applicant believed bona fide that by virtue of such clause he would be liable to pay tax under the Central/Gujarat Goods and Services Tax Act, 2017 on the consideration payable for construction of bungalow in as much as it would constitute supply of construction service under the GST Acts.

The counsel of the petitioner averred that the liability sought to be fixed by way of deeming fiction so as to presume only 1/3rd of total consideration towards land is ultra-vires the provisions of the GST Acts.

The respondents, however, relied upon the impugned entry no. 3(if) of the Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017 read with para 2 of the said notification informed the writ applicant that he would be liable to pay tax at the rate of 18% GST under the  Central/Gujarat Goods and Services Tax Act, 2017 on the entire consideration payable for land as well as construction of bungalow after deducting 1/3rd of the value towards the land in accordance with the impugned paragraph 2 of the said notification.

After analysing the submissions, the bench observed the validity of fixed deduction of 1/3rd for transfer of land or undivided share in land by the impugned notification needs to be decided.

The bench stated that when 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.

The Gujarat High Court observed the Supreme Court in the case of Narne Construction Pvt. Ltd where it was observed that there may be tax liability if the development of land is undertaken pursuant to contract with buyer. However, if the land is already developed and thereafter an agreement is entered into with the buyer for sale of such developed land, then it would not involve any service.

Further, it was held that in any case Entry 5(b) of Schedule II is not relevant for deciding the present controversy which has more to do with valuation rather than chargeability to tax.

It was also held that the application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India.

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