In a recent ruling, the Karnataka Appellate Authority for Advance Ruling (AAAR) has upheld that consideration received from prospective buyers, whether as advances or full payment, before completion of development works on land for selling them as plots, are not taxable under the Central Goods and Services Tax (CGST) Act, 2017.
The AAAR explained that the owner of the land is not developing the land at the behest of the buyer but it is an activity incidental to the sale of land, making a reference to Entry 5 of Schedule III of the CGST Act and the clarification given by the Central Board of Indirect Taxes and Customs (CBIC) vide Circular no. 177 dated August 03, 2022 and reiterated that they are bound to follow the clarification issued by the board.
The AAAR further stated that the transfer of title in land to the buyer is only limited to the dimensions of the plot being sold, and hence the developed roads, drains, water supply lines and tanks, electricity lines, and sewerage facilities are not sold to the purchasers of the plot. The ownership of these facilities lies with the local authority and planning authority.
The AAAR also clarified that any services procured from third parties for undertaking the development activity will be subject to GST at applicable rates.
The ruling was passed by the Appellate Authority Members Ranjana Jha and Shikha C of the Karnataka Bench.
N Sundaram appeared on behalf of the Appellant (Revenue), while the Respondent (Applicant) was represented by Santosh S.
The ruling provides clarity to the real estate sector on the taxability of consideration received from prospective buyers before the completion of development works on land. The ruling also emphasizes the need to differentiate between the sale of land and the development of land, which are two distinct activities.
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