• Notification Date: 10-05-2022
• Notification No: N/A

Gujarat HC Instructs Under-Construction Flats to Reduce Tax Outgo for Buyers

Gujarat High Court has passed a ruling for the under-construction flat buyers. According to the verdict of the HC, the actual value of the plot should be deducted before imposing the applicable rate of GST on the under-construction flats. This would minimize the tax outgo payable by the buyers of the flats. To avail of this facility, the homebuyers will have to produce the contractual arrangement which clearly denotes the value of the land.

At present, GST charge is applied on the entire value of the flat or unit after giving Ad Hoc deduction of one-third portion of the value of the flat or unit towards land. The value of the tax deduction is irrespective of the actual of the land. After making the deduction on the entire value of the land, the deduction is made on the sale of the under-construction flats or units.      

According to the experts, the actual value of the land is quite higher than one-third value of the flats or units in urban area or in metropolitan cities. Hence, the application of one-third deduction is arbitrary. The deduction rate is applied uniformly on the flats, irrespective of the area, size, and location of the land.

A Partner in N.A.Shah Associates, Naresh Sheth has stated that this is a process of indirectly levying tax on land. Imposing taxes on land is beyond the legislative competence of the Union for levying GST charges on land. The decision taken by the Gujarat High Court will be squarely applicable in those places where the sale agreement specifically mentions the actual value of the land and also that of the construction services. The ruling of the HC is quite fair and well-reasoned. If this decision is followed properly, then the tax charges applicable on the under-construction flat buyers will get subsequently reduced.

The Gujarat High Court has given its verdict on this matter on the last week’s Friday. The verdict was given in the case of Munjaal Manishbhai Bhatt versus Union of India. The final verdict of the High Court was read down with paragraph 2 of Notification No.11/2017, ruling one-third deduction of land as mandatory.

The Gujarat High Court has further analyzed that deducting one-third amount for the value of the land is not sustainable in those matters where the value of the land is specifically ascertainable. The rule of one-third tax deduction from the actual value is also not applicable for those cases where the value of the construction service can be calculated by using the valuation rules. The rule of one-third GST deduction can be applied to those cases particularly where the value of the land of the undivided share of land cannot be calculated by any means.

Partner Advocate of Athena Law Associates, Pawan Arora stated that the flat buyers, who have already had to pay the excess GST charges for the standard procedure of one-third tax deduction, may claim for a refund to their respective jurisdictional GST authority of the developer.              

Senior Partner at AMRG and Associates, Rajat Mohan stated that this ruling passed by the Gujarat High Court is a triumph of a decision for the real estate sector. The sector would be prevented from the imposition of taxes arbitrarily based on the calculated value of taxation. According to him, this decision will be effective in paving the way for a clarificatory circular by the GST department. This would induce more stability in the long imbalanced ecosystem.