The Gujarat High Court in the case of Munjaal Manish bhai Bhatt v. Union of India has granted substantial relief to buyers by clarifying that the Goods and Services Tax (GST) is payable only on the cost of construction and not on the cost of land. The court's decision addresses the issue of whether the value of land or an undivided share of land used for constructing a property is subject to GST. The judgment, delivered by a bench comprising Justice J.B. Pardiwala and Justice Nisha M. Thakore, highlights the distinction between the sale of land and the construction costs involved in real estate transactions.
The case before the court involved a practicing advocate who entered into an agreement with Navratna Organisers & Developers Pvt. Ltd. for the purchase of a plot of land and the subsequent construction of a bungalow on the said plot. The advocate, as the buyer, believed that the construction of the bungalow would constitute a supply of construction services under the GST Acts and therefore be subject to GST. However, the developer contended that GST should be levied on both the land and construction costs, as per the relevant notification.
The court upon examining the provisions of the GST Act and relevant notifications to determine the taxability of land inreal estate transactions. The Court observed that Section 7(2) of the GST Act excludes the transactions listed in Schedule III from the purview of supply. Entry No. 5 of Schedule III specifically includes the sale of land, indicating that it does not qualify as either a supply of goods or services. Consequently, the court concluded that the imposition of tax on consideration received for the sale of land, as per the delegated legislation, was ultra vires Sections 7 and 9 of the GST Acts.
Moreover, the court addressed the contention raised by the department that accepting the petitioner's interpretation would enable parties to manipulate the land value to minimize tax liability. However, the court emphasized that the purpose of the GST Acts is not to generate revenue by taxing the sale of land but to impose tax on the construction undertaken pursuant to the contract. Therefore, restricting the deduction for land value to only 1/3rd of the total value, as stated in the impugned notification, was deemed arbitrary and violative of Article 14 of the Constitution of India.
Consequently, the court declared that the impugned notification, which mandated a fixed rate of 1/3rd deduction towards the value of land, is ultra vires the provisions and scheme of the GST Acts. The court clarified that the deduction would only be applicable at the option of the taxable person when the actual value of land or an undivided share is not ascertainable. Furthermore, since the petitioner had already paid the tax under protest, the court directed the refund of the tax amount to the petitioner.
The Gujarat High Court's ruling provides crucial clarity on the applicability of GST in real estate transactions. By distinguishing between the cost of land and the cost of construction, the court has ensured that buyers are not burdened with unnecessary tax liabilities on the value of land. This judgment aligns with the objective of the GST Acts and upholds the principle of fairness and non-discrimination enshrined in the Constitution. The decision sets an important precedent for future cases involving the interpretation of GST provisions and offers significant relief to buyers in the real estate sector.