Supply under GST— Section 7 of CGST Act—In the instant case, the writ applicant is a practicing advocate in this High Court. The writ applicant entered into an agreement for the purchase of a plot of land. The said agreement also encompassed construction of bungalow on the said plot of land.
It appears that separate and distinct consideration was agreed upon between the parties to the agreement for (i) the sale of land and (ii) construction of a bungalow on the land.
As per the said agreement, the writ applicant was liable to pay all taxes including the GST. The writ applicant bona fide believed that he would be liable to pay tax under the CGST Act on the consideration payable for construction of bungalow only.
The (respondent) developer/ builder however, relying 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% under the GST Acts 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. The respondent No.4 raised an invoice on the writ applicant to collect such tax from the writ applicant.
The only question that falls for this court’s consideration is whether the impugned notification providing for 1/3rd deduction with respect to land or undivided share of land in cases of construction contracts involving element of land is ultra-vires the provisions of the GST Acts and/or violative Article 14 of the Constitution of India?
It is not in dispute that construction of building is a taxable service unless the entire consideration is received after issuance of completion certificate. However the question is that if the transaction is taxable then what should be the value of service and whether deduction towards land value can be stipulated by way of uniform rate of 1/3rd.
Held that— In the result, the impugned Paragpragh 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification under the State Act which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts. Application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India.
The question is whether the impugned paragraph 2 needs to be struck down or the same can be saved by reading it down. In this court’s considered view, while maintaining the mandatory deduction of 1/3rd for value of land is not sustainable in cases where the value of land is clearly ascertainable or where the value of construction service can be derived with the aid of valuation rules, such deduction can be permitted at the option of a taxable person particularly in cases where the value of land or undivided share of land is not ascertainable.
The impugned paragraph 2 of Notification No. 11/2017- Central Tax (Rate) dated 28th June 2017 and the parallel State tax Notification is read down to the effect that the deeming fiction of 1/3rd will not be mandatory in nature. It will only be available at the option of the taxable person in cases where the actual value of land or undivided share in land is not ascertainable.