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Prior to GST, VAT and service tax were applicable on real estate transactions. However, under GST, a single rate of 12% is applicable on under-construction properties, whereas no GST is applicable on completed properties. However, the tax rates have been reduced from 8% to 1% for affordable houses and 12% to 5% for other than affordable houses, subject to the builder not claiming input tax credit (ITC).
In the case of a works contract service being provided to develop a plot of land, a GST rate of 18% is applicable. Stamp duty and registration charges continue to apply apart from the indirect taxes.
Before GST, VAT was applicable on the sale of goods and goods were defined as all kinds of movable property. Land, being an immovable property, was not subject to VAT. However, stamp duties were charged on the sale of immovable properties.
As per Schedule III of the CGST Act, the land sale is neither considered a sale of goods nor a supply of services. The land is an immovable property, the sale of which attracts only stamp duty. Thus, GST does not apply to the sale of land.
However, the Gujarat Authority For Advance Ruling (AAR) has clarified in a judgement that GST is not applicable on the sale of land transaction only when it exclusively relates to the transfer of ownership of land. If it includes other services such as an electricity line, water line, drainage line, land levelling, etc., like in the case of plotted developments, then GST will be applicable. This is because construction of plotted developments or similar structures would fall under the Schedule II Para 5 Clause (b) definition of the CGST Act, which is liable to GST, except where the entire consideration for the land is received receiving the completion certificate.
Thus, the nature of the activity is very important. If the seller is charging an amount towards the sale of land, including charges for common amenities, it will amount to providing a service that attracts GST. The applicability of GST on such developed plots of land is discussed in the topics below.
Value: Under GST, the value of supply is the price that the seller is charging from the buyer for the sale of goods or services. As land is an immovable property, no GST is applicable on its sale. However, suppose there is a composite supply of land along with common amenities like in the case of plotted developments. In that case, GST applies to the amount charged by the seller for providing such additional services and common amenities.
Place of supply: Normally, under GST, the place of supply is the recipient’s location. But, in the case of services related to immovable properties, the property’s location is considered a place of supply.
Time of Supply: The time of supply of service would be-
As per section 17(5) of the CGST Act, ITC is not available on goods or services received by a taxable person for constructing an immovable property (other than plant and machinery) even if used for the furtherance of business.
The owner or a third party can do construction.
In case of construction by a third party: ITC is not available on works contract services when supplied for construction of immovable property except plant and machinery. ITC can be claimed only by a person who is in the same line of business and is using such service for further supply of works contract service. Thus, ITC on works contract service for construction of the immovable property is not allowed to the extent of its capitalisation. ITC is available if the expense is of revenue in nature.
In case of own construction: Even if the taxable person carries out the construction on his account and the same is used for the furtherance of business, ITC is not available on inward supplies to construct an immovable property.
As per Schedule III of the CGST Act, the sale of land does not attract GST only if the transaction exclusively relates to the transfer of ownership of land, which is an immovable property. Here, the nature of the transaction should only be related to the sale of the plot.
But, if the seller of the plot provides basic facilities such as water line, drainage line, electricity line, land levelling, etc., then such transaction amounts to the supply of services. So, the substance of agreement between both parties is essential. If the seller charges based on the super built-up area and not the exact measure of the plot, then it is assumed that he is collecting charges for land andand standard amenities like roads, drainage and water lines, etc. Such transactions do not amount to the sale of land but are considered the sale of developed plot, which amounts to rendering services.
Also, as per Schedule II, clause 5(b) of the CGST Act, construction of any complex, building or civil structure intended for further sale is considered as supply of service and is liable to GST.
Under GST, supply includes all types of supply of goods and services or both, including sale, transfer, barter, exchange, lease, rental or disposal made for a consideration by a person in case of furtherance of business. Thus, it is clear that both renting and leasing of land is considered as a supply under GST and is thus taxable.
As per Schedule II of the CGST Act, Para 2 (a), any lease, tenancy or license to occupy land is treated as a supply of service.
Long-term lease – As per a decision by the Bombay High Court, a one-time premium paid for a long-term lease (30 years or more) of land attracts GST at 18%.
Short term lease – It also attracts GST at 18%.
However, the following categories of leasing of land are exempt from tax under GST:
Thus, leasing of land by farmers for agricultural produce and industrial plots for the development of infrastructure for financial business are exempted from GST. However, leasing vacant land for commercial purposes is taxable.
ITC – GST paid on lease rent is eligible for ITC.