Home buyers – Split the contract and pay less GST?: The charging of tax on the provision of works contract service for construction of a complex/building before issuance of completion certificate, has been an area of constant debate in the pre-GST regime. The legislature tried several methods to segregate the value of goods, services and land involved in a works contract for the purpose of charging service tax. In the post-GST regime, the Central Govt. has tried to overcome this problem by a deeming provision in Notification 11/2017-Cetral Tax (RATE) dated 28.06.2017, to arrive at the value of land involved in the works contract service. Para 2 of the notification provides as below:
“2. In case of supply of service specified in column (3) of the entry at item (i) against serial no. 3 of the Table above, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.
Home buyers – Split the contract and pay less GST?
Explanation. – For the purposes of paragraph 2, “total amount” means the sum total of,-
- (a) Consideration charged for aforesaid service; and
- (b) Amount charged for transfer of land or undivided share of land, as the case may be.”
It is seen from the above para that the Govt. has allowed deduction of 1/3 part, being deemed value of land or undivided share of land, out of the total consideration to arrive at the value of goods and services for charging GST. Through this notification, the govt. has directed the tax payers to pay tax on the remaining part i.e. 2/3 of total consideration, being value of goods and services used in the supply of works contract service for construction of a building.
The readers are aware that the cost of land in metropolitan cities is much more than 1/3 of the deemed cost determined by the govt. in the above mentioned notification. In fact, the cost of land in big cities like Delhi, Chennai, Mumbai, Bangalore etc, is close to ¾ of the total cost of the building. Therefore, the deduction of 1/3, being deemed cost of land is totally unjustified.
This unjust levy of tax has led to charging GST on the value of consideration which should have been deducted if the deduction was allowed on ¾ of total consideration.
In the given situation, the question arises is can the builder and the customer agree to sell/purchase the land or undivided right in land and the cost of construction to the customer, separately? In case, the land or the undivided right in land can be sold separately, the Customer will have to bear the GST only on the consideration involving cost of goods and cost of supply of services when works contract service for construction is supplied.
The sale of undivided (indivisible or impartible) right in land to the customer separately from the value of construction services, is being considered by the trade as a tool to pay reduce the incidence of tax, since the law provides for deduction of only 1/3 of total consideration as value of land vide notification no. 11/2017-Central Tax (Rate) dated 28.06.2017, whereas the value of land is above ¾ of total consideration, in Delhi and other big cities.
Let us make analysis as to what happens to state taxes like stamp duty etc. when land is sold separately? Firstly, it has to be ensured that the tax, in the form of stamp duty, transfer fee and registration fee, is paid as per law. It appears that there is no problem regarding stamp duty etc. in sale of land and construction service separately, since the Transferee/customer would pay the same amount of stamp duty, transfer fee and registration fee as he would have paid when land and construction services are sold together as one transaction. The amount of stamp duty, transfer fee and registration fee is calculated on the total value of consideration of land/building which would include the cost of land, cost of construction and cost of services. Here, there is splitting the agreement into two parts viz. one would be for sale of land and the second would be for sale of construction part. On splitting, the stamp duty etc would be paid on the value of consideration for the land or the value of construction as the case may be. Therefore, the total incidence of state tax remains same.
Then the 2nd question is whether the owner of land would be able to pass good title to the customer. In case, there is no dispute to the title of property of the owner, the customer will get good title. Therefore, the owner or Power of Attorney can pass on good title to the customer.
Now the question is how the process of transfer of title to the customer will be executed? Once there is agreement to sell with the customer incorporating area of land to be transferred and price of land, the right in the property has to be transferred to the owner by partition deed making the customer co-owner. The respective shares of all the co-owners at this stage, are not physically ascertainable with definitive boundaries. The shares are undivided. The shares of co-owners of a property need not necessarily be equal. It depends on their investment in the property as detailed in the purchase document. The partition deed can be executed dividing the land and passing on undivided share in land to the customer. The deed has to be registered with the authorities. There is no bar in Partition laws that the deed for transfer of undivided share of land cannot be executed. In fact, a legal heir having ownership rights, can also claim his undivided right in the land and execute a partition deed. It is possible that actual division of land is not permissible in terms of law/local law. For example, as per city master plan, it may not be allowed to divide the land of a plot in a particular colony/area. However, this cannot be a bar from transferring undivided right in land and getting partition deed executed without physically dividing the plot.
The right of each co-owner has to be ascertained by determining his share in the land by applying various Acts like Hindu Inheritance Act, Muslim personal law, Transfer of property by way of will, Transfer of property by way of relinquishment, court order etc. Once the share is determined, the partition deed can be executed.
However, there are practical difficulties in the process. The customer generally prefers to pay in installments. A builder, may not like to transfer all the land rights to the customer on the basis of installment which would be much less of amount than the total value of land/undivided share in land. Similarly, the customer would not like to pay major amount merely on the basis of land rights which are impartible and indivisible. However, wherever the customer and the landlord/builder can mutually trust each other, the undivided share in land can be sold separately to the customer who can purchase Works Contract Services from the builder later. In the process, the customer would pay tax (stamp duty etc.) on the actual value of land which he would have paid in any case. Further, he would also pay GST on the actual value of goods and services involved in the works contract of supply of construction service.
I will explain the savings of GST on the basis of illustration given below:
A builder enters into an agreement with a customer to sell a flat for Rs. 100/- in the GST regime in Delhi. Since the deduction in respect of land is 1/3, (i.e. Rs.33/-) the total deemed value for tax purposes would be 2/3 of Rs.100/- (i.e. say Rs. 67/-). The builder will charge GST from the customer @ 18% at Rs. 67/- which would be close to Rs.12/-. However, if the land cost is taken as Rs. 80/- as per average cost of land in Delhi, the builder would collect tax @ 18% at Rs. 20/- i.e. construction cost, which would be Rs.3.60/-. Therefore, instead of Rs. 3.60/-, the customer has to shell out Rs.12/- as GST on purchase of home unit. The stamp duty etc will be paid on the entire consideration i.e. Rs. 80/- and again Rs. 20/- as per law.
However, if the builder and the customer agree to split the agreement i.e. one for sale of land and the other for sale of construction part, which involves the cost of goods and services, then on splitting, there would be no GST on sale of land (since law provides for that in schedule iii of the CGST Act). The customer can proceed to pay state tax of stamp duty etc. on the total consideration of land i.e. Rs. 80/-. Remaining cost of Rs. 20/- (construction part) will attract GST @ 18% i.e. Rs.3.60/-. It implies that the customer would get abatement of Rs. 80/- instead of Rs. 33/- (1/3 allowed under the notification) for the purposes of charging GST from total consideration of Rs. 100/-.
Disclaimer: The views expressed in this article are strictly personal. The content of this document are solely for informational purpose. It doesn’t constitute professional advice or recommendation. The Author does not accept any liabilities for any loss or damage of any kind arising out of information in this article and for any actions taken in reliance thereon.
Author – Ramesh Singla
Email – firstname.lastname@example.org