Introduction:

47th GST Council Meeting came up with a number of developments that are going to provide a far-reaching impact on the various segments of industries and their stakeholders.

We hereby put our analysis on the issues addressed by the Press Release pertaining to the real estate sector. This is part 1 of the series.

This article is meant to analyse for the clarification provided that the sale of land after leveling, laying down of drainage lines, etc. is the sale of land and does not attract GST.

Disclaimer:
It is stated that the Press Release contains the gist of certain matters for clarification. Of course, these matters will be crystallized with the publication of the circular. This article is authored based on the reading of the Press Release only. Authors and publishers shall not be responsible for the decisions taken based on this document.

Background:
Schedule III of CGST Act/ State GST Act states that the sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building shall be treated neither as a supply of goods nor a supply of services and thereby GST is not leviable on the sale of land.

GST law has got this issue in legacy from service tax regime about the Sale of land after the development of land* into plots / Sale of plotted land and has been debated a lot whether the development activities would be subject to GST or not in such a case.

*Development of land consists of leveling, road construction, drainage, electricity, water line, demarcation of plots, laying the underground cables, fencing etc.

This issue was also debated before Gujarat Authority for Advance Ruling in the case of Shree Dipesh Anil Kumar Naik where it is held that sale of developed plot is not equivalent to sale of land a treated as construction services under para 5(b) of Schedule II of CGST Act/Gujarat GST Act.

Post this advance ruling, the department aggressively started to issue the show cause notices in various corners of the country by alleging that the sale of the developed plot is subject to GST.

GST Council took up this matter to provide the clarity that the sale of land after leveling, laying down of drainage lines etc. is the sale of land and does not attract GST.

Observations:

• This issue has arisen because of the element of the development of the land contained in the transaction.
• Policymakers are expected to clarify by bifurcating the subject matter for various types of models including own project, JDA, and JV and Partnership models separately. It may be noted that the issue of sale of land after the development of land into plots / Sale of plotted land under JDA has been held chargeable for the construction services (based on the facts) by the Karnataka Authority for Advance Ruling in the case of Maarq Spaces Pvt. Ltd. and Madhya Pradesh Authority for Advance Ruling in the case of Vidit Builders.

Impact:

• Those who have paid the GST on the said transaction will be entitled to get the refund u/s 54 of CGST Act/Respective State GST Act. In the authors’ view, the same shall not be treated as a payment of tax, and thereby the limitation period mentioned as 2 years from the relevant date for applying for the refund u/s 54(1) shall also not be applicable in such cases.
• In view of the authors, this issue should be looked into as per the facts and nothing can be concluded blindly in this manner as if everything in the context of the sale of a developed plot is out of the net of GST.
• Needless to state the contractor charging for supplying the services (pure labour services/ works contract services, as the case may be) of the development of the land will be
• subject to GST and the person selling the developed plot shall not be entitled to ITC in such cases.

Sale of the developed plot being kept aside from the purview of GST as per above will carry the implication for reversal of common credit as per section 17(2) and section 17(3) read with rule 42 and rule 43 for the registered person who is engaged in the taxable supply.

“If we desire respect for the law, we must first make the law respectable.”

Press Release (43^rd GST Council Meeting) discusses on an important change for the landowner who has entered into the ‘Development Agreement’ with the developer. In this light, we have authored this article to explain the practical implication. We provide the disclaimer that this change will actually be crystalized once the notification comes into the picture.

In case of development agreement, landowner transfers the development rights of his land for the construction of a real estate project and the developer assumes the responsibility for the development of project along with other tasks including obtaining approvals, project launching etc. In area sharing arrangement, landowner receives the agreed ratio of constructed area with or without lump sum amount.

It may be noted that when the developer and landowner enter into the development agreement, it carries the GST implications not only in the hands of developer but also on the landowner (i.e. implication is for both of the parties.)

We all know that development agreement has seen number of colours in Indian Indirect Taxes, be it service tax or GST. Authors have attempted to provide the clarity on the issue prevalent as on the day (Part A) along with the change to take place in time to come which is yet to be notified (Part B). It is clarified that here we have not covered the GST implications pertaining to transfer of development rights by landowner to developer.

Part A: What is the position as on the day?

This part of the article enlightens on every aspect of the present law and practical implication about the Liability to pay tax, when the tax liability to pay the tax arises, valuation and ITC.

A-1) Liability is on the developer : Developer shall pay the tax on such supply of flats/ shops etc. to landowner as per the development agreement. (treated as supply of construction services)

Needless to state that developer is entitled to collect the tax from the landowner.

A-2) What is the value on which tax is required to be levied?

Developer will have to pay the tax on the value of first booking of such similar flats/shops etc. supplied to independent buyers (i.e. Date of first booking being the nearest date of development agreement.)

A-3) At what time the tax is required to be paid by the developer?

Tax liability in hands of developer on supply of flats/shops etc. to the landowner shall arise on the date of issuance of completion certificate for the project, where required, by the competent authority or on its first occupation, whichever is earlier.)

It signifies that liability of payment of GST is deferred till the completion of the project.

A-4) Is landowner eligible for ITC?

Landowner is eligible to take the credit of the tax paid by the developer if landowner further supplies such flats/shops etc. to his buyers before issuance of completion certificate or first occupation, whichever is earlier, and

This provision is also supported by section 17(5)(c). As per section 17(5)(c), ITC is not blocked in respect of procurement of works contract services when supplied for construction of an immovable property where it is an input service for further supply of works contract service.

It signifies that when the landowner will not be eligible to take the ITC in respect of :

• flat/shop etc. supplied by landowner after issuance of completion certificate or first occupation (whichever is earlier).
• Units not intended for further supply (i.e. intended it to be used it for own account say, rental purpose)

A-5) How developer can collect the tax from landowner (Interplay in Tax invoice, GSTR 1/3B and financial credit note)?

In the arrangement of development agreement, where developer supplies the flats/ shops etc. in lieu of the procurement of development rights from landowner, the developer is entitled to collect the tax only (but not the value of supply of flats/shops etc.) from the landowner, the developer will have to issue the tax invoice to landowner.

Say, developer has charged the 7.5% GST to landowner of on value of supply of units of INR 10 Cr. (2/3^rd of value).It may be noted that GSTR 1/3B do not allow to put the tax component (INR 75 lakhs) without entering the taxable value (INR 10 Cr). So, even though developer does not receive the amount of INR 10 Cr from the landowner, he will have to mention the value and tax both in tax invoice and GSTR 1/3B. Therefore, to nullify the effect of the 10 Cr shown in the ledger of landowner in the accounting, he has to issue the financial credit note (also known as commercial credit note) of INR 10 Cr in name of landowner to ensure the accounting adjustment.

Part B :

B-1) Difficulty being faced by landowner at present time

Even if the landowner is entitled to take the input tax credit on the procurement of flats/shops etc. from the builder, still landowner is facing the problems!!Timing is important!! Reason is the point of time on which the tax liability arises in the hands of developer.

Developer’s liability to pay the tax arises on the date of say first occupation (obviously landowner is entitled for ITC then only) but what will happen if the landowner books the flats/shops etc. for his buyer before this!!

For example, say in the March, 2021 the occupancy certificate is received by the developer whereas the landowner books his own share of flats/ shops etc. in July 2020 (i.e. before occupancy certificate). Due to this, landowner will not be able to enjoy the input tax credit for paying the liability for July 2020 as he has yet to avail the ITC in March, 2021. Landowner will have to pay the tax which he is entitled to collect from the buyer in July 2020. Here utilisation of ITC becomes theory for him as he will be eligible to take ITC later on (i.e. in March, 2021). ITC remains in the electronic credit ledger and could not be utilised by the landowner on the part of the sold units. Helpless Landowner, oh!!

B-2) How market is affected due to this?

As the ITC could not be utilised by the landowner and consequently there are 2 types of side effects can be observed:

(a)	It is obvious that the price of the flats/shops will go upside as the unutilized ITC becomes cost to the flats/shops etc. in the hands of landowner and/or
(b)	Landowner may loose the margin, if he has to compete with the market and to sell the flats/ shops etc. without giving the burden of unutilized ITC on the pricing.

B-3) Now where is the sun light?

It is said that everything that is faced can not be changed, but nothing can be changed until it is faced. To overcome this issue 43^rd GST Council Meeting has decided as per below (Extract of Press Release is as under):

“To make appropriate changes in the relevant notification for an explicit provision to make it clear that land owner promoters could utilize credit of GST charged to them by developer promoters in respect of such apartments that are subsequently sold by the land promotor and on which GST is paid. The developer promotor shall be allowed to pay GST relating to such apartments any time before or at the time of issuance of completion certificate.”

Charging of tax by the developer is decided by the GST Council to be preponed.

Effect of this change will be bringing the smile on the face of landowner as he will be able to enjoy the ITC against payment of the tax liability of the further supply of his own share of flats/ shops. It is stated in the press release that developer shall be allowed to pay GST relating to such flats/shops etc any time before or at the time of issuance of completion certificate.

B-4) Amendment is prospective or retrospective?

This change will be the prospective change but not the retrospective. Developers may plan the tax accordingly by preponing the tax liability (mutually with landowner) for the running projects.

Kindly note that the proposed change does not seem to apply for Revenue Sharing Model under Development Agreement/Joint Venture set up.

Authors can be reached at vivekladdha@hotmail.com, caguptamanish@gmail.com, dineshdoshi@tulsirealty.com

209, Standard House, 83, M K Road, Next to Axis Bank New Marine Lines Branch, Churchgate, Mumbai, Maharashtra – 400002

The CBIC introduced sub-rule (4) in Rule 36 of the CGST Rules, 2017 w.e.f. 09.10.2019.

According this Rule, a registered person can avail ITC in respect of the invoices, the details of which have not been uploaded by the suppliers and reflected in GSTR-2A of the registered person availing ITC, only to the extent of 20% of the total eligible ITC i.e. the ITC as reflected in its GSTR 2A. This limit was reduced from 20% to 10% w.e.f. 01 Jan 2020.

In simple terms, a person can avail ITC only 10% more than what is reflecting in GSTR-2A as eligible credit or actual eligible ITC in its purchase register, whichever is less.

Rule 36(4) : Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 10 per cent * of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.

*Before 01 Jan 2020, it was 20%.

Relief due to COVID-19 spread:

Notification No. 30/2020 – Central Tax, 3^rdApril, 2020

In the said rules, in sub-rule (4) of rule 36, the following proviso shall be inserted, namely:-
“Provided that the said condition shall apply cumulatively for the period February, March, April, May, June, July and August, 2020 and the return in FORM GSTR-3B for the tax period September, 2020 shall be furnished with the cumulative adjustment of input tax credit for the said months in accordance with the condition above.” 

It is provided that the said limit of 10% shall apply cumulatively for the tax periods Feb-20 to Aug-20 and the return in GSTR-3B for Sep-20 shall be furnished with the cumulative adjustment of ITC for the said months in accordance with the above condition of 10%.

*CBIC Circular No. 136/06/2020-GST, dated 3.4.2020:*

Whether restriction under rule 36(4) would apply during the lockdown period?
Vide notification No. 30/2020- Central Tax, dated 03.04.2020, a proviso has been inserted in CGST Rules 2017 to provide that the said condition shall not apply to input tax credit availed by the registered persons in the returns in FORM GSTR-3B for the months of February, March, April, May, June, July and August, 2020, but that the said condition shall apply cumulatively for the said period and that the return in FORM GSTR-3B for the tax period of September, 2020 shall be furnished with cumulative adjustment of input tax credit for the said months in accordance with the condition under rule 36(4).

ILLUSTRATION :

Month	Case 1			Case 2
	Total ITC	Eligible ITC in 2A	Maximum ITC can be claimed in GSTR-3B	Total ITC	Eligible ITC in 2A	Maximum ITC can be claimed in GSTR-3B
Feb-20	100	85	100	150	100	150
Mar-20	150	120	150	200	120	200
Apr-20	60	40	60	100	70	100
May-20	80	50	80	80	60	80
Jun-20	100	70	100	70	55	70
Jul-20	110	100	110	60	50	60
Aug-20	120	100	120	50	40	50
Sub-total	720	565	720	710	495	710
Sep-20	150	130	?	80	75	?
Total	870	695		790	570

 

Calculation of ITC for Sep-2020	Case 1	Case 2
Eligible ITC till End of Sep-20	695	570
Add 10%	69.5	57
Total A	764.5	627
Total ITC till date B	870	790
ITC than can be availed as per rule 36(4) (Whichever is lower from A &B )C	764.5	627
Less: ITC already availed till August D	720	710
ITC to be availed/ (Reversed) in September (C-D) [Interest as per section 50 will also be paid]	44.5	(83)

Here we can see that in case 1, the tax payer is able to avail ITC of only Rs.44.5 as against total credit of 130 in his purchase register, due to 2A mismatch. While there can be a situation like case 2, which may lead to reversal of ITC Rs. 83 to meet the requirement of rule 36(4). This is how the cumulative effect of Rule 36(4) will be given in September 2020.

Therefore, vendor compliance will again play a very important role for maximizing the ITC. Rule 36 (4) is not suspended but its effect of Feb 2020 to Aug 2020 has been deferred till September, 2020.

CONCLUSION :

• Whether 10% rule is suspended? – No
• Whether 10% rule is Not Applicable for February 2020 to August, 2020? – It is applicable but the application of this rule is to be done cumulatively for the months of Feb 2020 to Aug, 2020
• May I file GSTR 3B without applying rule 36(4)? – Yes, you may.
• How shall it impact the GSTR 3B of September (to be filed as per due date i.e. 20 Oct 2020)? – In Sep-20 return, we need to consider the rule 36(4) but cumulatively by taking effect of the new amendment. (as explained in the illustration below)
• If I have not filed GSTR 3B of Jan 2020 before 20 March 2020 then whether the same shall be relaxed as per the Notification No. 36/2020 – Central Tax, 3rdApril, 2020 – No, Proviso inserted is only to give the relaxation for the months of Feb 2020 to Aug 2020 only.
• Is this relaxation is relevant for composition scheme?– No, Person registered under Composition scheme is not eligible to take the ITC itself so question of relevance of rule 36(4) does not arise at all.
• Whether the person switching from composition scheme to normal scheme w.e.f. 01/ 04/2020 will be eligible to get the relaxation as per the Notification No. 36/2020 – Central Tax, 3^rd April, 2020?- Yes, because from April 2020, he does not remain the composition taxable person rather the same is under the purview of normal scheme.
• Whether this deferment will cause the interest deferment on the excess ITC taken for the period Feb 2020- Aug 2020? – If the cumulative effect of the period of Feb 2020- Aug 2020 is taken care of as per the Notification No. 36/2020 – Central Tax, 3rdApril, 2020 in the months of Sep 2020 then there is not a consequence of interest to be into the picture

Brief Introduction

1. The issue is, can place of supply be determined by AAR? Till the judgment of the Kerala High Court (being discussed below) there was a view that it was not the cup of tea of AAR. But the said Court held Advance Ruling Authorities responsible for not deciding on “Place of supply” matters. In this article we have tried to convey the impact of this judgement.

2. Crux : Applicant sought the question “Whether supply of services by India Branch of Sutherland Mortgage Services Inc., USA to the customers located outside India shall be liable to GST in the light of the intra-company agreement entered into by the said branch with the principal company incorporated in USA?”

To answer this query firstly it should be examined whether it is an export of service and for examining this, issue “place of supply of service” should be determined. AAR says (May 24, 2019) that the determination of same is not within its ambit but the Hon’ble Kerala HC (Feb 03, 2020) has stated that section 97(2)(e) of the CGST Act (determination of the liability to pay tax on any goods or services or both) is having wider coverage and determination of place of supply is covered under the same. As per the court AAR is bound to pronounce the ruling on place of supply.

2.1 Future steps : Now again the matter would be in the lap of AAR and it will take time to provide the ruling on it. of course, it is the instance of “Justice delayed is justice denied”. It is not a good sign for the financial health of the nation, which follows a principle of “one nation, one tax”. Despite this an investor can-not get the clarity on such issues. Lawmakers should create such an eco-system where one can get more certainty from tax authorities. Earlier also a number of business houses have applied before AAR on determination of place of supply. All of such applications remained unanswered by stating that it is out of the scope of AAR. Hope the order of the Hon’ble HC of Kerala will make the business tax decision more convenient.

2.2 Parties to the case : Sutherland Mortgage Services INC. v. Principal Commissioner  [2020] taxmann.com 82.

2.3 Judgment provided by : The HIGH COURT OF KERALA

3. Issue : The point on which advanced ruling has been sought by the petitioner is on the following aspect:

“Whether supply of services by Indian Branch of Sutherland Mortgage Services Inc. USA to the customers located outside India shall be liable to GST in the light of the intra-company agreement entered into by the said branch with the principal company incorporated in USA.”

3.1 AAR’s Views :

Advance Ruling Authority has proceeded to hold that as per the submissions of the petitioner, it is evident that the question raised is whether the supply made by the petitioner would qualify as “export of service” as defined in Sec. 2(6) of the IGST, 2017 and that, therefore, the question would essentially and substantially involve the determination of place of supply, etc.

Thereafter, the Advance Ruling Authority has proceeded to hold that, the issue which is to be determined is one relating to the place of supply of service and then such an aspect may not be subject matter of an Advance Ruling as envisaged in Sec. 97, for the simple reason that the issue relating to the “determination of place of supply of service” as in the instant case, is not covered by any of the provisions contained in Sec. 97(2) of the CGST Act.

Thus, the Advance Ruling Authority after having determined that in this case the supplier of service is located in India and the recipient of services is located outside India, took a view that the other issue to be determined, viz., the “place of supply of service” cannot be the subject matter of advance ruling and expressed its inability to proceed further. Authority stated that the issue of place of supply is not expressly enumerated in Sec. 97(2) for an advance ruling authority to comment upon.

Advance Ruling to be provided on following matters: (For Ready Reference)

“Sec.97: Application for advance ruling.–

(2) The question on which the advance ruling is sought under this Act, shall be in respect of,–

• (a) classification of any goods or services or both;
• (b) applicability of a notification issued under the provisions of this Act;
• (c) determination of time and value of supply of goods or services or both;
• (d) admissibility of input tax credit of tax paid or deemed to have been paid;
• (e) determination of the liability to pay tax on any goods or services or both;
• (f) whether applicant is required to be registered?
• (g) whether any particular thing done by the applicant with respect to any goods or services

or both amounts to or results in a supply of goods or services or both, within the meaning of that term.

Kerela HC Held :

3.2 That, though the issue relating to determination of place supply as aforestated is not expressly enumerated in any of the clauses as per clauses (a) to (g) of Sec. 97(2) of the CGST Act, but there cannot be any two arguments that the said issue relating to determination of place of supply, which is one of the crucial issues to be determined as to whether or not it fulfills the definition of place of service, would also come within the ambit of the larger of issue of “determination of liability to pay tax on any goods or services or both” as envisaged in clause (e) of Sec. 97(2) of the CGST Act.

The Advance Ruling Authority has proceeded on a tangent and has missed the said crucial aspect of the matter and has taken a very hyper technical view that it does not have jurisdiction for the simple reason that the said issue is not expressly enumerated in Sec. 97(2) of the Act. This Court has no hesitation to hold that the said view taken by the Advance Ruling Authority is legally wrong and faulty.

Comments :

4. The Parliament in its wisdom has decided to mandate such a provision as in Sec. 97(2)(e), whereby the applicant is empowered to seek advance ruling even on the said larger issues of determination of liability to pay tax on goods or services or both. In view of above scenario, the Advance Ruling Authority is obliged to entertain such plea and consider it on merits and then render its opinion/answer and its advance ruling on those aspects in accordance with the provisions contained in the aforesaid Acts.

We hope that after such constructive decision of the Hon’ble Kerala High Court, Advance Ruling Authorities will understand solemnity of the issue and entertain the other applications/plea lying unanswered for determination place of supply, with a view to facilitate the tax decision of business.