[By Shubham Gupta]

The author is a student at National Law University, Odisha.

It is a renowned, articulated and explicitly provided fact that selling of land does not attract any kind of tax as per the Goods and Services Tax. The reason provided for non-imposition of tax in case of sale and purchase of land is that they neither come under the purview of services nor under the definition of goods under Schedule III of the CGST Act, 2017. The fact that land is an immovable property, only stamp duty is required to be paid on its purchase.

However, there has been a consistent doubt regarding taxation of those plots which are sold after their development. The definition of development of land includes “levelling the land, construction of roads, laying underground cables and water pipelines, development of landscaped gardens, drainage system, demarcation of individual plots, and other infrastructure works”.  In this article, the author has tried to highlight various legal frameworks and judicial perspectives to reach out to an exact picture regarding the imposition of tax on such developed plots.

The ‘Popular Meaning’ Approach

The solution to this enigma can be reached by analyzing the definition of land and benefit arising out of the land. The absence of any definition of immovable property and land in the CGST Act, 2017 leads us to fall back on various other enactments and judgments. It is a well-known fact that in case of the absence of a definition in a statue, it has to be construed in its popular sense. Hence, the interpretational solace can be drawn from the Land Acquisition Act to interpret the word “Land” in Clause 5 of Schedule III. The definition of land provided by the “Section 3(a) of Land Acquisition Act, 1894” mentions that the expression “land” includes things attached to the earth or permanently fastened to something attached to the earth and also the benefits arising out of the land. Similar is the definition of land in “Section 3(4) of the Bombay Land Revenue Code, 1879”. The definition of immovable property provided in “Section 3(26) of the General Clauses Act (GCA)”, “Section 2(z) of the Real Estate (Regulation and Development) Act, 2016” and “Section 2(1)(6) of the Registration Act” have mentioned that land also includes benefits arising out of the land. In the case of “State of Maharashtra v. Reliance Industries Ltd.”, the Supreme Court, through various legal dictionaries and the maxim of “Cuius est solum, eiuses tusquead coelum et ad inferos”, attempted to define land and briefly held it to include all fixtures, structures and benefits arising out of the land. Thus, the judgment further gave an indefinite extent to land upwards and downwards.

The Bombay High Court, in the case of “Sadoday Builders Private Limited v. The Jt. Charity Commissioner”, held that the benefit arising from the land is also an immovable property. Further, it also elaborated that an agreement for the use of Transferable Development Rights can especially be enforced unless it is established that compensation in money would be adequate relief. Similar was mentioned in the recent case of “DLF Commercial Projects Corporations v. Commissioner of Service Tax, Gurugram”, where the tribunal provided that transfer of development rights comes under the definition of immovable property as per the “Section 3(26) of the GCA”. Hence, it can be concluded that no service tax defined under “Section 65B(44) of the Finance Act,1994” has to be paid in the development activities because of the exemption provided on taxation of land.  

Analysis of the Law

In view of the above discussion, it can be very well concluded that the development of land should consequently fall within Clause 5 of Schedule III and hence, should not be taxable. The fact that it is raw land or developed land does not change the fact that it is still a land. The sale of these plots is akin to the sale of developed lands and activities like drainage works, electricity supplies, and such are incidental to land and hence, does not change the characteristics of these plots. The fact which should be taken into consideration is that parks, roads, and other such utilities are not supplied to the purchaser of a plot but belongs to the Public Authority or Municipal Corporations. The sale and purchase of plots do not change the vested powers of the authorities in such utilities. The differentiation, hence, between the open undeveloped land and developed plot should only be in terms of compensation as the value addition will be part of the total consideration. The addition might be highlighted in the sale deed registered under Section 17 of the Indian Registration Act.

The Flawed Rulings

The Authority of Advance Ruling (AAR) of Karnataka, Gujarat and Madhya Pradesh have held contrary and imposed service taxes on such transactions. The reasoning provided by the above-mentioned bodies is that the development of land is a supply of service and hence should be taxed. Recently, the Gujarat AAR on 19th May 2020in the case of Sh. Dipesh Kumar Naik, while taking a similar approach as that taken by the AAR of Karnataka and Madhya Pradesh, explained its decision by mentioning that the amount charged by the seller is on the “super-built basis” and not as per the measurement of the plot. The “Super built-up” area includes the area of basic amenities like water tanks, parks, roads, etc. Thus, the seller charges the price which includes the price of the land and these provided amenities. In other words, according to the AAR, these amenities are the extrinsic part of the land purchased by the buyer. Ultimately based on such reasoning, it was held by the authority that the purchase of land and developed plot are two different transactions and hence tax should be imposed on such a developed plot.

The decision taken is prejudicial and biased on the very face as the authority has imposed a tax on the entire consideration of the plot. The AARignored the fact that charging tax on the entire value of the plot means charging tax on the value of land as well, which is explicitly exempted by the concerned statute. Further, the authorities in giving such decisions have neglected various judgments given by the apex court and several high courts in which the courts have included the benefit of land in the definition of land. Furthermore, in the absence of a definition of land, they have not even relied on the definitions provided in the existing statutes and in fact, have created their own definition. This is a clear scenario of judicial overreach and thus requires to be relooked by the High Courts of the respective states.

The Suggested Route

Although the author does not consent to the decisions of AAR, yet, as a matter of caution, the following route could be followed if it is decided to impose taxes on such plots. First, the value of land should be deducted from the value of the developed plot while imposing a service tax. Second, there should be an explicit bifurcation of developmental activities to articulate which activity will be considered as part of services and which activities will be considered an integral part of the land. Third, this approach of absolute taxation on developed lands should be dropped off and it should be subject to certain exceptions and exemptions. These exceptions can be on the self-development of lands as there is no availing of service in such a scenario. The exemption can be provided when development is done through contractors. The reason for the same is that in such cases, tax is already paid to the contractors through taxable invoices and hence, the developer can raise Input Tax Credit (ITC) on the tax so paid to contractors. Lastly, there should be a uniform approach among all the states to avoid confusion, ambiguity, and inequality regarding the imposition of tax on developed plots.

Concluding Remarks

Through the proper analysis of the various enactments and judgments, it can clearly be construed that the development of land is, in fact, a  part of the land. The Authority of Advance Ruling in their decision has taken a very confined approach while interpreting the definition of land and benefits of the land. Although, the development of basic utilities can be considered as services rendered by the developer yet the fact that these services are an intrinsic part of the land can’t be ignored. Lastly, the imposition of taxes on the entire plot is an arbitrary direction from the end of AAR(s) and the least which could be done in the present scenario is to impose taxes on the developmental activities only. It can simply be done by deducting the value of land from the value of the developed plot.