Immovable property plays a significant role in determining the classification of a contract as a works contract under GST. A works contract under GST must be related to an activity directly connected with an immovable property. The determination of whether a particular activity involves immovable property is a factual matter and must be assessed on a case-by-case basis. The GST law does not define immovable property, so reference is made to the definitions found in the General Clauses Act, 1897, and the Transfer of Property Act, 1882.
Definition under the General Clauses Act and the Transfer of Property Act
As per the General Clauses Act, immovable property includes land, benefits arising from land, and things attached to the earth or permanently fastened to anything attached to the earth. According to the Transfer of Property Act, immovable property excludes standing timber, growing crops, and grass. The phrase attached to the earth encompasses items rooted in the earth, such as trees and shrubs, embedded in the earth like walls and buildings, or attached to what is embedded for the permanent beneficial enjoyment of that to which it is attached.
From these statutory definitions, it is evident that items attached to the earth or permanently fastened to an object attached to the earth qualify as immovable property. Two key tests are generally applied to determine whether an item qualifies as immovable property. First, the degree of attachment must be such that the item resembles a tree or a building in its embedded nature. Second, the object and intent of the attachment should be for the permanent beneficial enjoyment of the property to which the item is affixed.
Understanding the Degree of Attachment
The degree of attachment helps in determining whether the property in question is immovable. If removing the item from its attached state would cause damage to the item or the structure, then it is likely considered immovable. Judicial decisions have interpreted this test in a variety of contexts.
In the case of Municipal Corporation of Greater Bombay v Indian Oil Corporation Ltd, the Supreme Court observed that petrol tanks resting on the earth by their weight without being bolted down were still considered permanently erected and thus immovable property. The focus was on the intent and permanence of the structure.
Similarly, in CCE v Josts Engineering Co. Ltd, the Tribunal concluded that spray paint booth structures embedded into the earth could not be dismantled without damage and therefore were immovable. The Tribunal emphasized the method and purpose of attachment, indicating that if dismantling a structure renders it non-functional or causes substantial damage, it should be treated as immovable.
In CCE Mumbai v Hutchison Max Telecom, the Bombay High Court held that telecom apparatus installed at a BTS site, being embedded into the ground and unmovable without damage, was immovable property. Even when such items could theoretically be dismantled, if their relocation necessitated the destruction of certain components, they were not considered movable.
Another example is Ibex Gallagher Pvt. Ltd. v CCE, where a solar-powered electric fence system was evaluated. The Court noted that although individual components like batteries and wires could be separately identified, the entire system formed a fence affixed specifically to one location. Since components like corner posts were grouted to the earth and could not be removed without dismantling the system, the electric fence was considered immovable.
These cases reflect the consistent application of the degree of attachment test. When the components of a structure are attached in a way that prevents removal without significant harm or loss of utility, the structure is classified as immovable property.
Case Law Illustrations on Degree of Attachment
The approach of courts to determining the immovable nature of property hinges on the degree and manner of attachment. In several cases, the courts have reaffirmed that items not merely placed but embedded or permanently fixed to the earth are immovable.
In the case of a spray paint booth discussed in CCE v Josts Engineering, the Tribunal focused on the visual and structural nature of the item. They considered how large metal structures with side portions embedded in concrete with bolts were inseparable without damage, and thus immovable.
In Hutchison Max Telecom, the dismantling of the telecom equipment required disassembling components embedded into civil structures. The inability to reassemble the entire system in another location without significant changes made the structure immovable.
In the case involving Ibex Gallagher, the interpretation extended to the specific components of an electric fence, especially the grouted corner posts. The attachment of these parts was not for temporary utility but for permanent installation, qualifying the system as immovable.
Relevance of Judicial Reasoning
Judicial reasoning offers clarity where statutory definitions fall short. Courts examine whether a structure has been set up for long-term use at a specific site and whether its removal would destroy or compromise its functionality. This reasoning helps determine the character of the property under GST.
The emphasis remains on the practical possibility of dismantling and reassembling the item without damage. If the structure is custom-built for a specific site and its relocation involves loss of components or complete disassembly, it may not be treated as movable.
The idea of permanence does not necessarily mean an eternal fixture. Rather, the focus is on the intent and the manner of attachment. If an item is embedded in the earth or a civil foundation in a manner that indicates long-term or indefinite use at a specific location, it qualifies as immovable.
Importance of Permanency
Permanency is a recurring theme in judicial interpretations. If a structure or equipment remains in the same position without being shifted, even if it’s resting by weight alone, it may still be considered permanent. The courts have consistently ruled that permanence does not always require bolting or cementing.
For instance, in the Indian Oil Corporation case, even though the petrol tanks were not physically bolted down, their consistent placement and non-movement led to their classification as immovable property. This principle shows that the intention behind the installation can often outweigh the method of installation when determining the property’s classification.
Practical Application in GST
The distinction between movable and immovable property under GST is essential, especially for determining whether a particular supply is a works contract. Works contracts under GST only apply to activities related to immovable property.
If a structure is movable, it may fall under composite or mixed supply, and the applicable GST provisions will differ. Therefore, businesses must assess the nature of the property involved in any project to determine the correct tax treatment.
The determination also impacts whether goods are excisable. Movable items assembled and then dismantled for transport may still be considered movable if the disassembly does not cause damage or is not necessary for continued use. If substantial damage is involved or the assembly is not reusable, the item becomes immovable.
Limitations of the Degree of Attachment Test
While the degree of attachment test is useful, it is not exhaustive. In some instances, even heavily bolted or embedded structures may be considered movable if they can be removed without damage and reused. Therefore, the analysis must also involve other tests, like the object of attachment.
Relying solely on the degree of attachment may result in incorrect classification, especially when the structure has been embedded for stability rather than for permanent enjoyment of land. Such nuances require a deeper examination of the purpose and intent behind the attachment.
Legal Interpretation of Immovable Property under GST
The term immovable property has not been explicitly defined under the GST Act. However, to interpret the provisions of the Act, reliance is placed on definitions provided in other laws. According to Section 3(26) of the General Clauses Act, 1897, “immovable property” includes land, benefits arising out of land, and things attached to the earth or permanently fastened to anything attached to the earth. This is similar to the definition given under Section 2(6) of the Registration Act, 1908. Under the Transfer of Property Act, 1882, the term includes land and things permanently attached to the land. These legislative interpretations help identify what constitutes immovable property in the context of GST.
GST laws classify supplies into goods and services. The classification becomes significant when determining tax liability. Schedule II of the CGST Act, 2017, identifies certain supplies to be treated as supplies of goods or services. For instance, the transfer of title in goods is treated as a supply of goods, while the lease, tenancy, easement, or license to occupy land is treated as a supply of services. Similarly, construction of a complex, building, civil structure, or a part thereof, intended for sale to a buyer, is deemed a supply of service if any consideration is received before issuance of the completion certificate. Herein lies the complexity of defining and classifying immovable property. The term is often intertwined with rights, leases, or benefits that are supplied, triggering GST implications.
The classification of immovable property impacts not just the rate of GST but also input tax credit (ITC) eligibility. For example, ITC on goods or services used for the construction of an immovable property (other than plant and machinery) is blocked under Section 17(5) of the CGST Act if the property is meant for self-use. However, if the property is used for further supply, the restriction may not apply. Hence, whether a property qualifies as immovable or not affects the admissibility of ITC, especially in construction, real estate, and infrastructure sectors.
Key Case Laws Interpreting Immovable Property under GST
Multiple judgments by courts and advance ruling authorities have clarified the scope of immovable property under GST. In the case of Tata Projects Ltd. (2018), the Authority for Advance Ruling (AAR) held that an offshore installation embedded in the seabed qualifies as immovable property. Thus, construction services rendered for such installations were classified accordingly. Similarly, in the case of Rashtriya Ispat Nigam Ltd., the issue was whether the construction of storage tanks and silos, permanently attached to the earth, constituted immovable property. The court held that these structures, given their permanent nature and inability to be dismantled without substantial damage, were immovable property.
In the Kandla Port Trust case, the installation of pipelines and other facilities for port operation was held to be immovable property. The court noted that the degree of permanence and the purpose of installation were key determinants. In Solid and Correct Engineering Works v. CIT, the Supreme Court ruled that if a plant is embedded in the earth and not easily movable without damage, it becomes immovable property. These judicial pronouncements emphasize that permanency, purpose of use, and mode of attachment are crucial factors.
In the Schlumberger Asia Services Ltd. ruling by the Maharashtra AAR, it was decided that skid-mounted equipment that is easily detachable and movable does not qualify as immovable property. The apparatus retained its character as movable goods despite temporary attachment for operational purposes. Hence, GST was applicable on the supply of goods. Similarly, in KPC Projects Ltd., involving construction services for hospital buildings, the AAR observed that such works result in immovable property and, hence, input tax credit was not admissible as per Section 17(5).
These rulings highlight the importance of factual analysis in each case. The nature of the item, its attachment to the earth, and whether it can be dismantled and reused all influence its classification. The diversity in judgments indicates that no uniform standard exists d a case-by-case approach must be adopted.
Lease and Licensing of Immovable Property under GST
The leasing or licensing of immovable property is treated as a supply of service under Schedule II of the CGST Act. Renting of commercial properties is taxable under GST, whereas renting of residential properties for residential use was initially exempt. However, from July 18, 2022, GST is applicable on residential property if rented to a registered person. In the case of Taghar Vasudev Ambrish, the Karnataka High Court upheld the levy of GST on the renting of residential property to a registered person, despite the property being used for personal residence.
The taxability of leasing government land to private developers was debated in the Greater Noida Industrial Development Authority. The AAR ruled that the lease premium collected by the authority for allotting plots was liable to GST as it constituted a supply of service. Similarly, in Mormugao Port Trust, the long-term lease of land for setting up industries was held taxable. These rulings confirm that the lease of land, even if immovable, is treated as a supply of service and attracts GST unless specifically exempted.
There are exemptions for specific types of leasing. For instance, lease of land for agricultural purposes, or leasing of land to state transport undertakings, may be exempt under specific notifications. However, such exemptions need to be interpreted narrowly and applied only if conditions are strictly fulfilled. Licensing agreements that grant temporary use of property for commercial purposes are also taxable under GST.
Construction of Immovable Property and GST Liability
Construction activities involving immovable property are treated as a supply of service if any consideration is received before completion. The nature of the supply affects the time of taxability and the applicable rate. For example, if a builder receives payment before the completion certificate is issued, GST is payable on such amount. However, if the entire amount is received after completion, it is treated as a sale of immovable property and hence outside the scope of GST.
In Larsen & Toubro Ltd. v. State of Karnataka, the Supreme Court had earlier held under the VAT regime that under-construction agreements involving the sale of flats are deemed works contracts and are taxable. Under GST, such transactions are now clearly classified as a supply of oservicesss. Further, Notification No. 11/2017-Central Tax (Rate), as amended, provides specific rates for the construction of residential or commercial complexes, subject to certain conditions like non-availability of input tax credit on goods.
The issue of ITC on construction is complex. Section 17(5) blocks ITC on the construction of immovable property for own use. However, if the property is meant for further sale, such as in the case of real estate developers, ITC may be admissible. Judicial clarity on this aspect has been evolving. In the Safari Retreats Pvt. Ltd. case, the Orissa High Court allowed ITC on the construction of shopping malls, ruling that blocking of credit defeats the purpose of GST. However, this decision has been stayed by the Supreme Court, and hence is not a binding precedent. The confusion persists, and businesses must evaluate the risk of availing ITC on immovable property based on facts.
Moreover, the valuation of supply in construction contracts is another contentious area. The inclusion of land value, discounting clauses, and the applicability of abatement under GST have all been subjects of litigation. The government introduced a composite rate of 5 percent and 1 percent (for affordable housing), subject to conditions like non-availability of ITC, to simplify tax computation.
Works Contracts and Immovable Property
A works contract under GST is defined under Section 2(119) of the CGST Act as a contract involving building, construction, fabrication, erection, installation, repair, or renovation of any immovable property. Such contracts are always treated as a supply oservicesss. The distinction from the earlier regime is that GST defines works contracts only concerning immovable property. Under VAT and Service Tax, works contracts could be for movable property as well.
This has led to litigation in cases where composite contracts involve both movable and immovable components. The test applied is whether the dominant intention of the contract is towards the construction or installation of immovable property. If yes, the entire contract is treated as a service and taxed accordingly. In ABB India Ltd., involving the supply and erection of electrical equipment, the AAR held the contract to be a works contract for immovable property.
The implication of classifying a contract as a works contract is that ITC may be restricted if the output is an immovable property meant for own use. Further, the time of supply and place of supply also impacted. The place of supply for works contracts is the location of the immovable property, which may lead to issues in case of inter-state projects. Also, subcontractors executing part of a works contract are required to charge GST even if the main contractor is paying GST under reverse charge.
Composite and Mixed Supply about Immovable Property
The concept of composite and mixed supply is significant when it comes to determining the taxability of transactions involving immovable property. Under GST, supplies are either classified as composite or mixed depending on the nature of the goods or services supplied together.
A composite supply refers to a supply consisting of two or more taxable supplies of goods or services or both, naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. For instance, a construction contract involving the supply of materials and labor is considered a composite supply, with the construction service as the principal supply. The tax rate applicable to the principal supply will apply to the entire composite supply.
In contrast, a mixed supply is a combination of two or more individual supplies of goods or services, made together for a single price, which do not constitute a composite supply. In such cases, the supply attracting the highest rate of tax is applicable. In the context of immovable property, if services or goods unrelated to the principal supply of construction or leasing are supplied together without being naturally bundled, the transaction may be treated as a mixed supply and taxed accordingly.
The proper classification of a transaction involving immovable property into composite or mixed supply is crucial to ascertain the correct GST rate and compliance requirements. Failure to do so may result in incorrect tax treatment, leading to disputes and litigation.
Works Contract as a Service under GST
Under the GST regime, a works contract involving immovable property is treated as a service. As per Section 2(119) of the CGST Act, a works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property wherein the transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
GST classifies works contracts involving immovable property exclusively as a supply of services. This treatment simplifies the taxability of such contracts, which previously involved bifurcation of goods and services under the earlier regime. Under the current framework, a uniform GST rate applies to the entire value of the works contract service.
It is important to note that only works contracts involving immovable property fall under this definition. Works contracts related to movable property are not considered as works contracts under GST and are treated differently. This classification has implications for the eligibility of input tax credit, the place of supply rules, and the time of supply provisions.
Various notifications and circulars have been issued by the GST Council to clarify the taxability of different types of works contracts, such as contracts awarded by the government, contracts involving composite supply of goods and services, and EPC (Engineering, Procurement, and Construction) contracts. These clarifications help in resolving ambiguities and ensuring uniform tax treatment across the industry.
Development Rights and Transfer under GST
Development rights refer to the rights granted by the landowner to a developer to construct residential or commercial buildings on a particular plot of land. In return, the developer may provide a certain portion of the constructed property or pay monetary consideration to the landowner. The transfer of development rights was a subject of debate under GST, particularly concerning its classification and taxability.
Initially, there was uncertainty regarding whether the transfer of development rights constituted a supply of goods or services. To resolve this, Notification No. 4/2018-Central Tax (Rate) dated 25 January 2018 clarified that the transfer of development rights or Floor Space Index (FSI) for the construction of a project is taxable under GST as a service.
Further, Notification No. 6/2019-Central Tax (Rate) dated 29 March 2019 introduced a new scheme for taxation of development rights in respect of residential projects. According to this scheme, promoters are liable to pay tax on the transfer of development rights under the reverse charge mechanism (RCM) at the time of issuance of the completion certificate or first occupation, whichever is earlier. This ensures that tax is collected at the appropriate stage and avoids litigation regarding the time of supply.
However, transfer of development rights in respect of projects intended for sale after obtaining a completion certificate is not subject to GST, as it is treated as a sale of immovable property. Thus, the timing and nature of the project significantly impact the GST liability on development rights.
The valuation of development rights is also critical. The value of supply is determined based on the open market value or the value of similar supplies, considering the rights transferred and the consideration received. Misvaluation can lead to tax shortfalls and penalties.
Leasing and Renting of Immovable Property
Leasing and renting of immovable property is a common commercial practice, and its treatment under GST is well defined. As per the GST law, renting of immovable property for business or commercial purposes is treated as a supply of service and is liable to GST. This includes leasing of office buildings, retail spaces, industrial sheds, warehouses, and similar properties used for business purposes.
On the other hand, renting of residential property for use as a residence is exempt from GST, provided certain conditions are met. Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017 provides for this exemption. However, with effect from 18 July 2022, renting of residential property to a registered person, even for residential use, is subject to GST under the reverse charge mechanism. This change was brought about by Notification No. 5/2022-Central Tax (Rate), making the registered recipient liable to pay tax.
Leasing of land is also taxable under GST if it is for commercial purposes. However, the lease of land used for agriculture or for setting up infrastructure projects may be exempt, subject to specific conditions. Long-term lease of industrial plots by state industrial development corporations is also exempt, provided the lease is for more than thirty years.
The rate of GST on the renting of commercial property is 18 percent. Input tax credit is allowed on such supplies, subject to the general provisions of the GST Act. Proper documentation, including lease agreements and payment records, is essential to establish the nature of the transaction and to avail credit.
The GST treatment of security deposits collected under lease agreements has also been clarified. If the deposit is refundable and no supply is linked to it, it is not considered a consideration for supply and hence not taxable. However, if the deposit is adjusted against rent or forfeited, it becomes a consideration and is subject to GST.
Transfer of Tenancy Rights
Tenancy rights refer to the rights of a tenant to occupy and use immovable property based on a tenancy agreement. The transfer or surrender of tenancy rights, particularly in rent-controlled areas, is a common transaction in urban real estate markets. Under GST, the taxability of such transactions depends on the nature and consideration involved.
In a landmark ruling, the Maharashtra Authority for Advance Ruling (AAR) in the case of Saurabh Arora [2019] held that the transfer of tenancy rights by a tenant to another person for consideration is a taxable supply under GST. The transaction was treated as a supply of service and was liable to tax at the applicable rate.
However, if the transfer or surrender of tenancy rights is without any consideration, it does not qualify as a supply under Section 7 of the CGST Act and is not taxable. Similarly, compensation received by a landlord from a tenant for premature termination of the lease has also been held to be a supply of service and liable to GST, as per various rulings.
It is important to distinguish between tenancy rights and ownership rights. While the former is a temporary right to use the property, the latter involves full title and transfer of ownership, which falls outside the scope of GST if it involves the sale of immovable property after completion.
In cases where tenancy rights are transferred as part of a larger real estate transaction involving redevelopment or construction, the transaction must be analyzed holistically to determine its tax implications under the GST framework.
Time of Supply in Real Estate Transactions
Determining the time of supply is critical under GST, as it dictates when the liability to pay tax arises. For transactions involving immovable property, particularly construction services and leasing, the time of supply is governed by specific provisions under the CGST Act.
In the case of supply of services, the time of supply is the earlier of the date of issue of invoice or the date of receipt of payment, whichever is earlier. If the invoice is not issued within the prescribed period, the date of provision of service becomes relevant. For the continuous supply of services such as leasing, the time of supply is linked to the due date of payment as per the contract or the actual payment date.
For reverse charge transactions, such as development rights or residential property leasing to registered persons, the time of supply is the earlier of the date of payment or 60 days from the date of invoice issued by the supplier. For development rights and similar services under the reverse charge, special provisions have been introduced to defer the time of supply to the date of issuance of the completion certificate or first occupation.
These provisions ensure that tax liability is linked to the actual occurrence of taxable events and provide clarity to taxpayers. However, incorrect determination of the time of supply may result in interest and penalties for delayed tax payment. It is essential to maintain accurate records and follow the timelines prescribed under the law.
Valuation of Immovable Property Related Transactions
The valuation of supplies involving immovable property is essential to determine the tax liability accurately. Under Section 15 of the CGST Act, the value of a supply is the transaction value, that is, the price paid or payable for the supply where the supplier and recipient are not related and the price is the sole consideration.
For real estate projects, the consideration may involve both monetary and non-monetary components. For example, in a joint development agreement, the landowner may receive constructed units in exchange for development rights. In such cases, the value must be determined based on the open market value or similar supply, as prescribed under the valuation rules.
In cases where the consideration is not wholly in money, Rule 27 of the CGST Rules applies, and the value is determined using the methods provided therein. For development rights, floor space index, or long-term lease transactions, specific valuation mechanisms have been prescribed through notifications.
Discounts offered to buyers, if mentioned on the invoice, are deductible from the value of the supply. However, post-supply discounts not linked to specific invoices are not allowed as deductions unless conditions under Section 15 are met.
Stamp duty valuation is not relevant for GST purposes, as GST is based on transaction value. However, differences between stamp duty value and declared value may trigger inquiries under anti-profiteering or tax evasion provisions.
Analysis of Landmark Case Laws
The interpretation of immovable property under GST has been significantly shaped by various judicial pronouncements. A landmark case is the ruling by the Authority for Advance Ruling (AAR) in the case of Tata Projects Ltd. In this case, the AAR examined whether the construction of a metro rail project constituted a supply of immovable property or a works contract service. It held that if the nature of work resulted in immovable property, then GST would apply only to the extent permitted under the GST law. The decision clarified the importance of examining the result of construction activity to determine tax implications.
In another key case involving NBCC (India) Ltd., the AAR addressed whether the supply of constructed flats after completion is subject to GST. The ruling emphasized that once the Completion Certificate is issued or first occupation takes place, the transaction is considered the sale of immovable property and is thus not subject to GST. The timing of supply and completion status significantly influences the taxability of the transaction.
The Larsen & Toubro Ltd. case under the pre-GST regime has also provided guidance in understanding works contracts. Though decided under the service tax regime, it continues to be relevant post-GST. The Supreme Court ruled that the construction of flats by developers for prospective buyers in exchange for consideration was a works contract and liable to tax. This rationale has been incorporated in GST through specific provisions on works contracts related to immovable property.
In Siyaram Developers, the AAR was faced with the question of whether leasing land for the construction of a hospital constitutes a supply of service. The authority held that leasing of land constitutes a supply of service under GST. This decision reinforced the idea that even if the asset is immovable, the nature of supply could still fall within the GST ambit depending on the contractual arrangement.
Another case of importance is the ruling involving Kishan Lal Pagaria, where the question was about GST applicability on the sale of land with basic development. The court ruled that if only basic amenities such as drainage, water supply, or boundary walls are provided without altering the fundamental nature of land, the supply remains immovable property and outside the scope of GST.
These case laws reflect the complexity and the fact-specific nature of determining whether a supply involves immovable property and whether GST applies. Each ruling depends on various factors such as the nature of the transaction, contractual terms, end use of the property, and the timing of possession or completion certificate.
Valuation of Supply Involving Immovable Property
When a supply involving immovable property is taxable under GST, determining the correct value for GST purposes is critical. As per Section 15 of the CGST Act, the transaction value is the price paid or payable for the supply, provided the supplier and recipient are not related and the price is the sole consideration.
However, in the case of long-term lease or transfer of development rights (TDR), or joint development agreements (JDA), the valuation of supply can become complex. Specific valuation rules apply under the GST Valuation Rules, 2017, especiaRulesess 27 to 35. For instance, Rule 27 deals with the valuation of supply when the consideration is not wholly in money, which is often the case in TDR or JDA arrangements.
For leases of immovable property, the consideration is usually in the form of upfront premiums (salami), monthly rentals, or both. As per GST provisions, even one-time lease premiums are considered as a supply of service and are chargeable to GST. The valuation must include all incidental charges and deposits that are not refundable.
In case of sale of constructed flats before completion, the sale price charged by the builder is the value on which GST is levied. However, deductions may be allowed for the value of land. Notification No. 11/2017-Central Tax (Rate), as amended, provides a deemed deduction of one-third of the total amount charged towards the value of land, and GST is applicable on the balance two-thirds.
Another area of valuation under GST involving immovable property is the reverse charge mechanism (RCM). When a promoter receives development rights or FSI (Floor Space Index), he is required to pay GST under RCM on the deemed value of such rights, which is calculated as per the prescribed rules and notifications.
In cases of related party transactions or where consideration is not available, valuation can be based on the open market value or value of similar supplies. The GST law also provides for the use of cost-based valuation or residual method if other methods are not applicable.
Proper valuation is essential for correct tax compliance and to avoid disputes or penalties. Businesses should obtain professional advice or seek an advance ruling in case of ambiguity in valuation for supplies involving immovable property.
Advance Rulings on Immovable Property under GST
Advance Rulings under GST serve as an important mechanism for taxpayers to seek clarity on taxability, classification, and valuation of complex transactions involving immovable property. Several AARs have addressed these issues, providing guidance and precedence for other similar cases.
One significant ruling came in the case of Karan Rathi, where the applicant entered into a lease agreement for land with an option to purchase after a certain period. The AAR ruled that such an arrangement constitutes a supply of service like leasing and is liable to GST, even though the result may lead to the transfer of ownership. The ruling stressed the importance of examining the current nature of supply, not just the result.
In Taghar Vasudev Ambrish, the Karnataka AAR ruled that renting of residential dwellings used as hostel accommodation does not qualify as exempt under GST. The rationale was that hostels do not qualify as residential dwellings meant for use as residences. This has implications for educational institutions and hostel operators, whose supplies may not qualify for exemption if they do not meet specific criteria.
Another ruling in Columbia Asia Hospitals clarified that renting of immovable property for commercial use is a taxable supply under GST, even if the lessee is engaged in exempt activities like healthcare. The taxability of renting services does not depend on the activities of the tenant but rather on the nature of the service supplied.
The Tirumala Milk Products Pvt. Ltd. ruling dealt with whether GST is applicable on reimbursement of electricity and water charges collected by landlords from tenants. The AAR ruled that such recoveries are incidental to renting and should be included in the taxable value of supply. This ruling affects landlords who bill utilities separately to tenants and must now include such charges in the taxable value.
Advance Rulings provide specific answers to taxpayers but are binding only on the applicant and jurisdictional officer. However, they offer valuable insights and serve as a persuasive authority in similar matters. Taxpayers must evaluate whether the facts of their case match those in existing rulings before relying on them.
The proliferation of AARs in the context of immovable property shows the level of ambiguity and the demand for clarity among taxpayers. It also highlights the evolving interpretation of GST laws in practical scenarios involving immovable assets.
Exemptions Related to Immovable Property under GST
While GST is applicable on many supplies related to immovable property, several exemptions are provided under the law to ease the burden on certain sectors and ensure tax neutrality in essential services. These exemptions are mostly found in Notification No. 12/2017-Central Tax (Rate) and its amendments.
One of the primary exemptions is for the sale of labuildingsgss, subject to clause 5 of Schedule III of the CGST Act. This means that the sale of land and completed buildings (i.e., those with a completion certificate) is not treated as a supply and hence not liable to GST. This provision prevents double taxation, as stamp duty is already levied on such transactions.
Another significant exemption relates to residential dwelling units rented for use as a residence. Such renting is exempt from GST if the recipient is not registered under GST. However, the exemption does not apply when residential property is rented to a registered person for commercial use.
There is also an exemption for leasing of agricultural land, including for agricultural operations. The GST law specifically exempts the lease or letting out of land for agro-based activities like farming, cultivation, or similar purposes.
Further, long-term lease (30 years or more) of industrial plots provided by the state or central government or their undertakings to industrial units is exempt from GST. This promotes industrial development and reduces the upfront tax burden on industries setting up operations.
For charitable trusts, exemption is available for renting of immovable property if it is used for charitable activities such as advancement of religion, education, or relief to the poor. However, if the rent exceeds certain thresholds or if the property is used for commercial purposes, GST becomes applicable.
Educational institutions also benefit from exemptions for renting of property for educational activities, provided it meets the conditions laid out in the notifications. Similarly, hospitals and clinical establishments enjoy exemptions for certain supplies, though not for the renting of commercial property.
It’s important to note that exemption conditions are subject to strict interpretation. Even minor deviations can result in the denial of exemption and demand for tax along with interest and penalty. Hence, taxpayers must ensure they meet all qualifying conditions and retain necessary documentation to claim exemptions related to immovable property.
Conclusion
The concept of immovable property under GST remains complex due to its overlap with several other legal frameworks and the varying nature of property-related transactions. Determining whether GST is applicable requires an understanding of the type of transaction, the nature of the property, the timing of supply, and specific exemptions or valuation rules. Case laws and Advance Rulings have added clarity but have also shown that each situation must be analyzed on its own merits. As GST law continues to evolve, staying updated on changes and seeking professional advice for property-related transactions remains essential for compliance and risk mitigation.