It is incorrect to assume that GST cannot apply to transactions involving immovable property. A useful perspective can be found in the case of Province of Madras v. Boddu Paidanna & Sons, which was later affirmed in Governor-General v. Province of Madras and quoted with approval in Atiabari Tea Co. v. State of Assam. In this case, a demand for Central Excise duty was made on the manufacture of pressed oil cakes after the extraction of groundnut oil. These oil cakes were sold on payment of applicable sales tax. The taxpayer resisted the excise demand, claiming it would amount to double taxation. The court clarified that Central Excise duty applies to the taxable event of manufacture, while sales tax applies to the taxable event of sale of the manufactured articles. Although the selling price may form the basis for quantifying both taxes, there is no double taxation. This reasoning is considered a simple illustration of the “aspect theory” of taxation.
For a transaction to be excluded from the incidence of GST, one of the following conditions must be satisfied:
- The levy must be expressly made inapplicable to certain articles such as securities, money, alcoholic liquor, and five specified petroleum products.
- The transaction must be covered under the exclusions listed in Schedule III.
- There must be a statutory exemption notified under the Act.
Payment of stamp duty on transactions involving immovable property does not provide immunity from GST unless it can be shown that the transaction falls under one of the three exclusion categories above. Stamp duty is levied on the instrument of conveyance, while GST is payable on the consideration for the transaction.
When the law defines “service” as “anything…”, it is intended to mean everything unless expressly excluded. Assuming that GST does not apply without establishing which exclusion applies reflects a limited understanding of the purpose of the 101st Constitutional Amendment. Article 246A opens with a non obstante clause, and therefore, supporting provisions like Schedule VII and its three lists cannot override GST applicability.
To properly apply GST rules to immovable property transactions and understand the limited exclusions allowed in Schedule III of the Central GST Act, a thorough study of this subject is necessary. Legal commentaries, particularly those by Mulla, offer valuable insights for such an understanding.
Immovable Property
Statutory Definitions
Statutory definitions must be applied as they are written. Words included in a definition cannot be excluded to fit a preferred tax treatment, nor can excluded items be forcibly included. The definition of “immovable property” has been interpreted by courts to ensure that its scope is neither unduly expanded nor narrowed.
Key statutory references include:
- Under the Transfer of Property Act, “immovable property” does not include standing timber, growing crops, or grass.
- The Registration Act defines it to include land, buildings, hereditary allowances, rights of way, lights, ferries, fisheries, and other benefits arising out of land, as well as things attached to the earth or permanently fastened to anything attached to the earth, but excludes standing timber, growing crops, and grass.
- The General Clauses Act includes land, benefits arising out of land, and things attached to or permanently fastened to anything attached to the earth.
Article 367 of the Constitution provides that the General Clauses Act applies for interpreting the Constitution as well.
The Supreme Court, in Tarakeshwar Sia Thakurji v. Dar Das Dey Co., held that the definition in section 3(26) of the General Clauses Act applies to the Transfer of Property Act, since section 3 of that Act defines “immovable property” in the negative. Earlier cases like Shantabai v. State of Bombay and Mohammed Ibrahim v. Northern Circars Fibre Trading support this view.
Affixation
The term “immovable” refers to the inherent character of an object, not to a person’s physical ability to move it. The “manner and purpose” of affixation determine whether an object is considered immovable. Affixation should create an inextricable bond between the object and the land or building. The method used for fixing the object and the intended purpose of the affixation both guide the classification.
Examples:
- A hut is immovable property.
- Gypsum partition walls with aluminium or wooden frames are immovable.
- Air-handling ducts are movable.
- ATMs installed on the premises are movable.
Purpose also plays a role. If an item’s intended functionality is significantly reduced without affixation, it may be classified as immovable. However, an object can be considered movable even if it is bolted down, if its purpose does not require permanent attachment.
Tier 2 affixation occurs when an object is attached to something already embedded in the earth. If the “manner and purpose” test is satisfied, it is still treated as immovable property.
The classification of a building also depends on its purpose. For example, an acoustic enclosure for a generator is part of the generator and not a building, while a projector room in a cinema is a building.
Standing Timber
A tree is a prime example of immovable property, as its growth depends on the land. However, standing timber, which refers to a tree ready for felling, is excluded from the definition. Once a tree has reached maturity and no longer depends on the land for nourishment, it is considered standing timber and not immovable property if it is intended to be felled.
Examples:
- A tomato plant bearing fruit is a tree.
- A teakwood plant over 6 cm in girth is a tree.
- Sprouted seeds are plants, not trees.
- A coconut sapling is a plant, not a tree.
Growing Crop
Growing crops are excluded from the definition of immovable property because they have not yet reached maturity. When land is sold with growing crops, both form a single object of transfer and are treated as immovable property. However, if land is leased for harvesting crops, the arrangement may be treated differently depending on the terms.
Examples:
- A short-term lease for harvesting fruit is essentially a purchase of the fruit, not the land.
- A long-term lease for agricultural use allows for multiple harvests, and the land must be returned after the lease period.
The principle, as stated in Marshall v. Green, is that if the purchaser benefits from the continued growth of the thing sold, it is an interest in land; if vegetation is complete and the item is to be removed immediately, it is a sale of goods.
Intangible Immovable Property
Immovable property need not be tangible. Tangible immovable property includes land and buildings, while intangible immovable property includes rights over such tangible property. Examples of intangible immovable property include rights to use land, fishing rights in a lake, or development rights over land.
Property refers to rights over a thing, not the thing itself. If rights relate to immovable property, they are classified as immovable property, whether tangible or intangible.
Benefits to Arise from Land
The expression “benefits to arise from land” refers to future benefits, meaning benefits that are yet to be derived from the land, rather than benefits that already exist. Since the benefits mentioned are those lying in the future, what exists in the present is the right to those benefits. This right, being enforceable in the present, can be transferred under the law, allowing the transferee to enjoy those benefits when they eventually materialise.
There is a distinction between the two categories:
- Intangible rights existing in the present that are enforceable and allow the holder to enjoy future benefits.
- Tangible or intangible future benefits that cannot be enforced until they come into existence.
The present right can be transferred immediately, so that the transferee will enjoy the benefits when they arise, while the transferor enjoys the proceeds from selling the right. Such present rights are intangible immovable property.
If the benefit is in the form of goods, such as harvested fruits or mined ore, the rights to them, before they exist, are still intangible immovable property. The uncertainty of yield does not affect the legality of transferring such rights, because the object of the transfer is the right in the present, not the benefit in the future.
Examples:
- Fruits on a tree are benefits from land, but the right to permit harvesting is a benefit to arises from the land.
- Ore under the ground is a benefit from land, but the right to permit mining is a benefit to arises from land.
- Fruits from the next three harvests can be transferred now through a registered, non-cancellable lease for three years.
- An irrevocable power of attorney coupled with an interest in land can be executed to allow development or exploitation rights.
The Sale of Goods Act recognises “future goods” as goods not yet in existence, and any contract involving such goods is a promise to sell when they come into existence. This concept is linked to the Transfer of Property Act, which requires that a transfer involve property in existence, not something that is yet to come into existence. Therefore, the benefitthat o arise from land are the present rights to enjoy in the future the benefits attached to immovable property.
Where a greater right is transferred, all lesser rights included within it also transfer and take on the same tax treatment. For example, selling land transfers not only ownership but also rights to lease or develop it. Similarly, ownership of company shares includes rights to vote, receive dividends, and transfer the shares, and transferring the ownership transfers all these rights as well.
Profit-a-Prendre
The term “profit-a-prendre” comes from French law and means the right of “taking away” something from another’s land. This right can be enjoyed by a specific person or an undefined group of people.
Examples:
- The right to draw water from a river, lake, or well.
- The right to catch fish from a river or lake.
- The right to pass through another’s field.
Profit-a-prendre includes the right to remove and appropriate part of the soil, or anything growing upon or attached to the soil, for profit. This could include gravel, stone, trees, or crops. It is broader than an easement, as easements include profit-a-prendre, but there are profit-a-prendre rights that are not easements.
A lease is an intangible immovable property where possessory rights are transferred by creating an interest in immovable property in favour of the lessee. However, if the arrangement allows the lessee only to take away the produce of the land and return the land itself at the end of the term, it is not a lease in the traditional sense but a profit-a-prendre.
If the right to take away is granted for goods already in existence and ready for removal, it is a contract for the sale of goods. If the right is for goods that will only exist in the future, the present right being transferred is intangible immovable property.
Courts have held that in a lease, one enjoys the property without taking it away, while in a profit-a-prendre, one is licensed to enter the land to remove part of its produce. The right itself is the profit-a-prendre, and what is physically removed is the result of exercising that right.
Land as a Distinct Species of Immovable Property
Land is only one category within the broader scope of immovable property. Immovable property also includes buildings, things attached to the earth, and various tangible and intangible rights related to land. Tangible rights include physical possession and use of land, while intangible rights can include the right to develop, lease, or extract resources from the land.
To equate the exclusion in paragraph 5 of Schedule III of the Central GST Act to every kind of immovable property—whether tangible or intangible—would improperly expand its meaning. The exclusion applies specifically to certain types of transactions involving land, not to all immovable property in general.
Understanding the exact scope of “land” and other categories of immovable property is essential for determining the applicability of GST. The law distinguishes between different rights and interests in land, and each may be taxed or excluded based on its nature and the specific legislative provisions governing it.
GST and Various Types of Immovable Property Transactions
The application of GST to immovable property transactions depends heavily on the nature of the transaction and the kind of immovable property involved. Not all dealings with immovable property attract GST; some are expressly excluded or exempted by legislation. Understanding these distinctions is essential to correctly applying GST and avoiding unintended tax liabilities.
Certain transactions, such as the sale of land or a building, may be outside the scope of GST if they qualify under specific exclusions. However, transactions involving services related to immovable property—such as construction, development, or renting—may attract GST. Therefore, the characterisation of the transaction, rather than the property alone, determines GST applicability.
Exclusions in Schedule III of the Central GST Act
Schedule III of the Central GST Act lists specific transactions that shall be treated neither as supply of goods nor supply of services and therefore are not liable to GST. Some relevant exclusions include:
- The sale of land and the building (subject to conditions) are not treated as supply.
- Lease or tenancy of land is excluded from GST, while lease of buildings is considered a supply of service.
- Transfer of the right to use immovable property is treated differently depending on the period of use granted. Short-term leases may attract GST.
- Services by an employee to an employer in the course of employment are excluded.
These exclusions serve as a guide but require careful interpretation to determine their exact ambit, especially concerning intangible immovable property and rights attached to land.
Judicial Interpretations
Courts have provided important clarifications to understand GST’s application in immovable property transactions. The judiciary emphasises that substance and intent govern taxability rather than mere form. For example, if a transaction is essentially a sale of ggoodsunder the guise of an immovable property deal, GST will apply. Conversely, if the transaction falls squarely within the exclusions of Schedule III, it will be outside GST’s scope.
Judgments have also highlighted the need to apply the “manner and purpose” test to determine the nature of property or rights involved in a transaction. For instance, whether a structure or equipment affixed to land constitutes immovable property depends on whether it is meant for permanent beneficial enjoyment.
GST on Construction and Development Services
GST is generally applicable to construction and development services relating to immovable property. This includes contracts for constructing residential or commercial buildings, apartments, or complexes, provided they do not fall under certain exemptions.
Real estate developers and builders are subject to GST on the consideration received for these services. The rate and applicability of GST may vary depending on the stage of construction, type of project, and other regulatory factors.
Renting and Leasing under GST
Leasing or renting of immovable property also attracts GST, but is subject to distinctions:
- Lease or tenancy of land is not taxable under GST.
- Lease or rentalof buildings or parts thereof attracts GST as a supply of service.
- Leasing of commercial property attracts GST at prescribed rates.
- Residential property leasing may be exempt in certain cases, depending on use and duration.
Short-term leases (typically less than 12 months) are more likely to attract GST, while longer leases may be exempt depending on specific provisions and interpretations.
Impact on Buyers and Sellers
For buyers and sellers of immovable property, GST implications affect the overall transaction value, tax credits, and compliance requirements. Buyers may have to pay GST in addition to the purchase price, depending on the nature of the transaction. Sellers, especially developers and builders, must comply with GST invoicing, filing, and payment obligations.
Incorrect classification or treatment can lead to tax disputes, interest, and penalties. Therefore, due diligence and professional advice are critical in structuring and documenting immovable property transactions to align with GST law.
Procedural Aspects of GST in Immovable Property Transactions
The compliance framework under GST for immovable property transactions requires meticulous attention to procedural details. Both suppliers and recipients involved in such transactions must ensure correct registration, timely issuance of tax invoices, and proper filing of returns. Builders and developers must maintain detailed records of construction activities, including stages of completion and consideration received. These documents form the basis for GST assessment and input tax credit claims.
Registration under GST is mandatory for entities whose aggregate turnover exceeds the prescribed threshold, which applies to developers, builders, and service providers engaged in immovable property transactions. Additionally, separate registrations may be necessary if business operations span multiple states.
Tax invoices issued must specify the value of supply, GST rates applicable, and the amount of tax charged. Errors or omissions in invoicing can lead to disputes or the denial of input tax credits. The correct classification of the supply as either goods or services, and whether any exemption or exclusion applies, must be reflected in the documentation.
Valuation of Immovable Property Transactions under GST
Valuation is a critical aspect of GST application to immovable property transactions. GST is levied on the “transaction value,” which generally means the price paid or payable for the supply of goods or services. In immovable property transactions, the value may include not only the basic sale price but also additional charges such as brokerage, commission, legal fees, or any other amount that forms part of the consideration.
Special valuation rules exist where the supply involves related parties or non-monetary consideration. The valuation must comply with the provisions of the Central Goods and Services Tax Act, including rules that prevent undervaluation or artificial pricing.
Determining the correct value is essential for accurate calculation of GST liability and for entitlement to input tax credits. Misvaluation can lead to penalties, interest, and legal challenges.
Challenges in GST Application on Immovable Property
The application of GST to immovable property transactions presents several challenges:
- Complexity in differentiating between the supply of goods and services due to the mixed character of property deals.
- Ambiguities in the definitions and scope of exemptions or exclusions under Schedule III.
- Difficulties in valuation, particularly when transactions involve multiple components or staged payments.
- Managing input tax credit entitlement, especially for developers who undertake large projects involving materials and services.
- Compliance burdens related to invoicing, filing returns, and record-keeping.
- Disputes arise from divergent interpretations by tax authorities and courts.
These challenges necessitate clear guidelines, ongoing education, and effective dispute resolution mechanisms.
Recent Developments and Amendments
GST laws relating to immovable property continue to evolve, with amendments introduced to clarify the taxability of various transactions and to address practical difficulties. Notifications and circulars issued by tax authorities guide issues such as the classification of certain goods and services, valuation methods, and exemptions.
For example, the introduction of the composite supply concept helps determine the tax treatment when a transaction involves both goods and services related to immovable property. Clarifications on the threshold limits for exemption and the treatment of affordable housing projects have also been significant.
Judicial pronouncements continue to shape the interpretation and application of GST in this sector, offering precedents that influence compliance and planning strategies.
Conclusion
Understanding the impact of GST on immovable property transactions requires a comprehensive grasp of statutory definitions, judicial interpretations, and procedural requirements. While certain transactions are excluded or exempted, many dealings involving construction, development, leasing, or transfer of rights attract GST.
Careful attention to classification, valuation, and documentation is essential to ensure compliance and optimize tax outcomes. The evolving legal landscape demands continual monitoring and professional guidance to navigate the complexities inherent in GST application to immovable property.