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of <h1>Gujarat HC strikes down GST notification requiring mandatory one-third land value deduction in construction contracts as unconstitutional</h1> <h3>Munjaal Manishbhai Bhatt Versus Union of India</h3> Munjaal Manishbhai Bhatt Versus Union of India - 2022 (62) G. S. T. L. 262 (Guj.) , [2022] 104 G S.T.R. 419 (Guj) Issues Involved:1. Validity of Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) regarding fixed deduction of 1/3rd for land value.2. Whether the deeming fiction of 1/3rd deduction is ultra-vires the provisions of the GST Acts.3. Whether the deeming fiction violates Article 14 of the Constitution of India.4. Relevance of developed versus undeveloped land for GST purposes.5. Measure of tax and its nexus with the charge of tax.6. Application of Section 15(5) of the GST Acts.7. Potential artificial inflation of land value to reduce tax liability.8. Validity of advance ruling appellate orders based on the impugned notification.Detailed Analysis:1. Validity of Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) regarding fixed deduction of 1/3rd for land value:The court examined whether the mandatory fixed deduction of 1/3rd for land value stipulated in Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) is valid. The court found that the deeming fiction of 1/3rd deduction is arbitrary and does not align with the actual value of land in many cases, leading to discriminatory consequences.2. Whether the deeming fiction of 1/3rd deduction is ultra-vires the provisions of the GST Acts:The court held that the mandatory application of the 1/3rd deduction is contrary to the statutory provisions of the GST Acts. Section 15(1) of the GST Acts requires the value of supply to be the transaction value, i.e., the actual price paid or payable. The court emphasized that deeming fiction should only apply where the actual value is not ascertainable.3. Whether the deeming fiction violates Article 14 of the Constitution of India:The court found that the deeming fiction of 1/3rd deduction is discriminatory and arbitrary, thus violating Article 14 of the Constitution of India. The court provided illustrations showing how the same construction on different plot sizes leads to different taxable values, which is irrational and discriminatory.4. Relevance of developed versus undeveloped land for GST purposes:The court clarified that the sale of land, whether developed or undeveloped, should not be subject to GST. The court emphasized that the GST should only apply to the construction service supplied by the developer at the behest of the buyer. The court rejected the argument that developed land should be treated differently for GST purposes.5. Measure of tax and its nexus with the charge of tax:The court reiterated that the measure of tax should have a nexus with the charge of tax. The arbitrary deeming fiction of 1/3rd deduction leads to a measure of tax that does not align with the actual supply of construction services, thus lacking the required nexus.6. Application of Section 15(5) of the GST Acts:The court noted that Section 15(5) allows the government to determine the value of certain supplies in a prescribed manner. However, the term 'prescribed' means prescribed by rules, not by notification. The court held that even if the government had the competence to issue the notification, the deeming fiction must still align with the statutory provisions and not be arbitrary.7. Potential artificial inflation of land value to reduce tax liability:The court acknowledged the concern that parties might artificially inflate land value to reduce GST liability. However, the court pointed out that the GST Acts already provide mechanisms to address such situations through Section 15(4) and the valuation rules (Rules 27-31 of the CGST Rules).8. Validity of advance ruling appellate orders based on the impugned notification:The court quashed the advance ruling appellate orders that were based on the impugned notification. The court overruled the objection regarding the maintainability of writ applications against these orders, considering the challenge to the notification itself.Conclusion:The court declared Paragraph 2 of Notification No. 11/2017-Central Tax (Rate) ultra-vires the provisions of the GST Acts and violative of Article 14 of the Constitution of India. The court read down the impugned paragraph to make the 1/3rd deduction optional, applicable only when the actual value of land is not ascertainable. The court directed the refund of excess tax collected under the GST Acts to the writ applicant, along with statutory interest. The advance ruling appellate orders based on the impugned notification were quashed.
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