Construction services on leased land attract 18% GST under SAC 9954 as no title transfer occurs to qualify for lower rates

The AAR WB held that construction work for prospective clients on 99-year leased land attracts 18% GST under SAC 9954 (Construction Services). Since the lease deed prohibits sub-leasing of land but permits sub-letting of constructed structures, no title transfer occurs, disqualifying the applicant from lower tax rates under "intended for sale" provisions. The supply doesn't qualify as accommodation services (SAC 9963), thus exemption under notification 12/2017 doesn't apply. GST at 18% is also payable on monthly/annual maintenance charges under SAC 9995. The applicant can claim 1/3 deduction for land portion from total consideration value.

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The core legal questions considered by the Authority for Advance Ruling (AAR) pertain to the applicability and rate of Goods and Services Tax (GST) on construction services provided by the applicant under a 99-year lease arrangement from a government entity, specifically:

1. Whether the applicant is liable to pay GST on construction work for prospective clients when payments are made (a) as a lump sum and (b) as periodic payments.

2. If GST is payable, what is the applicable Harmonized System of Nomenclature (HSN) or Services Accounting Code (SAC), the GST rate, and whether the tax should be calculated on the entire amount received or after deducting the land portion (one-third of consideration) as per the relevant rate notification.

3. Whether the supply qualifies as accommodation service and if so, whether the applicant is eligible for exemption under clause 12 of Notification No. 12/2017 dated 28-6-2017.

4. Whether GST is payable on monthly or annual maintenance charges and if yes, the applicable HSN/SAC and GST rate.

Issue-wise Detailed Analysis:

Issue 1: Liability to pay GST on construction work under lump sum or periodic payment models

The applicant plans to lease land for 99 years from a government company to construct a Hotel-cum-Shopping and Multiplex complex with residential flats. The lease deed prohibits sub-leasing the land but permits sub-leasing or assignment of constructed buildings or parts thereof. The applicant may transfer rights to constructed units either by a lump sum payment (with registry and ownership rights) or periodic payments (without registry and no ownership transfer).

The legal framework involves the GST Act, particularly Section 7 defining 'supply' and the rate notifications (No. 11/2017 and 03/2019) specifying GST rates on construction services. The Real Estate (Regulation and Development) Act, 2016 (RERA) and its definition of Real Estate Project (REP) were also considered.

The Court examined whether the transactions fall under sale or lease. It noted that the applicant does not have ownership of land but holds rights over constructed property, which can be sub-leased or assigned. Transfer of ownership rights in constructed property to clients was considered akin to sale of constructed units.

Notification No. 11/2017 provides concessional GST rates for construction services intended for sale to buyers. However, the Court emphasized that the condition "intended for sale to a buyer" is pivotal for concessional rates.

Drawing from the Transfer of Property Act and legal precedents, sale involves transfer of ownership/title. Since the land ownership remains with the lessor and the applicant only sub-leases or assigns rights on constructed property, the transaction is not a sale of land.

However, the applicant's assignment of constructed units with ownership rights to prospective clients was treated as transfer of ownership in the constructed property, thus constituting supply of construction services liable to GST.

The Court concluded that GST is payable on construction services regardless of whether payment is lump sum or periodic, with applicable SAC 9954 and GST rate of 18%.

Issue 2: Applicable HSN/SAC, GST rate, and valuation basis including land portion deduction

The Court clarified that the applicable code is SAC 9954 (Construction Services), not an HSN code, with GST rate at 18% for the supply under consideration.

Regarding valuation, Para 2 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 provides that GST shall be calculated on the value of supply excluding the value of land, which is deemed to be one-third of the total amount charged.

The Court interpreted "total amount" to include consideration charged for construction services plus amount charged for transfer of land or undivided share thereof, including by way of lease or sublease. Since the applicant's lease is for 99 years, the land portion is relevant for deduction.

Therefore, the applicant is entitled to deduct one-third of the consideration attributable to land from the taxable value for GST purposes.

Issue 3: Classification as accommodation service and eligibility for exemption

The applicant queried whether leasing constructed units qualifies as accommodation service under SAC 9963 and if exemption under clause 12 of Notification No. 12/2017 applies.

The Court examined the definition of accommodation services under Notification No. 12/2017 and noted that accommodation services include renting residential dwellings for use as residence, with certain exemptions and conditions effective till and after 15.07.2024.

However, the Court found that leasing constructed property on leased land does not fall under "Accommodation Service" as defined, since the applicant's activity is more akin to real estate services involving transfer or assignment of rights in constructed property rather than mere renting of residential dwelling.

Hence, exemption under clause 12 of Notification No. 12/2017 does not apply.

Issue 4: GST on monthly/annual maintenance charges

The Court observed that maintenance services provided to unit holders are taxable under SAC 9995 (Services of membership organisations) as per Notification No. 11/2017, with GST rate at 18%.

Therefore, GST is payable on monthly or annual maintenance charges at 18% under SAC 9995.

Significant Holdings and Core Principles:

"GST on construction work for prospective clients, regardless of whether one charges a lump sum or periodic payments is liable to be paid."

"The applicable SAC (and not HSN Code) on this supply is 9954 (Construction Services) and the applicable tax rate on the supply under consideration shall be 18%."

"The applicant is eligible for a deduction as attributable to land portion i.e. 1/3 of consideration on the total value of supply for the purpose of payment of applicable tax."

"Leasing out of constructed property on leased land does not fall under the category of 'Accommodation Service' (SAC: 9963) and hence the question of exemption under entry in sl. No. 12 of Notification No. 12/2017 does not arise."

"GST is payable on monthly/annual maintenance charges as per entry in sl. no. 33 of Notification No. 11/2017. The SAC Code in this case would be 9995 and the applicable GST rate is 18%."

The ruling establishes that long-term lease of land with construction of buildings and transfer of rights in constructed property to clients is treated as supply of construction services liable to GST at 18%, with deduction allowed for land portion at one-third of consideration. Leasing constructed units does not qualify as accommodation service for exemption purposes. Maintenance services attract GST at 18% under membership services.

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