Facts on Value of Supply of Residential/Commercial Property

Hon’ble AAR, Gujarat in Re: Karma Buildcon [Case No- GUJ/GAAR/R/33/2020 dated July 2, 2020] has fixed this supplied value for a transaction of supply of services to residential/commercial properties with undivided land rights is to be achieved in terms of the provisions of paragraph 2 of Notification No. 11/2017 – Central Tax (Rate) dated 28 June 2017 (as amended) (“Service Rate Notification”). Furthermore, the real value of the plot cannot be deducted from the supply value. Let us look at the topic of the value of the supply of residential or commercial property with undivided rights of the land. However, we shall be looking at another aspect on Undivided Shares or Rights of Land.

Undivided Share of Land (UDS)

The Undivided Share of Land, or UDS, is a portion of the land allocated to the owner of a flat in an apartment complex on which the entire construction is erected. This block of land has no defined borders, and any flat erected on it will have its own UDS.

Simply, when you buy an apartment, you are buying two things. The first is the completed component of the building where the owners will actually dwell, while the second is a proportionate piece of the land on which the property is built. The later piece of land allocated to the flat buyer is known as an undivided land share, or UDS.

The Importance of Having an Undivided Share of Land

Real estate price appreciation is really a rise in land values. This is why the quantity of land you possess is important. The significance of UDS is as follows:

• It is your right that the value of your property is determined principally by your undivided share inland in an apartment building. Purchasing a flat is not a good investment since the value of the built space depreciates with time. The lower the market worth of the property, the older the construction. The ground on which the structure is constructed rises in value, while the building itself depreciates.
• The legality of a housing project is also determined by whether UDS complies with the FSI (floor space index) allowed to the developer. An examination of your undivided portion of land and similar specifics would disclose the illegality of a construction.
• If you apply for a house loan, the bank will search for the UDS before providing you with credit. If you are purchasing a resale property, they will look for the share certificate from your housing society, as well as other documentation, to process your request for a house loan. The sub-registrar would also inspect the share certificate during property registration.
• In the event of a natural disaster, a buyer gets paid based on his UDS. The same would be true if the government decided to buy the site and demolish the project, or if the project was taken up for redevelopment. If you desire to sell your property in the future, you will need to provide documentation of your undivided part of the land.

UDS Legal Implications

UDS has legal implications, whether stated openly or implicitly. For example, if an apartment building is to be demolished for rebuilding or acquired for a government project to be made available for demolition, the compensation paid to the flat owner is based on the proportion of the property’s undivided land share.

The total of each apartment owner’s undivided land shares must be commensurate to the size of the land on which the flats are built.

In the case of co-operative housing societies, the UDS must be legally in the name of the society because the flat owners are the society’s shareholders.

Now, let us move on discuss about Value of Supply of Residential/Commercial Property with Undivided Rights of Land through a judicial pronouncement that explains this concept in brief.

Judicial Pronouncement on Value of Supply of Residential/Commercial Property with Undivided Rights of Land

AAR Gujarat outlines what the supply value would be for the sale of residential/commercial property with undivided rights of land in the instance of Karma Buildcon ADVANCE RULING NO. GUJ/GAAR/R/33/2020 DT: 02.07.2020 M/S. KARMA BUILDCON is the name of the company.

Facts of the case: Karma Buildcon (hereinafter referred to as the “applicant”) is engaged in construction activities. They buy land for business and develop residential/commercial properties on it. For this purpose, they engaged architects, consultants, and structural engineers to prepare a residential/commercial property development plan. Prescribed approval from various authorities is further secured for the construction of residential/commercial properties on these plots.

The applicant further stated that based on such plan and approval they are entering into a contract with prospective buyers for such residential/commercial property. The concluded agreements relate to the land or an undivided share in the land. The applicant constructs such residential/commercial property by employing labor and machinery for the purpose and transfers such property to the purchaser.

He further contended that the cost of land which is transferred to the purchaser including land or undivided interest in the land must be allowed to be deducted as a whole according to the actual value and not as stated in the service rate notice as one-third (33.33%) of the value, because in the case of the applicant, the price of the land is determinable and amounts to more than one third (33.33%) of the consideration value.

The issue raised: What will be the supply value for a transaction of supply of services to residential/commercial properties with undivided land rights?

Held: Hon’ble AAR, Gujarat in Case No. – GUJ/GAAR/R/33/2020 dated July 2, 2020, held as follows:

• Paragraph 2 of the Service Rate Notice (as amended) clearly stated the value of the land or undivided share of the land to be deducted from the total amount charged for the supply in question.
• It shall further be deemed that the value of the transfer of lands, or undivided share of lands, and the value of such transfer of lands, or undivided share of lands, upon such supply, shall be deemed to be one-third of the total amount charged for such supply.
• Accordingly, the applicant’s contention to allow the actual value of the land to be deducted from the value of the supply on the basis that the value of their land is ascertainable and for other reasons are not legal within the meaning of paragraph 2 of the Service Rate Notice (as amended).
• Further, reliance on Rule 18(A) (A) of the erstwhile Gujarat Value Added Tax Rules, 2006 is not justified in this case as the Value Added Tax Act no longer exists. The Value Added Tax Act has no legal force for determining the GST liability as the value of the supply is to be determined in terms of the provisions of the GST Act.
• The applicant is therefore required to deduct one-third of the value of the land or undivided shares from the total value charged for the supply in question in terms of paragraph 2 of the Service Rate Notice (as amended).

Relevant provisions included understanding the concept

Paragraph 2 of the Service Rate Notification- In case of a supply of service specified in column (3), in item (i); (i) (ia), (ib), (ic), (id), (ie) and  (if) against serial number 3, involving the transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply.

Explanation: – For the purposes of this paragraph and paragraph 2A below, “total amount” means the sum total of,-

• Consideration charged for aforesaid service; and
• Amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sublease.”
• Analysis 

Let us analyze it with a short questionnaire that was very similar to the question raised by the applicant: 

Question 1: What is the delivery value for a residential/commercial sale with undivided land rights?

The value to be obtained in accordance with paragraph 2 of Notification No. 11/2017-CT (Rate) dated 06/28/2017, as revised by Notification No. 1/2018-CT (Rate) dated 25/01/2018.

Question 2: When building a residential/commercial complex, the builder charges a fee that includes the land or an undivided piece of the site. According to Not No. 11/2017-CT (Rate) and 08/2017-I.T (Rate) dated 28.06.2017, the value of the land is regarded as one-third (33.33%) of the whole amount (i.e. value including the value of the land), and GST is due on the remainder. However, in the case of the application, the value of the land can be determined. Can the real cost of the land be subtracted in this scenario to establish the taxable value of the supply?

The answer is “No.”

Final words

Accordingly, the claim of the applicant to allow the real value of the land to be deducted from the sale value because their land value is ascertainable and other reasons are not the statutory conditions of paragraph 2 of the note. No. 11/2017 – ČT (Rate) Dt: 28.06.2017 as amended, see notice No. 1/2018 ČT – (Rate) Dt: 25.01.2018. Further, reliance on Rule 18(A) (A) of the erstwhile Gujarat Value Added Tax Rules, 2006 is not justified in this case as the Value Added Tax Act no longer exists. The Value Added Tax Act has no legal force for the determination of VAT liability, as the value of the performance is to be determined in terms of the provisions of the Value Added Tax Act.

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