Failed Land Transactions May Attract GST
Plotted development at Hiranandani Parks, Oragadam, Chennai (Source: Hiranandani Communities)

Failed Land Transactions May Attract GST

A recent ruling under the goods and services tax regime may increase the tax liability in failed land transactions.

A two-member bench of the Gujarat Authority for Advance Rulings has ruled if a seller agrees to exit a contract by forfeiting the advance paid by a buyer, its act will be treated as a supply of service—a “declared service”—under the Central Goods and Services Tax Act, 2017.

Forfeiture of advance money will be considered as a taxable “supply” even if land transactions don’t attract GST, the AAR has held. In such a case, the seller will be the service provider and buyer will be the recipient, it said.

This isn’t the first time where subordinate activities arising from the main transaction relating to land or property have been held taxable. Last year the Gujarat and West Bengal AARs said assignment of leasehold rights or payment of one-time premium to acquire a long term lease will attract GST.

Abhishek Rastogi, partner at Khaitan & Co., told BloombergQuint that forfeited amount in land transactions shouldn’t be subjected to GST, as there is an absence of supply and a consideration.

Person Forfeiting Advance Will Be Considered Service Provider, AAR Says

The case relates to an application for advance ruling by Fastrack Deal—a textiles manufacturer—which agreed to sell its factory land. As the transaction couldn’t materialise, the company forfeited Rs 20 lakh obtained as advance from the buyer.

Fastrack Deal argued against the taxability citing that sale of land isn’t a supply of goods or services. As the amount was received against a sale transaction, the forfeiture must not attract any tax.

Dismissing these arguments, the AAR concluded that amount received by the company was in fact, a consideration against non-fulfillment of contractual obligation by the buyer. It did not relate to the sale of land but arose due to breach of an agreement. Thus, the seller “tolerated” the buyer’s act of dishonour, making it a taxable transaction.

Ruling May Impose Additional Costs On Real Estate Sector, Experts Say

Experts said the AAR ruling goes against the prevailing commercial understanding.

The ruling may impose additional costs on transactions in the real estate sector, Rajat Mohan, partner at AMRG & Associates, pointed out.

If GST is recovered on the forfeited amount by the seller, a buyer will try to adjust input tax credit obtained from the transaction. The buyer’s move may be challenged by GST authorities based on section 17(5), as it relates to a land transaction. It is not possible that all sale agreements would eventually fructify in a sale. 
Rajat Mohan, partner AMRG & Associates

One must wait to see if the AAR stretches this ruling to similar transactions like forfeiture of a deposit or loan, Mohan said.

While an advance ruling is only binding on the applying party, it may have a precedential value for other similar transactions. Rastogi pointed out the defense parties can take.

The moot point is whether the element of supply exists in the amount forfeited on the land transactions. A view can be taken that the consideration or the amount forfeited isn’t towards any supply but is penal in nature, he said.

The amount forfeited is a consequential effect and hence there may be parameters to say that such transaction is not a taxable supply at all. The other point is whether the transaction would fall within the purview of a refraining act. It must be clearly understood that any supply also happens with the consent of the service receiver. 
Abhishek Rastogi, partner, Khaitan & Co. 

This castes a doubt on whether such activity can be treated as a refraining act, he said.

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