Goods & Services Tax (GST) in IndiaMandatory Deduction of 1/3rd of Land Value is Ultra Vires the CGST Act

May 17, 20220

The Gujrat High Court in the case of Munjaal Manishbhai Bhatt v. Union of India C/SCA/1350/2021 dated 06.05.2022 held that in cases where the actual value of land or the undivided share in the land is not ascertainable, the deeming fiction of 1/3rd of the total land value will only be available at the option of the taxable person.


The Applicant is a practicing lawyer who entered into a Purchase Agreement with Respondent No. 4 for a piece of property. The Agreement also included construction of a bungalow on the said land by the Respondent No. 4. The Parties agreed upon separate and distinct considerations for the sale of land and construction of bungalow on the said land.

The Applicant was liable to pay all taxes, including the Goods and Services Tax (GST) under the Central Goods and Services Tax Act, 2017 and Gujarat Goods and Services Tax Act, 2017 (“CGST Act” and “GGST Act”) and bona fide believed that GST would be applicable on the consideration for construction of the bungalow.

However, the Respondent referring Entry 3(if) of Notification No. 11/2017- Central Tax (Rate) dated 28.06.2017 (“Notification”), informed the Appellant regarding his liability of 9% CGST and 9% SGST on the entire consideration payable for land and construction of bungalow, after deducting 1/3rd of the price for land in conformity with the Paragraph 2 (“Impugned Paragraph”) of the Notification.

The Applicant filed advance ruling application seeking a ruling on the question whether there was any tax liability under the CGST Act or SGST Act on supply of developed land. The Advance Ruling Authority held that the deduction for sale of land was admissible only to the extent of 1/3rd of the total consideration, in accordance with the Notification. This ruling was further affirmed by the Appellate Authority for Advance Ruling.

The present Writ Application was filed by the Applicant challenging the validity of the Notification and the ruling of the Advance Ruling Authority.


Whether the Notification, which only allows for 1/3rd deduction with respect to land or an undivided part of land in construction projects containing land, is ultra vires the CGST Act, SGST Act and/or violates Article 14 of the Constitution of India?


The Applicant contended that by virtue of Section 7(2) of the CGST Act, transactions laid down in Schedule III of the CGST Act do not constitute a supply of goods or services, which also includes the sale of land in Paragraph No. 5 of the Schedule III.  Thus, the imposition of tax on consideration received for sale of land is ultra vires Section 7 and 9 of the CGST Act. The Applicant emphasized on the settled legal position that a delegated legislation cannot travel beyond the scope of the parent legislation.

The Applicant submitted that if the tax liability is restricted to the construction value alone, the deduction of entire consideration for land has to be granted and the said deduction cannot be restricted to only 1/3rd of the total consideration, as is provided in the Notification.

The Applicant relied on the decision of the Supreme Court in the case of Gannon Dunkerley and Co. v. State of Rajasthan (1993) 1 SCC 362 (Gannon Case), wherein it was held that tax could only be imposed on the value of the goods incorporated under the Works Contract, and that the labour employed and the profit earned was to be excluded. The Supreme Court further held that in case when actual value could not be ascertained, the State could prescribe a formula on the basis of fixed percentage of value of contract.

The Applicant contested that the Notification prescribed a set percentage deduction of 1/3rd value without providing an option to deduct the actual value of the land. Further, the Notification did not take into account the different types of contracts or size of the land regarding the sale consideration, which is contrary to the Gannon Case.

The Applicant placed reliance on the decision of the Delhi High Court in Suresh Kumar Bansal v. Union of India (2016) 92 VST 330 (Del.), wherein it was held that there should be a specific statutory provision that excludes the value of land from the taxable value of the works contract and mere abatement by way of a Notification is not sufficient.

The Applicant submitted that the Notification provided only a set percentage of abatement for property, thus being in conflict with the aforementioned decision of Delhi High Court.

Finally, the Applicant argued that the liability sought to be fixed through the Notification by way of deeming fiction, so as to presume only 1/3rd of the total consideration is towards land, is ultra vires the provisions of the GST Acts.

The Respondents contended that the Central Government has the authority to determine the rate in the public interest, subject to certain conditions, based on the GST Council’s suggestions. The Respondents argued that the GST Council is statutorily empowered to suggest such a deduction on land value with certain conditions.

The Respondents stated that under Section 15(5) of the CGST Act, the Government is empowered to notify the value of certain supplies for the purpose of GST liability, based on the recommendations of GST Council. As the Notification was issued based on the recommendations of the GST Council, the question of Paragraph No. 2 of the Notification being ultra vires Sections 7(2), 9(1), 15 of the CGST Act and Articles 14 and 246A of the Constitution of India does not emerge.

The Respondents submitted that if the concerned transaction entails the construction of a house, civil layout, or a portion thereof, including a tower or building designed for sale to a buyer, entirely or partially, and the certificate of completion for such structures have not been obtained, then such supplies do not fall under Schedule III but are to be considered as services under Paragraph 5(b) of Schedule II of the CGST Act and levied GST in accordance with the Notification.

Thus, the Respondents argued that as the present transaction was not a sale and purchase of building or property with a completion certificate, it does not fall under Schedule III of the CGST Act. The present supply is for the development and construction of a house, civil engineering works, or component thereof to be transferred to the Applicant, and thus would be a taxable supply of service under Paragraph 5(b) of Schedule II of the CGST Act.

The Respondents further contended that if the Applicant’s argument to consider the price of the land as proclaimed in the contract is accepted, it could give rise to preposterous outcomes employed by buyers and sellers to save tax. This would result in significant revenue losses for the Government and goes against the basic principles of taxation.

The Respondents finally submitted that a writ application under Article 226 of the Constitution of India, for challenging the rulings of Advance Ruling Authority and Appellate Authority for Advance Ruling, was not maintainable.


The High Court relied on the legislative intent for the imposition of tax on construction activity and observed that there existed no legislative intent to impose GST on the supply of land in any form, which is reflected from the exclusion granted to the supply of land as neither supply of goods or services under Schedule III of the CGST Act. The High Court further noted that the term “sale of land” under Schedule III of the CGST Act is inclusive of sale of developed land.

The High Court held that when the actual price of the supply is known and available, then the valuation for the purpose of taxation shall be in accordance with such actual value, and the deeming fiction cannot be imposed when the actual value is already known. The High Court noted that the applicability of deeming fiction is limited to supplies where the actual value is not ascertainable.

With reference to the GST Council’s 14th Meeting which led to the Notification being issued, the High Court observed that the Minutes of the Meeting make it clear that the 1/3rd deduction was contemplated for the purpose of supply of flats, wherein the value of undivided land was unascertainable.

The High Court additionally noted that the prescription of value by virtue of Section 15(5) of the CGST Act was to be done through Rules, and not by Notification.

In conclusion, the High Court held that the mandatory deduction of 1/3rd value of land, even when the actual value of land is ascertainable and known, is contrary to the provisions and scheme of the CGST Act and resultantly ultra vires the CGST Act.

The High Court read down the deeming fiction in Paragraph No. 2 of the Notification as non-mandatory in nature, and held that the taxable person would be at a liberty to utilize the deeming fiction when the actual value of land is unascertainable.


This decision of the Gujarat High Court is a welcome precedent for both the sellers and the buyers in the real estate industry, as it is likely to result in reduced cost of acquisition of developed property for the buyer due to reduced tax liability, along with creating more demand for such acquisitions.

The deeming fiction under Paragraph No. 2 of the Notification is indeed useful for buyers of property where the value of land cannot be determined using reasonable means, which has been the legislative intent behind introduction of the Notification.

However, the deeming fiction of 1/3rd deduction cannot be applied as a standard deduction on all the transactions involving purchase of developed land even when the value of such land is separately known. Such a blanket deduction would defeat the purpose of Schedule III of the CGST Act, which identifies the sale of land as a non-taxable supply.

This decision is of utmost relevance for the sellers and the buyers of the developed land, as it clarifies the GST implications arising out of such supply. The parties involved must review and amend the Agreements for sale of developed land in accordance with the High Court’s decision to reduce the overall purchasing cost of such land.

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