Land Sales may Come Under Taxman's Lens

Many land transactions are set to attract goods and services tax (GST) following an appellate authority of advance ruling (AAAR) ruling that distinguished between "developed land" and "barren land".

This means that if the developer or seller has done any work on the land parcel before selling it, then that could attract GST.

Any land sold after undertaking development activities such as providing water line, electricity or sanitation facility should attract 18% GST, Madhya Pradesh AAAR ruled.

It set aside an order of Madhya Pradesh Authority for Advance Ruling (AAR) that said sale of developed land is not liable to GST as the transaction is transfer of immovable property which is outside the purview of indirect tax.

"This is another instance of divergent ruling by different state authorities," said Harpreet Singh, indirect tax partner at KPMG in India. "In the past, Madhya Pradesh and Goa advance ruling authorities have held sale of developed land as non-taxable as in essence the transaction continues to be sale of immovable property."

Madhya Pradesh AAR had earlier ruled out the applicability of GST on sale of developed land, holding that it "cannot be bought and sold as something distinct and separate from the plot of land" and, therefore, GST is not applicable on such sale.

The AAAR ruling, however, said the real estate developer selling the land had developed roads and provided water supply before selling the land parcel. And that the sale "cannot be imagined without these basic development activities".

Tax experts said there could be an alternate argument as well.

"There is a strong alternate argument that improvements on barren land are done only to make the same saleable, and that should not change the essential character of the transaction from supply of land to construction service, especially when the buyers were not pre-determined at the time of improvements," Singh said.