HC holds sale of partly constructed mall on “as-is-where-is” basis is not leviable to GST

This Tax Alert summarizes the recent ruling of the Karnataka High Court (HC) ^[1] regarding levy of Goods and Services Tax (GST) on partly constructed mall sold on as-is-where-is basis.  

The key observations of the HC are:

• Entry 5 of the Schedule III read with Section 7(2) of the CGST Act (Central Goods and Services Tax Act, 2017) is only by way of “ex abundanti cautela” to show the Legislative intent not to tax sale of land and building.
  
  
• Insisting taxation on partly constructed building on as-is-where-is condition, on the ground that completion certificate is yet to be received will not reflect the true nature of the transaction, as entry 5(b) of Schedule II apply only to agreements meant to provide construction services.
  
  
• There is a distinction between contract for rendering construction services and contract for sale of building, albeit incomplete, but as a building per se.
  The former is amenable to the GST regime while the latter is amenable to the stamp duty regime.
  
  
• Entry 5(b) is merely a service contract simpliciter and not a composite works contract as under entry 6(a) of the Schedule II. 
  
  
• At later stage, depending on whether the recipient of such partly constructed property would hire a contractor or build himself for subsequent completion, the levy under GST law may or may not get attracted. 

Basis above, HC held that Revenue made a fundamental error in assuming jurisdiction to tax a sale of mall on “as-is-where-is basis”, even if not completed. 

Comments:

• The ruling offers much needed clarity on the taxability of transactions involving partially constructed properties. This may significantly reduce litigation within the real estate sector. 
• Businesses may consider the potential applicability of this ruling to the taxability of leasehold rights and transfer of development rights (TDR), being subjected to stamp duty.
• The Revenue authorities may not universally agree with this interpretation across all transaction types. For instance, transactions involving subsequent transfer of partially constructed flats could warrant further examination to understand the implications of this ruling.

^[1] WP No. 12700 of 2023