The Authority for Advance Rulings (AAR), Telangana, has ruled that sale of land would not draw goods and services tax (GST) unless there is a works contract in the agreement between the seller and buyer.
A works contract is essentially a contract of service that may also involve supply of goods in the execution of the agreement.
It is basically a composite supply of both services and goods, with the service element being dominant in the contract between parties.
The authority ruled in a case related to an agreement between TIF Integrated Industrial Parks (TIFIIP) and the Telangana State Industrial Infrastructure Corporation (TSIIC), said Sandeep Sehgal, director, tax and regulatory, AKM Global, a tax and consulting firm.
TIFIIP is a company formed by industrialists as required by TSIIC as a special purpose vehicle (SPV) representing the member industrialists. It has an objective of providing industrial infrastructure by development of land acquired by the corporation. TSIIC issued a final allotment letter for 377 acres of land for Rs 55.11 crore on Vijayawada Highway to set up an industrial corridor.
A sale agreement was executed between TIFIIP and TSIIC, but a sale deed will be executed upon completion of development of internal infrastructure.
Similarly, TIFIIP is authorised, in turn, to sell pieces of land to individual industrialists after each of the allottees commences commercial operation by executing individual sale deeds.
TIFIIP sought to know from AAR whether the sale agreement would draw GST.
AAR ruled that the activity undertaken by the applicant for construction at the immovable property would qualify to be a “works contract” if it is executed in pursuance of a contract or agreement; there is transfer of property in the execution of works contract from the contractor to the contractee; and there is a consideration paid by the contractee to the contractor.
AAR said perusal of the contract entered by the applicant with the TSIIC clearly indicated that the property in land will be transferred to the applicant only when the TIFIIP completes the development of infrastructure of scheduled land. However, this clause in the agreement appears to have been made to meet the larger objective enumerated in the industrial policy of the state.
Though there is a contract for development of the land, the other conditions – transfer of property from the applicant to the TSIIC and payment of consideration by TSIIC to the applicant – have not been fulfilled.
As such, there would not be any GST in this deal, it ruled.
However, if the applicant sells the land after developing it by way of erecting a civil structure or a building or a complex, then such supply is liable to tax under GST laws.
Sehgal said, “Telangana AAR has looked into the substance of the transaction and held that the essential element of a transaction is the sale of land and it will not be subject to GST.”
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