The taxability of the construction industry has been a meandering path and so it continues under the GST regime, mainly on account of the GST on FSI/TDR. Whilst much has been written on the law as it stands; this article seeks to examine the rationale behind the controversy and maybe a probable solution to the controversy.
Before we dive into law and the controversy on GST on FSI / TDR; we need to determine the elements independently and then consolidate for concluding on what it entails.
The scope of the levy is limited to tax on goods and services, both these terms have been defined with an add-on of certain exclusions and deemed inclusions. Once it is determined that a supply is either goods or services then one needs to examine the exemptions and / or the tax rate applicable thereon.
- FSI and TDR are two distinct terminologies and denote two distinct things.
FSI – Floor Space Index is defined by the Development Control Regulations for Greater Mumbai, 1991 as “ the quotient of the ratio of (1) combined gross floor area of all floors, excepting areas specifically under the regulations; to (2) the total area of the plot. In other words, it represents the ratio between total built up area with reference to the area of the plot of the land on which such structure is (to be) located.
TDR – Transferable Development Rights means certificates issued in respect of category of land acquired for public either by Central or State Government in consideration of surrender of land by the owner without monetary compensation, where the certificates/ rights therein are transferable in part or whole. [Regulation Nos 2(d) and 2(ix) of Foreign Exchange Management (Borrowing and Lending in Rupees) Regulation 2000]
Thus, FSI is the right attached to land while TDR is the non-monetary consideration for the acquisition of a part of land by the government.
- GST is levied on the supply of goods and service.
Goods means any kind of movable property other than money and securities but includes actionable claim, …….. [CGST Act Sec 2(52)]
Service means anything other than goods, money and securities but includes………[CGST Act Sec 2(102)]
Movable Property shall mean property of every description except immovable property. [General Clauses Act, Sec 3(36)]
Black’s Law Dictionary defines movable property that can be movable or displaced, such as personal goods; a tangible or intangible thing in which an interest constitutes personal property; specif., anything that is not so attached to land as to be regarded as a part of it as determined by local law.
Thus, GST is a levy on movable property and not on land or other immovable property.
- Scope of Supply
The Term ‘Supply’ has not been defined in the GST Law, however CGST Act, Sec 7 provide the scope of supply.
- The expression supply includes –
- All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
- Import of services for a consideration whether or not in the course or furtherance of business; and
- The activities specified in Sch I, made or agreed to be made without a consideration
(1A) Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Sch II
- Notwithstanding anything contained in sub-section (1), –
- Activities or transactions specified in Sch III; or
- Such activities…….
shall be treated neither as supply of goods nor a supply of services
- Subject to the provisions of sub-section (1), (1A) and (2), the Government may, on the recommendation of the Council, specify, by notification, the transactions that are to be treated as –
- A supply of goods and not as a supply of services; or
- A supply of services and not as a supply of goods.
Sch III Activities or transactions which shall be treated neither as a supply of goods nor a supply of services
Clause 5 Sale of land and, subject to clause (b) of paragraph 5 of Sch II, sale of building.
Sch II Activities or transactions to be treated as supply of goods or supply of services
Clause 5 Supply of services
The following shall be treated as supply of services, namely –
- Renting of immovable property;
- Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of occupancy certificate or after its first occupation, whichever is earlier.
Thus, Supply is – any transaction in goods and / or services for a consideration and excludes sale of land and sale of building (post receipt of occupancy certificate/ first occupancy) from GST.
- Immovable Property and Land
Immovable property shall include land, benefits arising out of land, and things attached to the earth. [General Clauses Act, Sec 3(26)]
Black’s Law Dictionary defines immovable as a property that cannot be moved, an object so firmly attached to land that it is regarded as part of the land.
Land includes benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth. [Land Acquisition Act (1 of 1894), S. 3(a)].
Ultimately, as a juristic concept, ‘land’ is simply an area of three-dimensional space, its position being identified by natural or imaginary points located by reference to the earths surface. ‘Land’ is not the fixed contents of that space, although we may see that the owner of that space may well own those fixed contents. Land is immovable, as distinct from chattels, which are movable; it is also in its legal significance, indestructible. The contents of the space maybe physically severed, destroyed or consumed, but the space itself, and so the land remains immutable. [Peter Butt, Land Law 9 (2nd ed.1988)]
Black’s Law Dictionary defines Land as 1. An immovable and indestructible three-dimensional area consisting of a portion of the earth’s surface, the space above and below the surface, and everything growing on or permanently affixed to it.
Black’s Law Dictionarydefines immovable as a property that cannot be moved, an object so firmly attached to land that it is regarded as part of the land.
Thus, immovable property includes land and rights which are attached to and arising out of land.
- Right(s) and Actionable Claims
Black’s Law Dictionarydefines Right 5. (often pl.) the interest, claim or ownership one has in tangible or intangible property.
Black’s Law Dictionarydefines Tangible 1. Having or possessing physical form; corporeal. 2. Capable of being touched and seen; perceptible to the touch; capable of being possessed or realised. 3. Capable of being understood by the mind.
Black’s Law Dictionarydefines Intangible Something that lacks a physical form; an abstraction, such as responsibility; esp.; an asset that is not corporeal, such as intangible property.
Actionable Claim shall have the same meaning as assigned to it Sec 3 of Transfer of Property Act, 1882. [CGST Act Sec 2(1)]
Actionable Claim means a claim to any debt, other than a debt secured by a mortgage of immovable property, or by hypothecation or a pledge of movable property , or to any beneficial interest in movable property, or any beneficial interest in movable property not in the possession , either actual or constructive of the claimant , which the civil court recognizes as affording grounds for relief , whether such debt or beneficial interest be existent , accruing , conditional or contingent. [Transfer of Property Act, 1882 Sec 3]
Thus, the right arising out of land is an intangible right from an immovable property and is not an actionable claim.
- Tax on FSI / TDR
FSI cannot be considered as movable property since it is attached to land and the right accruing out of land is immovable property. This excludes FSI from being within the definition of ‘goods’.
TDR is a consideration for the land acquired by the government and is in the form of a certificate of FSI which is transferable onto other land and is a transferable negotiable instrument (akin to money). To this excludes TDR from being within the definition of goods or services.
The supply of goods is only for tangible and movable goods while the supply of services does cover within in scope intangibles. However, the Sch III Clause 5 read with Sch II Clause 5(b) exclude land and building post OC from the scope of supply under the GST law. This excludes land and the rights derived from land from the ambit of the GST Law.
The way through the labyrinth
The powers vested under Article 246A of the Constitution an amendment in Sch III Clause 5 and Sch II Clause 5(b) would get within its scope the taxability of FSI and TDR.
5. Sale of land, subject to para 5(c) of Sch II; and sale of building subject to para 5(b) of Sch II.
5. Supply of services
The following shall be treated as supply of services, namely –
- Transfer of FSI / TDR