Indirect tax experts and real estate developers seem to have issues with the deduction of one-third of the value of a flat under construction for calculating the GST liability.The finance ministry, by its June 28 notification, allowed one-third of an apartment cost to be deducted towards the transfer of land or the undivided share of land and pay GST at the rate of 18% on the balance amount. The effective GST rate, thus, becomes 12%, says the government. This has sparked off some interpretations.When a buyer pays the developer, he makes a lump sum payment, which includes the cost of both construction and land. Barring exceptional cases, the price does not provide a break-up of land cost and construction cost.The GST provisions requiring the buyer to mandatorily pay the tax on the lump sum value which includes the land cost even at a lower rate may not be constitutional. Such a tax would have been justified, as under the erstwhile VAT regime if there is an option for the buyer or seller to declare the actual land cost, said a former VAT commissioner in Karnataka, not willing to be identified. According to him, there should have been an explicit provision stating that the price must exclude the land value, leave alone allowing a deduction the Centre has no powers on in the first place.Developers and experts find the 33% deduction from total value of an apartment towards land value jarring. “The government should have allowed exclusion of the actual land cost or one-third of the land value. The government cannot say only one-third of the price should be excluded when, in several cases, the land cost could be higher,“ the person quoted above said.“This will eventually become an issue when land prices soar,“ said JC Sharma, president of Credai Bengaluru, a real estate industry lobby. “As much as 98% of products in Bengaluru fall in the price range of Rs 4500 and Rs 7,500 per square feet. Land costs are an important component, and this is, in fact, a big issue in Mumbai, where they have asked for allowing actual land cost rather than an arbitrary value for calculating GST,“ he said.“This is a grey area,“ said MA Maniyar, a former deputy commissioner of commercial taxes department. “The land value varies from one place to another, while the cost of construction would be, by and large, the same. That is something the real estate industry has to explain to the authorities and the GST Council.“There is also no clarity with regard to the treatment of joint development projects, which is a major issue in Karnataka, he added. A former commissioner said the GST law covering the construction sector could have been made more robust with appropriate amendments to the Constitution which, as of now, empowers only states to tax land and buildings.GST is not applicable on sale of a plot of land or an apartment, according to Sudipta Bhattacharjee, partner at Advaita Legal, a law firm, in Delhi. “So, a flat under construction is neither a plot of land or a building, and hence, an effective 12% GST may not pose such a problem,“ he interpreted. Others argue, when a developer collects a price, it includes the cost of land, as well.“I don't see an overlap. Demarcation between where the GST stops and where the stamp duty begins is very clear,“ he said.