GST Implications for Non-RERA Buildings and Micro-JDAs

Summary: Current-law update (11 October 2026): Cement (HSN 2523) generally attracts 18% GST from 22 September 2025, replacing the earlier 28% rate. Any cement RCM calculation must be split by receipt dates. The illustrative cement purchases below are assumed to have occurred entirely after that date. The treatment of TDR/FSI in a JDA is subject to the residential exemption, unbooked-apartment limits and conditions under the applicable notifications. The 80% procurement test and ITC entitlements require project-specific analysis; the illustrations are not a substitute for statutory reconciliation.

Small real estate developments exempt from registration under the Real Estate (Regulation and Development) Act, 2016 do not automatically qualify for exemption from Goods and Services Tax. This article examines the distinction between RERA registration thresholds and the GST framework governing promoters, construction services and real estate projects. It discusses the implications for standalone buildings, speculative developments and joint development agreements, including the separate treatment of development rights, construction services supplied to landowners and apartment sales to buyers. The analysis explains how the timing of consideration relative to a completion certificate or first occupation affects the classification of apartment transactions. It also considers the distinction between residential real estate projects and other real estate projects, particularly where commercial carpet area exceeds 15% of the total apartment carpet area. The article addresses concessional residential construction rates, input tax credit restrictions, procurement conditions, and reverse charge exposure arising from purchases from unregistered suppliers, including cement. Illustrative procurement calculations show how shortfalls can affect project cash flows and tax liabilities. Further sections examine the evidentiary importance of completion and occupation records, judicial developments concerning development rights, and the contractual safeguards that may be incorporated into joint development agreements. The practical emphasis is on maintaining vendor documentation, tracking project-level procurement and tax obligations, reviewing design changes, and establishing clear handover procedures to manage GST compliance and potential disputes. The discussion is based on the supplied analysis and its stated statutory references.

The Statutory Disconnect: Decoupling RERA Immunity from Indirect Tax Architecture

The micro-construction, small-scale building, and standalone redevelopment ecosystems across urban India operate under a widespread and expensive misconception: that exemption from regulatory registration under the Real Estate (Regulation and Development) Act, 2016 (RERA) confers immunity from indirect tax compliance. Throughout tier-1 and tier-2 metropolitan centres, independent realtors, family-owned development entities, and boutique builders frequently undertake infill residential projects where the land parcel measures less than 500 square metres or where the total scheme comprises not more than eight apartments, inclusive of all phases. Because Section 3(2)(a) of RERA explicitly carves out these developments from mandatory registration with State Real Estate Regulatory Authorities, project proponents routinely infer that their operations reside within a deregulated, low-scrutiny zone of the Indian economy.

This regulatory complacency collapses upon contact with the Central Goods and Services Tax Act, 2017 (CGST Act). In indirect tax jurisprudence, statutory carve-outs created for consumer protection cannot be imported into taxing statutes unless specifically codified by the legislature. RERA was enacted to protect allottees against builder insolvency, unfair marketing practices, and execution delays, setting administrative thresholds below which formal state oversight was deemed administratively disproportionate. Goods and Services Tax (GST), conversely, functions as an indirect excise upon the economic consumption of goods and services. The indirect tax regime contains no general monetary or spatial exemption for real estate developers based on the size of the plot or unit count.

Borrowed Lexicon Without Borrowed Exemptions

The structural genesis of the compliance trap stems from the wholesale incorporation of RERA definitions into the GST framework under Notification No. 11/2017-Central Tax (Rate), as amended by Notification No. 03/2019-Central Tax (Rate). The Central Board of Indirect Taxes and Customs (CBIC) deliberately imported essential concepts from RERA into the GST rate notifications. Under these notifications, the term “Promoter” is given the exact meaning assigned to it in Section 2(zk) of RERA; “Real Estate Project” (REP) derives its meaning from Section 2(zn); and “Carpet Area” is anchored to Section 2(k).

Small developers frequently misunderstand this borrowed lexicon as a blanket adoption of RERA’s regulatory exemptions. In statutory interpretation, adopting definitions from an external statute does not import that statute’s threshold exemptions. When GST notifications designate a “promoter” constructing a “real estate project” as the taxable person, the framework applies the substantive definition, namely, any person who constructs, redevelops, or converts a building for sale, while disregarding the spatial and unit-volume exemptions of Section 3(2)(a) of RERA. A developer constructing a four-unit residential building on a 300-square-metre plot is not exempt from the GST regime; rather, the developer is classified as a promoter executing an unregistered real estate project, subject to all statutory liabilities under the CGST Act.

The Jurisprudential Anatomy of a Taxable Promoter

Registration is assessed under Sections 22–24 of the CGST Act, including Section 23 and any applicable notification-based exceptions. RERA registration status alone is not determinative.

Under Section 22 and Section 24 of the CGST Act, liability to register and discharge tax depends on aggregate turnover and specific transaction characteristics, rather than municipal boundaries or land area. A builder constructing independent residential units who collects advances from prospective buyers prior to completion engages in a taxable supply of services under Schedule II, Entry 5(b) of the CGST Act. Once aggregate receipts cross the statutory registration threshold, or where compulsory registration applies under Section 24, read with Section 23 and applicable exemption notifications, the builder becomes a fully accountable taxable person.

During departmental audits, indirect tax officers do not cross-reference state RERA portals to confirm registration status before issuing inquiries. Instead, audit wings review municipal plan sanction records, local water authority approvals, and land registration databases to detect unregistered builders. The tax administration treats an unregistered boutique builder through the same standard applied to institutional developers, demanding compliance with the non-Input Tax Credit (ITC) output rate conditions, the 80% domestic registered procurement rule, and the reverse charge liabilities on developmental transactions.

Operational Models: Tri-Partite Joint Development Agreements versus Speculative Infill Builds

Non-RERA property developments generally operate through two business structures: independent realtor-driven speculative builds, and Joint Development Agreements (JDAs). Each model creates distinct tax liabilities, valuation frameworks, and departmental audit exposure.

Speculative Realtor-Led Infill Developments

In a speculative build, the developer acquires outright title to an urban land parcel via a registered deed of conveyance, finances the project independently, and sells completed or under-construction units to home buyers. For indirect tax purposes, this model appears relatively straightforward:

• Where any part of the consideration for an apartment is received before the completion certificate or first occupation, whichever is earlier, the construction supply must be examined under Schedule II, paragraph 5(b), subject to the applicable rate and valuation rules.
• A sale falls outside GST under Schedule III, paragraph 5 only where the entire consideration is received after the completion certificate or first occupation, whichever is earlier; later instalments on an earlier under-construction booking do not automatically convert the transaction into a completed-property sale.

Beneath this framework lie significant operational pitfalls. Under the revised real estate tax structure introduced on April 1, 2019, the effective tax rates of 1% for affordable residential apartments and 5% for other residential apartments are non-optional conditions for all new residential projects. These rates are explicitly conditioned on two statutory requirements: the non-availability of ITC attributable to supplies taxed under the concessional scheme, and the procurement of at least 80% of project inputs and services from registered vendors. Small-scale speculative builders, who often rely on cash payments and unorganised subcontractors for excavation, masonry, and finishing work, frequently trigger major hidden tax shortfalls under Section 9(4).

Tri-Partite Joint Development Agreements and the Three-Legged Tax Framework

A landowner-promoter may be eligible for ITC of construction services supplied by the developer-promoter where the specific notification conditions are satisfied, including onward taxable supply and tax payment requirements. The three legs must not be treated as universally taxable at the full rate.

Important qualification: The transfer of development rights is not invariably taxable in full. For qualifying residential apartments, the TDR/FSI exemption under Notification No. 12/2017-Central Tax (Rate), as amended, applies subject to conditions. Tax attributable to residential apartments unbooked at completion or first occupation is subject to prescribed limits. A landowner-promoter may also have a specifically conditioned ITC entitlement on construction services received from the developer-promoter. The applicable notification, valuation and timing rules must be applied separately to each JDA leg.

The tri-partite Joint Development Agreement (JDA) introduces complex legal relationships and multiple taxable events. In this structure, the original landowner contributes the plot, the developer contributes capital and construction expertise, and the completed units are split between them according to agreed-upon percentages. Both parties subsequently monetise their allocations by selling to retail buyers.

Under the GST regime, this collaboration comprises three distinct transaction legs, with taxability depending on applicable exemptions and timing, each operating under separate valuation formulas and payment milestones:

Transaction Leg	Supplier	Recipient	Statutory Nature & Charging Section	Time of Supply Mechanism
Leg 1: Development Rights Transfer	Landowner	Developer	Supply of TDR/FSI; shifted to Developer under Reverse Charge via Notification No. 13/2017-CT(R)	Deferred to date of CC or First Occupation via Notification No. 06/2019-CT(R)
Leg 2: Construction Services to Landowner	Developer	Landowner	Composite supply of works/construction services; paid by Developer under Forward Charge	Deferred to date of CC or First Occupation via Notification No. 06/2019-CT(R)
Leg 3: Retail Apartment Disposals	Developer or Landowner	Retail Purchaser	Construction supply; Forward Charge at 1% or 5% effective rates without ITC	Earliest of: invoice date, payment receipt, or payment milestone

Translating the Technical Mechanics: TDR, RCM, and Time of Supply

The tax implications of a JDA become clear when technical legal terms are understood through practical operational realities:

Transfer of Development Rights (TDR)

Residential TDR/FSI exemptions under Notification No. 12/2017-Central Tax (Rate), as amended by Notification No. 04/2019-Central Tax (Rate), must be applied. The residential portion attributable to apartments booked before completion/first occupation may qualify for exemption, while the unbooked residential portion is subject to the notified liability and 1%/5% value ceilings. Commercial portions are treated separately.

Transfer of Development Rights functions much like a development voucher or zoning ticket. The owner of a residential parcel holds both legal title to the land and the zoning authority’s permission to build volume on that site. When entering into a JDA, the owner does not immediately convey the land. Instead, the owner provides the builder with a development voucher, granting the legal entitlement to enter the property, pour concrete, build upward, and commercialise the resulting structures. The tax authority treats this grant not as an exempt sale of bare land, but as a commercial licensing service subject to GST.

Reverse Charge Mechanism (RCM)

In everyday commerce, the vendor collects sales tax from the customer and pays it to the state. The Reverse Charge Mechanism flips this standard dynamic: the tax department relieves the supplier of collection responsibilities and requires the recipient to act as the tax collector. The recipient must calculate the tax liability, declare it on their own return, and pay it directly to the treasury in cash. In a JDA, because individual landowners are typically unregistered, the tax framework treats the developer as the institutional entity, generally assigning notified TDR/FSI reverse-charge obligations to the promoter, subject to residential exemptions and conditions.

Time of Supply

The Time of Supply operates like an alarm clock embedded in tax law. Rather than requiring immediate tax payments when contracts are executed, or construction begins, the government, exercising powers under Section 148 via Notification No. 06/2019-Central Tax (Rate), sets this alarm for a specific milestone: the date an official Completion Certificate is issued, or the date the building is first occupied, whichever occurs earlier. The moment that milestone arrives, the applicable deferred liabilities are evaluated, subject to the residential TDR exemption and the distinct rules governing construction supplied to the landowner.

The 15 % Commercial Carpet Area Trap: Project Reclassification Under Mixed-Use Realities

A frequent issue in non-RERA developments involves mixed-use real estate. In urban infill sites, developers often include street-level shops on the ground floor while constructing residential units above. Developers frequently assume that if a project is primarily residential, the entire development qualifies for concessional residential tax rates. In practice, however, exceeding commercial limits can disrupt this tax classification.

The Statutory Boundary Between RREP and REP

Notification No. 03/2019-Central Tax (Rate) divides real estate into two categories based on carpet area:

• Residential Real Estate Project (RREP): Defined as a Real Estate Project in which the carpet area of commercial apartments does not exceed 15% of the total carpet area of all apartments in the project.
• Real Estate Project (REP) Other than RREP: Any real estate development where the carpet area of commercial units exceeds the 15% threshold.

To evaluate this boundary, consider a developer redeveloping a 400-square-metre urban parcel into a four-storey building with a total carpet area of 800 square metres. To maximise ground-floor rental yields, the builder designs two retail storefronts measuring 130 square metres of total carpet area, allocating the remaining 670 square metres across six residential apartments on the upper floors.

Commercial Carpet Area Percentage = (130 m²/800 m²) × 100 = 16.25%

Because 16.25% > 15%, this development is disqualified from RREP status and classified as a standard commercial Real Estate Project (REP).

Mathematical Drift and the Domino Effect on Tax Rates

Exceeding the 15% threshold by even a fractional percentage point alters the project’s tax profile, shifting the development into a different set of rate and compliance requirements:

Operational Tax Dimension	Residential Real Estate Project (RREP) (≤15% Commercial Area)	Real Estate Project (REP) (>15% Commercial Area)
Residential Units (Affordable)	Effective 1% without ITC	Effective 1% without ITC
Residential Units (Non-Affordable)	Effective 5% without ITC	Effective 5% without ITC
Commercial Storefronts / Units	Concessional 5% effective without ITC	Standard 12% effective with ITC eligibility
Input Tax Credit (ITC) Mechanics	ITC attributable to concessional-rate supplies is unavailable; other supplies require separate examination	Eligible and ineligible credits must be identified and common credits apportioned where Rules 42/43 apply
Procurement Compliance Burden	Project-wide 80% registered mandate under Section 9(4)	80% rule applies to residential; standard credit rules on commercial
Works Contract Vendor Tax Rate	Concessional rate only where the specific notified entry and conditions are satisfied	Concessional rates often denied; standard 18% applied across contracts

Where commercial units were taxed at 5% but the project does not qualify for the relevant concessional entry, the developer should examine any differential output GST (potentially seven percentage points under the illustrated 12% effective rate), along with applicable interest and available ITC adjustments.

The Accounting Nightmare: Dual Credit Apportionment Under Rules 42 and 43

The transition from an RREP to a standard REP creates complex accounting requirements. In an RREP, tax accounting is simplified because ITC on specified concessional-rate supplies is unavailable. In a standard REP, however, the developer must operate a dual credit system:

• Credit on inputs and services attributable to commercial units may be claimed.
• Credit on inputs and services attributable to residential apartments remains blocked.

This system requires continuous apportionment under Rules 42 and 43 of the CGST Rules. Every purchase invoice, from structural steel and concrete to site equipment rentals and engineering fees, must be mathematically divided between eligible commercial credits and ineligible residential credits.

Small-scale developers rarely maintain cost-accounting systems capable of tracking common credits across residential and commercial allocations. During audits, tax authorities routinely challenge credit calculations, identifying common input credits that were improperly claimed in full. These assessments often result in the complete reversal of disputed credits, along with interest under Section 50(3), read with Rule 88B, where ITC is wrongly availed and utilised; demands and penalties depend on Sections 73/74 or 74A, as applicable.

Reclassification Ramifications for Downstream Works Contracts

Project reclassification also impacts subcontracting arrangements. Under Notification No. 11/2017-CT(R), item (va), specialised subcontractors can bill works contract services at a concessional rate of 12% instead of the standard 18% rate, provided the project meets specific affordable residential housing criteria. To apply this rate, the developer must certify that affordable residential apartments represent more than 50% of the project’s total carpet area.

When an unmonitored commercial layout alters the project’s classification, the contractor’s rate must be checked against the precise works-contract entry, qualifying affordable-housing conditions and applicable date; reclassification is not automatic. During an audit, the revenue department routinely holds the developer liable under indemnities or issues direct assessments against contractors, disrupting vendor agreements.

The Procurement Crucible: Section 9(4) RCM Shortfalls and the Cement Penalty

The 2019 real estate tax changes lowered headline rates for residential property to 1% and 5% without input tax credits. To prevent tax leakage and curb unorganised cash procurement in construction supply chains, the GST Council established a mandatory procurement requirement under Section 9(4) of the CGST Act.

The Architecture of the 80% Registered Procurement Rule

The 80% procurement condition applies to specified notified concessional-rate supplies, on the prescribed project-wise basis. Excluded supplies, cement, capital goods and supplies on which tax is paid under reverse charge must be handled in accordance with the relevant notification; a generalised ratio is insufficient.

Under Notification No. 07/2019-Central Tax (Rate), a promoter paying concessional GST rates on residential construction must ensure that at least 80% of all project inputs and input services are procured from GST-registered suppliers across each financial year.

The statutory calculation uses a specific inward supply base. The denominator excludes several major project costs:

• Direct labour payments and wages excluded from the definition of supply under Schedule III.
• Procurements of development rights, TDR, additional FSI, and long-term land lease premiums.
• Non-taxable supplies, including municipal charges, grid electricity, motor spirit, and high-speed diesel.

Any procurement subject to reverse charge under Section 9(3), such as goods transport agency (GTA) services or legal fees, counts as registered procurement toward the 80% requirement.

If registered inward supplies fall below the 80% floor at the end of the financial year, the developer must pay an 18% reverse charge on the shortfall. This tax must be discharged within the time and reporting mechanism prescribed by the applicable notification and return provisions, paid entirely in cash through the Electronic Cash Ledger without using ITC.

The Monthly Cash Trap: Unregistered Cement Procurements

While an overall procurement shortfall can be settled annually at 18%, purchases of cement from unregistered dealers (URDs) are handled under a separate, much stricter rule.

Under Notification No. 07/2019-CT(R), read with Notification No. 24/2019-CT(R), cement is completely excluded from the annual 80% balancing pool. Every rupee of cement purchased from an unregistered supplier incurs an immediate 18% for supplies from 22 September 2025 (historically 28%) GST liability under reverse charge.

Crucially, this 18% for supplies from 22 September 2025 (historically 28%) tax must be declared and paid on a monthly basis in the GSTR-3B return for the period in which the cement was received. Because the developer cannot claim input tax credit under the 1% or 5% regimes, this 18% for supplies from 22 September 2025 (historically 28%) charge becomes a direct out-of-pocket project cost.

Forensic Audit Mechanics: Quantitative Modelling of Procurement Deficits

To understand how procurement deficiencies compound during an audit, consider a developer constructing an infill project of six residential units on a 420-square-metre plot over a twelve-month tax period. The developer operates under the assumption that the project’s non-RERA status exempts it from formal vendor tracking.

The project’s inward procurement register shows the following figures:

Head of Project Procurement	Total Spend Incurred	Procured from Registered Suppliers	Sourced from Unregistered Vendors	Statutory Treatment Under Section 9(4)
Structural Steel	₹50,00,000	₹50,00,000	₹0	Registered supply; counts toward the 80% threshold
Aggregates, Sand & Earthfill	₹25,00,000	₹0	₹25,00,000	Unregistered supply; falls into the general annual shortfall pool
Architectural & Design Fees	₹10,00,000	₹10,00,000	₹0	Registered service; counts toward the 80% threshold
Electrical, Plumbing & Woodwork	₹35,00,000	₹15,00,000	₹20,00,000	₹20,00,000 falls into the general annual shortfall pool
General Inward Base Total	₹1,20,00,000	₹75,00,000	₹45,00,000	Achieved 62.5% vs. 80% required; shortfall of ₹21,00,000
Portland Cement Procurements	₹30,00,000	₹10,00,000	₹20,00,000	Unregistered portion subject to immediate monthly RCM at the rate applicable on receipt (18% from 22 September 2025)
Direct Construction Labour	₹30,00,000	Excluded	Excluded	Excluded under Schedule III; ignored in all ratios

During an indirect tax audit, the revenue authority calculates the resulting liability across two steps:

First, the officer separates the unregistered cement purchases and applies the mandatory 18% for supplies from 22 September 2025 (historically 28%) reverse charge under Section 9(4):

Cement RCM Liability (assuming receipts from 22 September 2025) = ₹20,00,000 × 18% = ₹3,60,000

The cement reverse-charge liability must be assessed by the receipt period and rate then in force; interest, where payable, is computed under Section 50 and the applicable rules.

Second, the officer assesses the general inward procurement pool for the annual 80% registered procurement threshold:

Minimum Registered Procurement Target = ₹1,20,00,000 × 80% = ₹96,00,000

Actual Registered Procurement = ₹75,00,000

Procurement Deficit = ₹96,00,000 – ₹75,00,000 = ₹21,00,000

Section 9(4) Shortfall = ₹21,00,000 × 18% = ₹3,78,000

On the stated assumption that all unregistered cement was received from 22 September 2025, the illustrative combined principal RCM is ₹7,38,000 (₹3,60,000 cement RCM plus ₹3,78,000 procurement shortfall RCM). Actual liability depends on receipt dates, notified rates, the statutory procurement base and any applicable adjustments. Interest and penalties require separate determination.

The Subjective Completion Date Dilemma: The Evidentiary Hunt for First Occupation

In large, RERA-registered developments, the completion date is clearly documented through public filings. Promoters upload Form 4 architect certifications, file quarterly progress updates, and publish official Occupancy Certificates issued by planning authorities. In non-RERA developments, however, this administrative paper trail rarely exists.

Small builders often finish construction, hand over keys, and allow occupants to move in while utility connections remain temporary and formal municipal certificates are delayed. This dynamic creates the “completion date dilemma,” an area of frequent dispute during tax audits.

Statutory Triggers Under Schedule II, Entry 5(b)

Paragraph 5(b) of Schedule II of the CGST Act defines the construction of a complex intended for sale as a taxable supply of service, except where the entire consideration is received after the issuance of a completion certificate by the competent authority, or after its first occupation, whichever occurs earlier.

Statutory Condition (Timing of Consideration)	Trigger Benchmark Evaluated	Legal Classification under CGST Act	Indirect Tax Treatment & Implications
Consideration received before Completion Certificate or First Occupation	Issuance of Completion Certificate by Competent Authority OR Physical First Occupation (whichever is earlier)	Supply of Service (Schedule II, Entry 5(b))	Taxable: Subject to forward charge GST at 1% (affordable) or 5% (non-affordable) without ITC; activates deferred JDA reverse charge liabilities
Entire consideration received after Completion Certificate and First Occupation	After the earlier of completion certificate or first occupation	Sale of Immovable Property / Building (Schedule III, Entry 5)	Outside the scope of GST (Schedule III): Falls outside the scope of GST; no output liability on apartment disposal

The statutory phrasing, “whichever is earlier”, functions as a dual tripwire. A developer cannot defer tax liability simply by delaying an application for a municipal Completion Certificate. If physical occupation takes place before an official certificate is issued, the legal completion date is set by that first occupation, ending the under-construction phase and establishing the tax timeline.

The Evidentiary Weight of Competent Authority Certifications

The Explanation to Entry 5(b) defines a “competent authority” as any government authority authorised to issue a completion certificate, or, where local regulations do not require one, an architect registered with the Council of Architecture, a chartered engineer, or a licensed municipal surveyor.

In non-RERA developments, builders frequently rely on private certificates issued by their own project architects, arguing that because the project is exempt from RERA, an architect’s certificate satisfies the statutory requirement.

Tax authorities routinely reject this argument. Where municipal planning laws provide a procedure for issuing an Occupancy Certificate, building use permission, or completion certificate, the local relevant competent authority must be determined under the statutory Explanation and applicable local law; the municipality may be the “competent authority” recognised by law. An architect’s private certificate must be assessed against the statutory Explanation, including whether local law requires a competent-authority certificate. Private certificates obtained solely to avoid GST liabilities are consistently set aside during audits.

Surrogate Markers of Occupation: Dissecting Departmental Audit Trails

When a municipal certificate is delayed or absent, audit officers search for indirect evidence of “first occupation”. Because the statute uses the phrasing “whichever is earlier,” proving that physical occupation occurred before a formal certificate was issued allows the department to retroactively fix the completion date.

During field audits, officers typically review several sources of secondary evidence:

Audit Inquiry Source	Evidentiary Records Examined	Departmental Tax Position
DISCOM / Power Utility Records	Applications to convert temporary construction power to permanent domestic tariffs; individual meter activations	Active domestic billing meters establish physical habitation, triggering the statutory “first occupation” date
Municipal Property Tax Registers	Initial property tax assessment entries, annual ratable value assignments, and local tax receipts	Inclusion in municipal tax rolls demonstrates that the asset is usable, establishing completion for tax purposes
Piped Water & Sewerage Approvals	Permanent municipal water connection records and road-cutting fee receipts	Operational domestic utilities indicate residential readiness, establishing that physical occupancy has occurred
Developer-Buyer Communications	“Fit-out possession letters,” interior access keys, and site handover agreements	Granting interior access for carpentry or decorating is treated as legal occupation, overriding unissued municipal certificates

The Cascading Cost of Retrospective Completion Dates

When an audit officer establishes an earlier completion date based on physical occupation, the reclassification triggers two distinct tax liabilities:

First, under Notification No. 06/2019-Central Tax (Rate), the developer’s deferred liability to pay GST on development rights under reverse charge, as well as the construction services provided to the landowner, crystallises on the date of first occupation. If an auditor establishes that domestic electricity meters were energised two years before municipal approvals were finalised, the tax liability falls due in that earlier tax period. The developer must pay the original principal tax alongside mandatory interest under Section 50 at the applicable statutory rate across the intervening period.

Second, under Notification No. 04/2019-Central Tax (Rate), the exemption on development rights for residential apartments applies only to units sold before project completion. On the date completion is established, any unsold units remaining in the developer’s inventory forfeit their exemption. The developer must pay GST under reverse charge on the development rights attributable to those unsold units. An earlier deemed date of first occupation increases the number of unbooked units, creating a much larger upfront cash tax liability.

Divergent Judicial Currents: Judicial Scrutiny of Development Rights

Editorial verification note: The exact text, citation, operative holding and subsequent appellate status of Prahitha Construction, Shrinivasa Realcon, Durga Projects and Vajra Infracorp require independent checking against the original orders before these discussions are relied upon as authority. An advance ruling is binding only within Section 103 of the CGST Act.

The taxability of development rights remains one of the most contested legal issues in the real estate sector, with ongoing debates centring on the interpretation of property rights and the limits of executive notification powers.

The Telangana High Court Doctrine: Prahitha Construction and TDR as a Service

The legal foundation supporting the GST department’s position was affirmed by the High Court of Telangana in Prahitha Construction Private Limited v. Union of India (WP No. 5421 of 2021). The petitioner challenged Notification No. 04/2018-CT(R) and Notification No. 04/2019-CT(R), arguing that development rights are benefits arising out of land under the Transfer of Property Act, 1882, and should therefore be treated as an outright sale of land exempt under Schedule III, Entry 5 of the CGST Act.

The High Court rejected the petitioner’s argument, establishing several key principles:

• Separation of Rights from Title: Executing a Joint Development Agreement does not transfer legal title or ownership of the land to the developer at the point of signing. The landowner retains ownership until individual, fractional undivided shares of land (UDS) are conveyed to ultimate buyers upon project completion.
• TDR as a Taxable Service: The court held that granting permission to enter a plot and construct buildings constitutes a commercial service rendered by the landowner to the developer. It determined that TDR cannot be equated with an outright sale of land under Schedule III, affirming that development rights are subject to GST under Section 7 and Section 9.
• Validity of Notification Powers: The court confirmed the central government’s authority under Section 148 to establish special procedures governing the time of supply and payment milestones for real estate transactions.

While an appeal against Prahitha Construction is currently pending before the Supreme Court of India (SLP (C) No. 11079/2024, where notice has been issued), tax authorities across India rely on this judgment as established precedent to enforce RCM demands on development agreements.

The Bombay High Court Distinction: Shrinivasa Realcon and the Limits of Entry 5B

In April 2025, the Bombay High Court (Nagpur Bench) delivered an important judgment in M/s Shrinivasa Realcon Private Ltd. v. Deputy Commissioner, Anti-Evasion Branch, CGST & Central Excise (Writ Petition No. 7135 of 2024), establishing meaningful boundaries on the department’s use of reverse charge provisions.

The petitioner entered into a development agreement to build a multi-storey complex on an 8,000-square-foot plot, providing ₹7 crores and two constructed apartments to the landowner as consideration. The GST department issued Show Cause Notices asserting that the developer was liable for RCM under Entry 5B of Notification No. 13/2017-CT(R) (as amended by Notification No. 29/2019-CT(R)), which taxes services supplied by any person through the transfer of development rights or FSI.

The Bombay High Court set aside the department’s demand, establishing several distinctions regarding the scope of Entry 5B:

• TDR as an External Asset: The court reviewed urban planning regulations, specifically the Unified Development Control and Promotion Regulations (UDCPR) of Maharashtra, which define TDR as a specific development potential certificate issued by a public authority as compensation for land surrender, capable of being traded independently in the open market.
• Inapplicability to Pure Development Rights: The court ruled that the rights a developer acquires from a landowner to construct a building on that owner’s land do not constitute the acquisition of TDR or FSI within the meaning of Entry 5B. Because no external TDR or additional FSI certificates were acquired or transferred, the reverse charge mechanism under Entry 5B could not be applied to the agreement.

Shrinivasa Realcon provides developers with an important defence against improper RCM assessments on standard construction arrangements. However, tax departments frequently attempt to limit this ruling to the specific wording of Maharashtra’s planning regulations or argue that it conflicts with the broader reasoning in Prahitha Constructions.

Advance Rulings on Valuation and Transition: Durga Projects and Vajra Infracorp

State Authorities for Advance Rulings (AAR) have consistently supported early tax intervention in JDA transactions:

• Durga Projects & Infrastructure Pvt. Ltd. (AAR Karnataka): The Authority ruled that construction services provided by a developer to a landowner in exchange for land development rights are fully taxable. The tax liability crystallises when possession of the landowner’s share of apartments is transferred, with valuation determined by the market value of comparable units sold to independent buyers during the same period.
• Vajra Infracorp India Pvt. Ltd. (AAR Telangana): The Authority confirmed that even where a JDA was executed before the introduction of GST, if the underlying construction is completed under the GST regime, the developer remains liable to pay GST under RCM on the development rights attributable to unsold inventory held when the completion certificate is received.

Contractual Insulation and Strategic Risk Mitigation

Given the financial exposure created by the intersection of RERA definitions, GST procurement thresholds, and JDA valuation rules, developers must use protective drafting and audit-ready accounting practices to safeguard their operations.

Protective Drafting Architecture for Development Agreements

Joint Development Agreements for small-scale projects should include several structural protections within the development contract:

Mandatory Tax Indemnity and Gross-Up Mechanisms

Contracts must clearly state that any output GST on construction services provided to the landowner’s share will be reimbursed by the landowner, or settled through the transfer of additional built carpet area. The agreement should stipulate that if the landowner sells their allotted units prior to completion, they must provide their GST registration details and verify their tax filings with the developer.

Express Fit-Out Possession Restrictions

Contracts should strictly prohibit the physical transfer of keys or site access for “fit-outs,” “carpentry,” or “temporary storage” before the formal issuance of an Occupancy Certificate or an authorised completion certificate. Handover clauses should explicitly state that site access granted before completion is a temporary license that does not constitute legal possession or occupancy, protecting the developer against departmental claims of early “first occupation”.

Indemnification for Planning Alterations

If a landowner insists on adding commercial shops on the ground floor, the agreement should establish that if commercial carpet area exceeds 15%, the landowner will fully indemnify the developer for any resulting tax increases, including the loss of RREP classification, higher 12% output rates, and Rule 42/43 credit reversals.

Operationalising Procurement Controls and Project Ledger Accounting

To avoid liabilities under the 80% procurement rule, developers must replace informal site purchasing with structured procurement controls:

Centralised Vendor Onboarding

Small builders should implement vendor verification procedures, ensuring that no purchase order for taxable goods or services is issued to an unregistered entity without management approval. Automated systems should cross-check vendor GSTIN validity and filing status on the tax portal to prevent credits from being blocked under Section 16(2)(aa).

Strict Prohibition of Unregistered Cement Procurements

Developers should establish strict purchasing controls prohibiting the procurement of cement from unregistered dealers. Inward delivery logs must match registered tax invoices with accompanying e-way bills to ensure that cement purchases do not trigger an immediate 18% for supplies from 22 September 2025 (historically 28%) cash RCM liability.

Monthly Procurement Shortfall Monitoring

Instead of calculating procurement ratios annually on June 30, developers should maintain monthly project ledgers tracking the balance between registered and unregistered purchases. This gives development teams time to shift purchases toward registered suppliers if their ratio nears the 80% floor, avoiding an 18% cash shortfall penalty.

Actionable Conclusions for Industry Stakeholders

The legal boundary separating RERA exemptions from GST liability is a critical risk area in the Indian real estate market. Builders, landowners, and professional advisors must approach non-RERA developments with the same tax rigour applied to large-scale, registered projects.

The primary compliance obligations governing non-RERA real estate developments require systematic oversight across four key areas:

The fundamental premise that projects exempt from RERA registration are similarly exempt from indirect tax oversight is incorrect. A developer operating under Section 3(2)(a) of RERA remains fully classified as a promoter under Notification No. 11/2017-CT(R), requiring active GST registration, compliance with standard output tax rates, and strict adherence to reverse charge rules.

Architectural designs must be reviewed to ensure that commercial carpet area remains strictly at or below 15% of total project carpet area. Allowing commercial space to exceed this threshold reclassifies the entire development as a commercial REP, increasing tax rates on commercial units from 5% to 12% and requiring complex input tax credit reversals under Rules 42 and 43.

Procurement workflows must treat unregistered cement purchases as an immediate financial liability. While general procurement shortfalls can be reconciled annually at 18%, unregistered cement purchases incur an immediate 18% for supplies from 22 September 2025 (historically 28%) reverse charge payable monthly in cash through the Electronic Cash Ledger. Developers must require active GST registration from all material suppliers to protect their operating margins.

Finally, developers must manage completion timelines carefully. Tax authorities do not depend solely on official Completion Certificates; they actively review utility activations, property tax assessments, and fit-out letters to establish earlier dates of “first occupation”. Establishing an earlier completion date triggers deferred tax liabilities on development rights and creates immediate tax obligations on unsold inventory. Developers must maintain strict control over physical site handovers until all formal completion milestones are achieved.

Cases Discussed

M/s Shrinivasa Realcon Private Ltd. v. Deputy Commissioner, Anti-Evasion Branch, CGST & Central Excise (Bombay High Court, Writ Petition No. 7135 of 2024) — The article discusses the Bombay High Court’s treatment of the scope of reverse charge demands in the construction arrangement before it and distinguishes that ruling from development-rights disputes.

Prahitha Construction Private Limited v. Union of India (Telangana High Court, WP No. 5421 of 2021) — The article describes the challenge to the GST treatment of development rights and notes a pending Supreme Court proceeding, SLP (C) No. 11079/2024.