Taxation of Development rights under GST

Arjuna (Fictional Character): Krishna, the taxation of development rights has changed from 1^st April, 2019. What are the changes and also what is TDR/JDA?

Krishna (Fictional Character): Arjuna, Yes the taxation of Development Rights under GST has changed from 1^st April 2019. But before seeing the changes let us know something about TDR/JDA.

Joint Development Agreement (JDA) is an agreement between a landowner and a real estate developer to construct new projects; where the landowner provides the land and the builder carries out the construction as well as looks into the legal work.

TDR stands for Transferable Development Right in which the landowner provides the rights to the builder for development.

Arjun: Krishna, are Development Rights taxable under GST and at what rate?

Krishna: Arjuna, Providing Development Rights by the landowner to the developer is covered under exemption, but to avail the benefit of this exemption the builder needs to sale flats constructed before issuance of completion certificate. Also tax needs to be paid on such flats.

If flats are sold after issuance of completion certificate by the builder, No exemption would be given. And providing Development Rights by the landowner to developer would become a transaction liable to tax.

The tax needs to be paid @ 1% if the units sold are under Affordable Residential Project, for other residential units, tax shall be @5%. These rates would apply only if the developer opts to pay tax at new rates.

Arjun: Krishna, who needs to pay the tax, if builder sells some or all flats after issuance of completion certificate?

Krishna: Arjuna, the new scheme has put Development Rights under RCM and hence the GST payable on Development Rights provided by the Landowner is now payable by developer on RCM basis.

One should note that the tax ability of Development Rights depends on the unsold inventory in the hands of the builder on the date of issuance of completion certificate.

The builder would pay tax in relation to rights received but it would be payable on proportionate rights attributable to unsold flats on the date of completion.

Arjun: Krishna, what if the rights received by the developer are used to build some residential as well as some commercial units?

Krishna: Arjuna, the exemption for Development Rights service is only for using the same for construction of residential units. In case the Development Rights is used for construction of commercial units, the same will be taxable.

Arjun: Krishna, when tax needs to be paid and on what value?

Krishna: Arjuna, the builder would pay tax under RCM on the date of issuance of completion certificate.

The value to be considered for the rights received shall be deemed to be equal to the Total Amount charged for similar apartments in the project from the independent buyers, nearest to the date on which such development right or FSI is transferred to the promoter.

For e.g. If the landowner transfers the Rights to the developer on 2 nd April 2019, the builder constructed apartments on the land for which the completion certificate is received on say, 25th May 2022.

Then in this case, the Builder would pay tax under RCM on rights attributable to unsold inventory on 25th May 2022, but the value to be considered for the same shall be equal to the value for similar apartments sold nearest to the date 2nd April 2019.

Arjuna: Krishna, what one should learn from this?

Krishna: Arjuna, the Real Estate sector has become very complex and an important role is played by completion certificate. Builders and the landowners shall check the facts, relevant sections, rules of GST before entering into any transaction.