KNOWLEDGE SERIES-ANSWER ON ANSWER-I
ANALYSIS OF THE GST ON DEVELOPMENT RIGHTS, TDR, PAID FSI BEFORE APRIL 2019 AND THEREAFTER
Real estate industry is going through lot of changes since last 5 years. There are major reforms like Demonetisation, GST, RERA etc. which transform the real estate industry but it was not much favourable for initial cash flows of the projects.
From 1st July 2017, GST Act has come into effect and 12% GST rate is announced for the real estate industry with input tax credit. Thereafter for lower housing schemes, it was applicable at the rate of 8% with input tax credit.
From 1st April 2019 the GST council had taken a major decision to lower the GST rate for the residential real estate project to 5% without ITC which has to be collected from the customer and directly pay to the government as it is. Also till date, there was uncertainty about the taxability of Development rights, TDR, Paid FSI etc. but from 1st April 2019 Development rights, TDR, Paid FSI made taxable. There is one notification issued by GST department in which they have speciffically mentioned that in case of residential projects, GST on develeopment rights, TDR , Paid FSI etc have to be paid at completion of the project and that too on the portion of valuation of unsold stock as on date of completion certificate of the said project.
In case of commercial projects, no any comment there but it is assumed that GST on development rights, TDR , Paid FSI etc should be paid on date of development agreement itself because it is eligible for input tax credit and it is set off against the collection of 12% GST on sale of commercial spaces.
Now there are some questions which have to be addressed. Questions are noted below:
1. Development rights, TDR and Paid FSI purchased before 1st April 2019 was taxable or not ?
If taxable then it was under forward charge and landowner (not the developer) is liable to pay the GST on development rights, in such cases what will be the developer’s duty if landowner had not taken the GST registration and had not paid the GST on development rights?
2. What if GST is not paid at the time of Development rights, TDR, Paid FSI purchased before 1st April 2019 and now paid at completion of the project on value of unsold stock . Will it be treated as compliance under GST of the Development rights, TDR, Paid FSI etc. purchased before 1st April 2019?
3. There is always two way consideration flow in Development agreement of in kind consideration with monetary consideration if any. One value is what developer is giving to landowner and second value is what landowner is giving to the devoloper. As far as the consideration given by landowner to devoloper concern, the total plot potential FSI is treated as consideration for stamp duty valuation which is actually not so because maximum potential of the plot is coming from loading TDR, paid FSI, ancillary FSI for which developer is incurring cost after execution of the Development agreement. So now question is whether stamp duty valuation shall be treated the value to charge the GST or not ?
4. If GST is required to be paid on valuation of unsold stock on completion of the project and if it comes to 5% /1% on the market value of the flat as per formula given then effectively where is the exemption for the stock sold after completion?
We will discuss the questions one by one below:
1. Development rights, TDR and Paid FSI purchased before 1st April 2019 was taxable or not ?
If taxable then it was under forward charge and landowner (not the developer) is liable to pay the GST on development rights, in such cases what will be the developer’s duty if landowner had not taken the GST registration and had not paid the GST on development rights?
Ans: There was ambiguity about applicability of the GST on Development rights, TDR and Paid FSI purchased before 1st April 2019. Thereafter one circular issued by GST department, in case of Residential projects, exemption for the portion of the valuation of Development rights, TDR and Paid FSI purchased after 1st April, 2019 in proportion to the stock sold before completion out of total area available for sale.
One may interprete that there was GST applicable on Development rights, TDR and Paid FSI purchased before 1st April, 2019 though it is not clearly mentioned anywhere in the Act. Land is under negetive list in the GST Act but whether rights arsing out of the land should be treated as land or the rights are altogether different from the land is the matter of interpretation everytime.
If we consider the Development rights, TDR and Paid FSI purchased before 1st April, 2019 was taxable then it was under forward charge and selling vendor (not the developer) has to discharge the liability on the said.
In a practical situation, landowner has to take the GST registration for selling the development rights if value exceeds 20 lakhs. He has to issue the invoice to the developer by charging 18% GST and discharge the GST liability. Developer can take input tax credit of the same.
If landowner fails to do so and afterwards he wants to comply the said then whether landowner will be in position to recover the GST from developer at later stage or not is depend on the terms and conditions mentioned in the development agreement but landowner has to pay off the GST liability of the said development rights. The above scenario is considered for the period upto 31st March, 2019 and thereafter it is covered under reverse charge and all the obligation of the compliance under GST on Development rights, TDR and Paid FSI is shifted on the developer.
Further questions 2,3 and 4 will be discussed in next article.
****
if anyone has query, they may reach us at “canitesh.mukadam@gmail.com”
Disclaimer: – This article is for the purpose of information and shall not be treated as solicitation in any manner or for any purposes whatsoever. For the benefits of reader a short glimpse of provisions is presented in own language as per my capabilities. It shall not be used for any legal advice or opinion. Readers are advised to kindly go through to the original government publications and published laws and judicial pronouncements. It will be highly appreciable to highlight errors or providing suggestions for effective improvements.
Author Bio
Where can I read the second part of the above article where question number 2, 3 and 4 are discussed