A joint development agreement is an agreement between a land owner and a real estate developer to construct new projects. Two types of JDA are common: Area Sharing JDA and Revenue Sharing JDA. In a JDA the capital, construction and legal work is carried out by the builder whereas the land is provided by the land owner.
The question before us is about:
1. Type of transactions and its taxability,
2. Time of supply and
3. Value of supply of services in GST regime.
Transactions in JDA & GST Treatment:
1. Land owner to Developer: Transfer of development rights by Land owner to developer. It attracts GST at the time of supply mentioned hereunder. It is a continuous supply of services.
2. Developer to Land Owner: Developer provides construction service to Land owner over a period [Applicable in Area Sharing JDA which is outside the scope of on-going discussion]
3. Developer to End Customer: When an under construction property is sold, GST is chargeable thereon. This too is a continuous supply of services.
Continuous Supply of Services:
It is also relevant to refer to the following definition of “continuous supply of service” under Section 2 (33) of the Act and Section 31 (5) dealing with issue of invoices.
As per Section 2(33), “continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify.
Section 31(5) states that in case of continuous supply of services, —
(a) where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment;
(b) where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment;
(c) where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event.
Time of Supply:
The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of Section 13.
The time of supply of services shall be the earlier of the following dates:-
- The date of issuing invoice (or the last day by which invoice should have been issued)
- The date of receipt of payment; whichever is earlier
Time of Supply in case of JDA:
Case 1: When consideration is given entirely in kind [Area Sharing]: Time of Supply is the time when possession is transferred or area is demarcated as per Notification No. 4/2018- Central Tax (Rate).
Case 2: When consideration is paid entirely in cash [Revenue Sharing]: Time of supply is as the time when invoice is raised or payment is made, whichever is earlier.
Notification No. 4/2018- Central Tax (Rate) dated 25th January, 2018 clarifies certain aspects of the said arrangement. It specifies that—
(a) registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and [Landowner]
(b) registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights [Real Estate Developer]
are liable to pay tax on supply of the said services at the time of supply which shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter). In simple words, the time of supply is the time when either the possession is transferred or the rightful area is demarcated.
The above provisions define the time of supply and time of raising the invoice in the relevant case. The service being provided by the builder to the final buyers is a continuous supply of services and that provided by the landowner to the builder is also continuous supply of services.
As per the provisions of the Act, the given case of revenue sharing JDA falls under clause (a) of sub-section (5) of section 31 where the due date of payment being ascertainable, shall be deemed to be the due date of raising of invoice. As per Section 31 (3), this date is considered to be the time limit for raising invoice.
After ascertainment of time limit of raising invoice, the time of supply can be understood. Section 13 as already mentioned above corresponds to the time of supply in case of services.
Value of supply:
The value of supply shall be determined using Valuation of Supply Rules. Reference has to be made to Section 15 of Central Goods & Services Tax Act, 2017. Valuation should be based upon the actual transaction value or cash consideration received.
Tax Rate on a JDA:
18% tax is applicable on the development right given by the land owner to the developer.