Applicability of Service Tax and GST on Joint Development Agreement

We observe a trend of Joint Development Agreements, commonly known as JDA, in real estate sector, from the year 2000-2001, onwards. JDA is agreement between Landowner and Builder/Developer. In such agreement, Landowner contributes his land and Builder/Developer is assumed to take the responsibility of obtaing various approvals and construction, at his own cost. In JDA, landowners may gets the consideration for contribution of land, in the form of, certain percentage of constructed area in the project, i. e area sharing type of JDA or certain percentage of sales revenue, i. e. revenue sharing type of JDA.

Here the question arises about the applicability of service tax, vat, and now GST on the flats or area allotted to landowner by builders.

In this regard, CBDT has issued a circular No. 108/2009-ST, dated 29/01/2009, which says, the service tax is not payable, if the allotted property, is held by landowners for their personal use. As well, the CESTAT in case of Purvankara Projects Ltd Vs CST Bangalore (2010-TIOL-28-CESTAT-Bang-Stay) states that construction of flats and transferring by developer/builder, to land owners in exchange for land received from them, cannot be held to be any service.

Thereafter, CBDT has issued yet another circular no-151/2/2012-ST, dated 10/02/2012, in which it was clarified that, For the period prior to 01/07/2010: construction service provided by the builder/developer will not be taxable, in terms of Board’s Circular No. 108/02/2009-ST dated 29.01. 2009. The same circular made it clear, that, for the period after 01/07/2010, construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/developers even for the flats given to the land owner.

Hereby the intentions of the CBDT, are to levy service tax on the services provided by Developer to landowner, are clear. So the next question arises about the point of taxation. At what point of time such service tax needs to pay?

The same circular 151/2/2012, states that, Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument(eg. allotment letter).

As well, as per Rule 3 of Point of Taxation Rules-2011,

Determination of point of taxation. – For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be, – (a) the time when the invoice for the service provided or agreed to be provided is issued: Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service. (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment. Provided that for the purposes of clauses (a) and (b), – (i) in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service; (ii) wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of clause (a). Explanation . – For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

According to this, point of taxation shall be earlier of following:

– Date of issue of invoice for service provided;

– If invoice is not issued within 30 days of completion of provision of service, then it is the date of completion of provision of service;

– If payment is received before date of issue of invoice or completion of service, then it is the date of receipt of payment.

In case of transactions between landlords and developer, usually there is no system of issue of invoices. Therefore, out of the above three events listed, the date of receipt of consideration or date of completion of service would be relevant in case of JDA. Thus as per Rule 3 of Point of Taxation Rules-2011, this it could be argued that point of taxation is the date on which development rights are received by builder/developer, as the developer gets the possession of land. However the CBDT had created confusions over the point of taxation, by issuing circular no 151/2/2012, which says service tax on construction services provided by builder/developer to landowner, is to be paid at the time when, the possession or right in the property of the said flats are transferred to the land owner. Mostly this view is accepted by department. It shows the circular no-151/2/2012, is not in line with Rule 3 of point of taxation.

Above all, CESTAT, hydrabad, came into picture, to give relief to builders, on the liability of service tax on the area allotted to landowners, by its decision in the appeal no-ST/31095/2017, of Vasantha Green Projects, dated 11/05/2018.

Honorable tribunal talks about, valuation by Rule 3, of Service Tax(Determination of Value) Rules-2006, and interpret that,

The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service and on perusal of above reproduced Section 67 of Finance Act, 1994, it can be observed that service tax is liable to be paid on gross amount charged i. e. to say consideration received from land owners in kind and consideration received from prospective customers i. e. total gross amount. In the case in hand, the amount attributable to the consideration received by appellant in the form of land rights from the land owner stands included in the value of villas sold to prospective customer which would mean that whatever consideration was received by the appellant in form of developmental right was considered in assessable value. The Chartered Accountant’s certificate placed on record by appellant goes into detail and certifies that appellant has discharged the service tax on consideration received by them and in such a case there is no reason to again demand service tax on the villas constructed and handed over to the land owners.

Applicability of GST-

In regard to the Joint Development Agreements, CBDT has issued a notification 04/2018 Central Taxes (Rate) dated 25/01/2018, which states –

In exercise of the powers conferred by section 148 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby notifies the following classes of registered persons, namely :-

(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

(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,

as the registered persons in whose case the liability to pay central tax on supply of the said services, on the consideration received in the form of construction service referred to in clause (a) above and in the form of development rights referred to in clause (b) above, 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).

Here notification 04/2018 Central Taxes(Rate) dated 25/01/2018, introduces tax, i. e. GST on providing a service of transferring development rights to builder/developer. The notification says, landowner providing a service of transferring development rights to builder for which the consideration from builder/developer is in the nature of constructed area alloted to landowner and as well builder is supplying a service of construction to landowners for which the consideration received from landowners is in the nature of grant of development rights and here both these transactions are taxable from 25/01/2018.

Most recently the same view is reflected in a Advance Ruling No-KAR ADRG 29/2018, dated 28/11/2018, in case of re Patrick Bernardinz D’Sa. The Applicant, filed this application dated 23. 02. 2018 for advance ruling, seeking clarification as to “Whether the applicant being the land owner is liable to pay GST on premises allotted to him, which he intends to distribute among his family members ?”Here the Advance Ruling Authority, by considering Notification 04/2018, dated 25/01/2018, replies that, the applicant being the person who has supplied development rights to a developer in respect of his land, is liable to registration and payment of tax.