The issue of levy of GST on development agreements has always been a bone of contention between the revenue department and the persons liable to pay GST on such transactions being the developer and the landowner. The challenge to the levy arises on the following issues:

1. Whether execution of development agreements between land owner and the Developer involve supply of service.

2. If the answer to 1 above is in affirmative then how to determine the value of such supply

3. What is the Point of taxation/time of supply of service included in the above transaction.

Recently, the above issues were adjudicated by the Authority for Advance Ruling in the case of  M/s. Durga Projects and Infra Structure Pvt. Ltd. 2019 (8) TMI 395 (AAR – Karnataka). In the said case the developer had entered into a development agreement with the landowner in the pre-GST era. As per the said development agreement the landowner was entitled to constructed area against supply of development rights of the said land to the developer. The developer had started construction of the said project on the said land during the pre-GST era.

The issue before the AAR was whether the developer was liable for any GST on the said transaction since even though the agreement was executed and the construction started in the pre GST era, the construction of the project had spilled over to the GST era.

Applicants contention :

The Applicant placed reliance  on  Section 142 (10)  and  (11)  of  CGST  Act,  2017 to contend that the said service is taxable under the earlier law to the extent of work executed under earlier law and GST if any is applicable to the extent of the remaining work executed under GST Law. The applicant also placed reliance on the case of State of Karnataka v. Vaswani Estates Developers Pvt. Ltd. 2014 (2) TMI 1143 (Karnataka HC) that transaction falling under JDA between land owner and developer does not fall under the definition of “sale” or “works contract” but “barter” and is not liable for tax under KVAT Act, 2003 on the ground that JDA is without any  monetary consideration.

Department’s Contention:

The department opposed the application of the Developer submitting that in terms of Section 7 of CGST Act 2017 “supply” includes “barter” also if it is in the course of “furtherance of business”. Further in terms of Section 2(31) of the CGST Act 2017 “consideration” in relation to supply includes money or otherwise. Hence the supply for the consideration other than money also squarely falls under the definition of “Supply”. Therefore, construction of a building by developer for land owner in exchange of transfer of development rights to such Developer falls under the definition of “Supply” and attracts tax under GST.

Ruling by AAR:

The AAR discussed the issues involved on the basis of the following provisions of CGST Act which was same as KGST Act:

(i) “supply” under section 7

(ii) “Consideration” under section 2(31)

(iii) Notification No. 4/2018-Central Tax (Rate) dated 25.01.2018,

(iv) Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017

(v) Transition provisions under section 142 of the CGST Act

and arrived at a conclusion that the developer is liable to pay GST on the construction being carried out on the area to be given to the landowner in consideration of the development rights given by landowners to the developer.

The AAR held that this was a transaction of “barter” wherein the consideration against construction service provided to the landowner was in the form of Development rights. The said transaction of was covered within the definition of “supply” as provided in section 7 of CGST Act. Hence, even if the value of the supply of service was not easily discernible, yet it was a supply of service.

For the purpose of determining the value of the supply of such service the AAR relied upon the provisions of notification number 11/2017-Central Tax (Rate) dated 28.06.2017 as per which the value of supply of service was calculated at 2/3rd of market value of constructed area given to the landowner, after abatement of land cost.

The AAR further held that as per the notification number No.4/2018-Central Tax (Rate) dated 25.01.2018 the time of supply of service shall be the point when the possession of the constructed area belonging to land owner or the rights therein are transferred to the landowner through a legal document like an allotment letter or otherwise. Since in the instant case the possession of the area belonging to land owner was not transferred in the pre-GST era, it was assumed that such possession would be handed over in the GST era and therefore there would be a GST liability on such transaction at the time when possession is handed over to the landowners.

The above decision holds that even if a transaction is carried out in the pre-GST era, if the point of taxation arise in the GST era due to any notification which is overriding the time of supply as provided under section 9 of CGST then the liability of GST would arise under GST. Even though the AAR did not mention the earlier notification no. 151/2012 issued under the erstwhile service tax Act, yet the language of the said notification no. 151 is same as that of notification no.4/2018 under the GST Act as far as time of supply of service is concerned. Hence, the author believes that while holding that there was a liability of GST under the GST era, ideally the AAR should have looked at the provisions of the service tax Act also to determine whether the said development agreement was liable to service tax upon execution of the said development agreement. Notification no.151 of service tax Act also holds that the point of supply of service would arise when the possession of the constructed area is handed over to the landowner. Hence in this case since possession was not handed over to land owner there would be no liability under the erstwhile Service Tax Act. Accordingly, the AAR has after holding that the said transaction of barter is covered within the definition of the “supply” has rightly held that the supply of such service has taken place in the GST era in view of specific notifications.

Recent Amendment to GST:

The government has issued fresh GST notifications on 29 March 2019 where in vide notification number 3/2019 and 4/2019, it has been laid down that the GST on development agreements of a residential real estate project would now be payable only after project is completed and occupancy certificate is obtained by the developer. Even the quantum of such supply is restricted to the unsold units of the landowner share. Therefore in the case of a new residential projects the doubt has been laid to rest by the government. However for the on going development agreements and the commercial projects the ruling of the AAR is a welcome clarity.

Note of Dissent:

To conclude it would be difficult to argue that the transactions of development agreements are not liable for GST even though they are “barter” in nature considering the wide legislation in this regard. Even internationally, countries like Australia and UK levy value added tax on the transaction of transfer of development rights. However, the valuation of supply of service of this barter transaction and it’s levy based on market value of the constructed area being given to the landowner remain a matter of dispute. The author believes that the constructed area given to land owner cannot be equated with area purchased by a buyer. This is because the landowner is receiving construction service being in the nature of works contract on its portion of land rights unlike a buyer of unit who is also buying the portion of land rights. Therefore value of supply to a land owner cannot be the same as market value of the constructed area of units being sold to other buyers. The land owner should ideally be taxed only on construction cost since land rights are not involved in the area being transferred to land owner unlike in the case of a buyer of unit. But for that we will have to wait for some clarification from government or decision of a higher judicial forum.

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