GST on Development Rights given by societies under Redevelopment Schemes

Notification No. 4/2018-Central Tax (Rate), dated 25th January, 2018 has clarified taxability of development rights under redevelopment schemes but it has still left many questions unanswered. This Article is an attempt to offer my views on the controversial topic.

Under redevelopment schemes, societies plan to undertake redevelopment of existing building owned by them and for that purpose they enter into Development Agreements with Builders.

Under Development Agreement , Builder will undertake construction on the plot of land, after demolishing existing building, and will give flats to existing members of the Society free of cost in proportion to the area of flats occupied by such members in the existing building. Remaining Flats in the new building will be sold by the Builder to independent buyers at market price.

Existing society members think that they must get flats free and they shall not be required to pay any money out of their pockets whether by way of GST, stamp duty or any other taxes. They expect Builder to pay all the taxes out of his share of sale to outsiders. Under these circumstances when existing members are told about additional GST on value of Development Rights, entire calculations about redevelopment start appearing unviable to those members, and also for developers.

Accordingly frantic inquiries are made by both societies and builders about impact GST will make on viability of the projects under redevelopment. In this respect following queries are typically posed to Consultants seeking their opinion about the same.

Queries related to GST on Development Rights given by societies under Redevelopment Schemes

1. Whether GST is applicable to existing members flats (land owners flats).

2. If yes, as per Govt. ruling, who is liable to pay GST i.e. Builder or existing member.

3. On which value i.e. construction cost or market value of flat and Rate of GST applicable.

4. When GST is payable. Some builders say that GST is payable by society at the time of signing of Development Agreement and again by Builder at time possession given to existing members and there will be no refund or set off. In other words, there will be double taxation by Govt. on one transaction

1. Legal Position in respect of GST on Development Rights given by societies under Redevelopment Schemes

1. Notification No. 4/2018-Central Tax (Rate), dated 25th January, 2018

Extracts as under

G.S.R. 67(E).– 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 :-

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

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).

2. Important Definitions

(a) “supply” as defined under Section 7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) inter alia includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business

(b) Para 2(a) in Schedule II of CGST Act, provides that any lease tenancy, easement, license to occupy land is a supply of service

3. Liability for Compulsory Registration

It arises when aggregate turnover of a supplier in a financial year is above the exemption threshold of 20 Lakh Rupees. However, the GST law enlists certain categories of suppliers who are required to get compulsory registration irrespective of their turnover such as persons who are required to pay GST under reverse charge.

4. Valuation Rules

According to rule 1 of Determination of value of supply “Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,

be the open market value of such supply;

if open market value is not available, be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money if such amount is known at the time of supply;

if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;

if value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by application of rule 4 or rule 5 in that order.

Further rule 4 states “Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.”

5. FAQ on GST in respect of Construction of Residential Complex by Builders/Developers.

Question under Sr. No. 16

Whether GST is payable on the owner‟s share of the flats/houses/portion of the building constructed by the builder/developer and given to the land owner as per the development agreement?

Answer

The builder/developer is liable to pay GST even on the share of the land owner and given in lieu of the land received for the development, besides GST on the builder/developer’s share of the complex/building. In the above transaction, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers: (a) from landowner: in the form of land/development rights; and (b) from other buyers: normally in cash. Thus the builder is liable to pay GST not only on his portion of the complex/building, but also on the share of the land owner.

Question under Sr. No. 17

If the answer to above query is „yes‟, then when the GST is liable to be paid; and what should be the taxable value?

Answer

As stated in the answer to the preceding question, GST is liable to be paid by the builder/developer on the share of the land owner, also. GST is liable to be paid 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 (e.g. allotment letter). The value of the „flats/portion of the building‟ supplied to the land owner by the developer/builder has to be determined under the provisions of Section 15 of the CGST Act, 2017 read with Rules governing Valuation as envisaged under Rules 27 to 35 of the CGST Rules, 2017. In terms of Rule 27 of CGST Rules, 2017, where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall: (a) be the open market value of such supply; (b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply; (c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality; In view of the above provisions, the value of supply of those flats would be equal to the value of similar flats charged by the builder/developer from the buyers of his share of flats. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax.

6. Notification No. 11/2017-CT (Rate) dated 28.06.2017

As per Sl. No. 3(i) of Notification No. 11/2017-CT (Rate) dated 28.06.2017 construction of residential complex attracts GST @18% [CGST @ 9% and SGST @ 9%] {which includes construction of complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier}. However, as the supply of service in relation to construction of Flat/House/Complex also involves transfer of “land/undivided share of land” which do not attract GST, the value of such land/undivided share of land shall be deemed to be 1/3rd of the total amount charged for such supply, as provided in Para 2 of the said Nfn. No:11/2017-CT ( R) dt: 28.06.2017. This implies that GST on a Flat/House/Complex [for which a part or total consideration is received prior to issue of a completion/occupancy certificate or it‟s first occupancy, whichever is earlier], shall be 2/3rd of the total consideration charged for such supply (thus GST payable on a Flat/House/Complex would works out to be 12% of the total consideration inclusive of the value of land/ undivided share of land).

7. Provisions for Input Tax Credit to Builders

The builders/developers are entitled to avail credit on the goods (i.e. inputs as well as capital goods) and input- services used or intended to be used in the course or furtherance of their business, subject to the conditions provided in Section 16 read with Section 17(5) of the CGST Act, 2017. Accordingly Builders/Developers are eligible to avail ITC of the GST paid on goods viz., inputs like:sand, Gravel, Cement, steel, electrical cables, switches etc.; and Capital Equipment like: Mixer, Crane etc.; and input-services Viz: Architectural services like Designing, drawing etc.; Manpower Supply Service etc. Further, GST paid on sub-contracted construction services (with or without material) by other (sub-)contractors (suppliers) to whom certain construction services are outsourced, is also available as ITC as the same do not fall under clauses (c) and (d) of Section 17(5) of CGST Act, 2017. The sub-contractors are independent taxable persons as per GST law.

Opinion on Queries related to GST on Development Rights given by societies under Redevelopment Schemes

Based on the above legal position my views on above type of queries is as follows

Query no.s 1 & 2

Whether GST is applicable to existing members flats (land owners flats) and if yes, as per Govt. ruling, who is liable to pay GST i.e. Builder or existing member.

As mentioned under Point 5 of Legal Position, there was no confusion about liability of Builder to pay GST on the notional value of Flats given free to flat owners in the existing building taken for redevelopment. Builder has to pay GST on such flats on the basis of price he charged to outsiders for similar flats in the building.

Controversy existed about liability of Society to pay GST on the value of Development Rights given to the Builder.

Even though Para 2(a) in Schedule II of CGST Act, provides that any lease tenancy, easement, license to occupy land is a supply of service, taxability of joint development agreement under area-sharing arrangement was contentious on various counts, i.e. whether transfer of development right is taxable, and if so, how to determine the time and value of supply.

It may be noted that the rights conferred by land owner to developer under a Collaboration Agreement or Joint Development Agreement whereby land owner gives a limited right over the land such as right to construct, own and sell the superstructure to developer are commonly known as development rights.

Such rights are granted by the landowner to developer in return of a consideration which may be a portion of constructed area or revenue or profit derived from the sale of units constructed over the land. Whether such transfer of rights amounted to sale of land by Society and hence out of GST or whether rights being benefit arising out of land do not constitute sale of land and hence liable for GST was the reason for that controversy.

Recent Notification No. 4/2018 – Central Tax (Rate) puts to rest such controversies by making it clear that the transfer of development rights is taxable when both Society and Builder are registered under GST. This leaves question about taxability of development rights in the hands of a Society which is not registered under GST still controversial.

However considering that Notification offers significant benefit towards deferment of GST liability for both Society and Builder till the time possession is given of the flats in the new building, and society may anyhow need registration for payment of reverse charge GST, it is opined that registration under GST may prove to be beneficial for the Society.

It must be noted however that Notification limits deferment only if there is a supply of development rights in land. Other arrangements for redevelopment under area or revenue sharing are outside the purview of benefit of deferment.

Query no 3

On which value i.e. construction cost or market value of flat and Rate of GST applicable.

There being two transactions, the first being transfer of rights in land by the existing society members to the builder/developer and second being the free sale of flats by the builder/developer to exiting society members along with interest in land, valuation needs to be done for both these type of transactions.

It is however opined that since both these transactions in fact constitute an exchange of service between Society and the builder, the value of supply for both should be same as the value on which builder/developer is liable to pay tax.

Accordingly as mentioned under Point 5 of Legal Position, valuation shall be taken to be price charged to outside buyer who happens to be first such buyer in the scheme. (Refer underlined portion in the Answer to Question 17)

As for rate of GST to be charged by Society and Builder the legal position is made clear under Point 6 above. Accordingly , as the supply of service by both Society and Builder, also involves transfer of land, the value of such land/undivided share of land may be taken as 1/3rd of the total amount charged for such supply. This implies that valuation for charging of GST in respect of supply of Development Rights by Society and supply of construction service by builder, shall be 2/3rd of the total consideration charged for such supply. With this GST payable on both these transaction works out to 12% of the value of first flat sold under the scheme.

Query no.4

When GST is payable. Our builder says GST is payable by him after Development Agreement and again the existing members will have to pay GST at possession and there will be no refund or set off. In other words, there will be double taxation by Govt. on one transaction

In terms of Notification No. 4/2018-Central Tax (Rate), dated 25th January, 2018, liability to pay GST on supply of construction service and development rights respectively by builder and Society shall arise at the time when the said builder 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).

It is thus clear that GST is payable by Society and Builder both, only upon handing over of possession of flats to Society and not at the time when Development Agreement is signed.

Benefit of deferment of tax liability offered under this Notification is however available only if registered person supply rights in land to a developer, builder, Construction Company or any other registered person, meaning that deferment is available only if both parties are registered under GST. Special dispensation to pay GST by deferment of Time of Supply in case of ‘supply of development rights’ is allowed only if Supplier (Society as a Landowner) is a ‘registered person’. Thus for availing deferment benefit, Society should obtain registration under GST.

As for the question of double taxation it is opined as follows. Supply of Development Rights by Society to Builder is an Input Service for the Builder and hence as mentioned under Point 7 of Legal Position, builder will be able to take Input Tax Credit of GST charged to him by the Society on value of Development Rights supplied to Builder.

Thus there is clearly no double taxation under Development Agreement. GST paid by Society will be set off against GST payable by Builder on construction services. Effectively therefore GST will be paid only once i.e. by builder on value of flats given under Development Agreement to Society.