It took a good number of years for the lobby of tax experts to give up on the debate as to whether the transfer of development rights is a taxable supply under GST. However, it is hard to say bon voyage to the old discussions so close to one’s heart. In that spirit, one must wonder, is the battle worth completely surrendering to the whims of the north block?!
In this article, an attempt has been made to illustrate how the impact of GST on the transfer of development rights should and could be minimized. To begin with, we must first come on a common wavelength regarding the nature of a vanilla joint development agreement.
In a joint development agreement, [1] the landowner parts with his right to develop his land which eventually results in him [2] transferring the title in the land to either the buyers identified by the developer or to the residential welfare society.
Thence, a classic transaction of a joint development agreement involves two activities viz. [1] a transfer of development rights by the landowner to the developer and [2] the sale of land by the landowner to the person(s) identified by the developer.
However, the consideration attributable to both the above two activities is single which is given to the landowner either by way of [1] free units in the developed project or [2] revenue sharing in the project or [3] in the cash or [4] a combination of all three.
In light of the above, an analysis is required as to whether;
[1] the two activities viz. [a] transfer of development rights and [b] eventual sale of land by the landowner, could be considered as separate and distinct activities for taxability under GST; and
[2] if yes then, whether the single consideration defined in the development agreement could be segregated and attributed to both activities?
Let us first discuss the severability of both activities.
Development rights and the eventual sale of land are two separable activities
The arguments in favour of considering the [1] transfer of land development rights and [2] sale of land as two separable activities are as follows;
- Firstly, the land is a bundle of rights so when the landowner transfers a development right from a such bundle, although significant, it does not, effectively or automatically culminates into a sale of land. Therefore, it could be construed that [1] the transfer of development rights is severable from [2] the sale of land.
- Secondly, a holistic reading of the GST Act gives an idea that the different rights in the land [renting, tenancy, leasing, easement and so on] are considered as a supply of service in Schedule II whereas the sale of land is considered neither as a supply of goods nor supply of service in Schedule III which substantiates the legislative intent to treat both the activities separately.
- Further, CBIC in Circular No. 44/18/2018-CGST dated 02 May 2018 has clarified that transfer of tenancy rights cannot be treated as the sale of land. Applying the same analogy in the instant case, it could be construed that the transfer of development rights and the eventual sale of land are two separate activities.
- Additionally, a contract of transfer of development rights is covered under Section 53A of the Transfer of Property Act, 1882. The Supreme Court, in Shrimant Shamrao Suryavanshi And Another Vs Prahlad Bhairoba Suryavanshi (D)[1] has specified the conditions to be satisfied for being covered under Section 53A, which are;
a). there must be a contract to transfer for consideration any immovable property;
b) the contract must be in writing, signed by the transferor, or by someone on his behalf;
c) the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;
d) the transferee must in part performance of the contract take possession of the property or any part thereof;
e) the transferee must have done some act in furtherance of the contract; and
f) the transferee must have performed or be willing to perform his part of the contract.
Accordingly, a joint development agreement would be considered enforceable only if the above conditions are satisfied whereas a registered contract of sale of land is enforceable even if the above conditions may not be fulfilled. This substantiates the fact that in a vanilla joint development arrangement, there are two separate activities involved viz. [1] a transfer of development rights and [2] the sale of land.
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- Moreover, under the Income Tax Act, 1961, the courts have allowed the segregation of land and building in the context of allowing depreciation on the building. See Commissioner of Income Tax vs Alps Theatre[2]. Considering this, one may argue that the concept of segregation of land and related elements may not be completely foreign to the judiciary.
- Furthermore, in a similar set of facts, the Administrative Appeals Tribunal of Australia, in the Trustee for Whitby Trust and Commissioner of Taxation[3] held that [1] execution of an option deed for purchase of land at a future date in exchange for an option fee which eventually leads to [2] a sale of land at a future date, are two separate and distinct supplies covering two separate bundles of rights for the purpose of levy of GST.
The laws w.r.t. taxability of land may differ substantially between Australia and India, nevertheless, the substantial principle that two different acts of transferring different bundles of rights should be considered as two distinct supplies may still hold good in Indian GST.
- Additionally, on a bare perusal of Section 45(5A) of the Income Tax Act, 1961, it transpires that the statute has tried to tax the transfer of land and building under a joint development agreement. Meaning thereby, the tax is not levied on the development agreement per se but on the underlying transfer of land. This also substantiates a difference between the [1] transfer of development rights and [2] sale of land.
- It is also apposite to note that for stamp duty transactions also both the activities viz. [1] transfer of development rights and [2] sale of land are treated differently.
All the above arguments point to a single conclusion that the act of [1] transfer of development rights and [2] sale of land could be considered as two separate activities for the levy of GST. Having said so, it could be construed that the Government may or may not be empowered to levy GST on the first activity of transfer of development rights but the second activity of the sale of land would definitely be ousted from the GST levy owing to Schedule III.
Having concluded that there are two activities involved in a vanilla joint development agreement, the next question that may come up is how to segregate a single consideration between these two activities. The same is discussed below;
Consideration can be segregated between the transfer of development rights and the sale of land
One of the methods of deriving the value of development rights could be;
[A] the total monetary value of benefits received by the landowner* [minus]
[B] the fair value of land as of the date of the joint development agreement**.
The difference between A and B could be considered as the value of development rights which may be used for payment of GST.
*Total monetary value of development rights can be calculated based on the total units given to the landowner multiplied by the value of the unit sold nearest to the date of the development agreement. This method has been supported by CBIC under the erstwhile service tax laws and GST.
**Fair value of land could be deduced by obtaining a valuation certificate from a registered valuer which may be excluded for payment of GST.
The above method is also in line with AS-10 which provides for the segregation of the values of different assets based on their fair value on the date of acquisition. Nevertheless, one could always consider assigning separate values in the development agreement for both activities.
With the above concept, an attempt has been made to highlight one of the ways in which the whole plethora of issues of taxability of development rights can be dealt with considering that paying GST on the transfer of development rights which includes the value of land may undermine the profitability of some of the projects substantially.
[1]Order in Appeal (Civil) 2706 of 1991 dated 22 January 2002
[2]1967 AIR 1437
[3][2017] AATA 343 (20 March 2017)
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[Written by CA Pooja Jajwani. For feedback , the author can be reached at [email protected]]
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